10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended August 31, 2001.

or

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

For the transition period from [                  ] to [                  ].

Commission File No. 1-9195

KB HOME
(Exact name of registrant as specified in its charter)

Delaware
(State of incorporation) 95-3666267
(IRS employer identification number)

10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000

(Address and telephone number of principal and executive offices)

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 [X]        No [   ]

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT’S CLASSES OF COMMON STOCK AS OF AUGUST 31, 2001.

Common stock, par value $1.00 per share, 50,321,172 shares outstanding, including 8,157,481 shares held by the Registrant’s Grantor Stock Ownership Trust and excluding 1,448,100 shares held in treasury.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
	Item 5.  Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
INDEX OF EXHIBITS
EXHIBIT 10.1

KB HOME
FORM 10-Q

INDEX

		Page Number(s)
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Income - Nine Months and Three Months ended August 31, 2001 and 2000	3
	Consolidated Balance Sheets - August 31, 2001 and November 30, 2000	4
	Consolidated Statements of Cash Flows - Nine Months ended August 31, 2001 and 2000	5
	Notes to Consolidated Financial Statements	6-9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10-16
PART II.  OTHER INFORMATION
Item 5.	Other Information	17
Item 6.	Exhibits and Reports on Form 8-K	18
SIGNATURES		19
INDEX OF EXHIBITS		20

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KB HOME
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts — Unaudited)

			Nine Months Ended August 31,						Three Months Ended August 31,
			2001			2000			2001			2000
Total revenues			$	3,123,323		$	2,686,791		$	1,235,313		$	981,024
Construction:
	Revenues		$	3,075,296		$	2,645,336		$	1,215,148		$	965,374
	Construction and land costs			(2,480,489	)		(2,149,342	)		(976,975	)		(775,106	)
	Selling, general and administrative expenses			(377,569	)		(328,870	)		(138,393	)		(114,387	)
		Operating income		217,238			167,124			99,780			75,881
	Interest income			2,646			5,021			805			1,274
	Interest expense, net of amounts capitalized			(30,723	)		(22,327	)		(11,424	)		(9,145	)
	Minority interests			(20,274	)		(20,941	)		(7,954	)		(8,417	)
	Equity in pretax income of unconsolidated joint ventures			2,381			2,253			825			763
	Gain on issuance of French subsidiary stock			—			39,630			—			—
	Construction pretax income			171,268			170,760			82,032			60,356
Mortgage banking:
	Revenues:
		Interest income		15,862			15,901			6,191			5,062
		Other		32,165			25,554			13,974			10,588
				48,027			41,455			20,165			15,650
	Expenses:
		Interest		(14,452	)		(14,256	)		(5,518	)		(4,645	)
		General and administrative		(14,334	)		(11,406	)		(5,192	)		(4,922	)
	Mortgage banking pretax income			19,241			15,793			9,455			6,083
Total pretax income				190,509			186,553			91,487			66,439
Income taxes				(64,800	)		(50,000	)		(31,100	)		(21,800	)
Net income			$	125,709		$	136,553		$	60,387		$	44,639
Basic earnings per share			$	3.50		$	3.39		$	1.63		$	1.17
Diluted earnings per share			$	3.36		$	3.32		$	1.58		$	1.14
Basic average shares outstanding				35,897			40,240			37,016			38,267
Diluted average shares outstanding				37,371			41,189			38,199			39,218
Cash dividends per common share			$	.225		$	.225		$	.075		$	.075

See accompanying notes.

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KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands — Unaudited)

			August 31,			November 30,
			2001			2000
ASSETS
Construction:
	Cash and cash equivalents		$	33,725		$	21,385
	Trade and other receivables			371,581			306,581
	Inventories			1,969,675			1,657,401
	Investments in unconsolidated joint ventures			8,696			10,407
	Deferred income taxes			66,633			73,842
	Goodwill			192,399			202,177
	Other assets			96,137			89,975
				2,738,846			2,361,768
Mortgage banking:
	Cash and cash equivalents			11,456			11,696
	Receivables:
		First mortgages and mortgage-backed securities		34,655			43,137
		First mortgages held under commitments of sale and other receivables		505,667			403,165
	Other assets			8,574			9,155
				560,352			467,153
Total assets			$	3,299,198		$	2,828,921
LIABILITIES AND STOCKHOLDERS’ EQUITY
Construction:
	Accounts payable		$	343,861		$	311,537
	Accrued expenses and other liabilities			246,495			201,672
	Mortgages and notes payable			1,135,293			987,980
				1,725,649			1,501,189
Mortgage banking:
	Accounts payable and accrued expenses			15,032			11,135
	Notes payable			485,631			385,294
	Collateralized mortgage obligations secured by mortgage-backed securities			23,934			29,928
				524,597			426,357
	Minority interests:
		Consolidated subsidiaries and joint ventures		59,407			56,866
		Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company		—			189,750
				59,407			246,616
Common stock				51,769			44,397
Paid-in capital				445,330			240,761
Retained earnings				716,060			598,374
Accumulated other comprehensive income				(7,173	)		(9,564	)
Deferred compensation				(10,810	)		—
Grantor stock ownership trust				(177,294	)		(190,872	)
Treasury stock, at cost				(28,337	)		(28,337	)
	Total stockholders’ equity			989,545			654,759
Total liabilities and stockholders’ equity			$	3,299,198		$	2,828,921

See accompanying notes.

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KB HOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands — Unaudited)

				Nine Months Ended August 31,
				2001			2000
Cash flows from operating activities:
	Net income			$	125,709		$	136,553
	Adjustments to reconcile net income to net cash used by operating activities:
		Equity in pretax income of unconsolidated joint ventures			(2,381	)		(2,253	)
		Minority interests			20,274			20,941
		Gain on issuance of French subsidiary stock			—			(39,630	)
		Amortization of discounts and issuance costs			948			755
		Depreciation and amortization			32,566			30,497
		Provision for deferred income taxes			7,209			10,348
		Changes in assets and liabilities, net of effects from acquisitions:
			Receivables		(167,415	)		74,301
			Inventories		(255,256	)		(224,597	)
			Accounts payable, accrued expenses and other liabilities		78,925			16,906
			Other, net		14,745			(29,786	)
Net cash used by operating activities					(144,676	)		(5,965	)
Cash flows from investing activities:
	Acquisitions, net of cash acquired				(29,058	)		—
	Investments in unconsolidated joint ventures				4,092			151
	Net sales of mortgages held for long-term investment				2,132			668
	Payments received on first mortgages and mortgage-backed securities				6,350			5,262
	Purchases of property and equipment, net				(5,794	)		(11,632	)
Net cash used by investing activities					(22,278	)		(5,551	)
Cash flows from financing activities:
	Net proceeds from (payments on) credit agreements and other short-term borrowings				(19,217	)		98,314
	Proceeds from issuance of senior subordinated notes				247,500			—
	Issuance of French subsidiary stock				—			113,118
	Payments on collateralized mortgage obligations				(5,994	)		(4,994	)
	Payments on mortgages, land contracts and other loans				(17,479	)		(15,682	)
	Payments to minority interests				(17,733	)		(16,037	)
	Payments of cash dividends				(8,023	)		(8,914	)
	Repurchases of common stock				—			(137,464	)
Net cash provided by financing activities					179,054			28,341
Net increase in cash and cash equivalents					12,100			16,825
Cash and cash equivalents at beginning of period					33,081			28,367
Cash and cash equivalents at end of period				$	45,181		$	45,192
Supplemental disclosures of cash flow information:
	Interest paid, net of amounts capitalized			$	35,354		$	28,101
	Income taxes paid			$	24,324		$	30,673
Supplemental disclosures of noncash activities:
	Cost of inventories acquired through seller financing			$	33,639		$	12,436
	Conversion of Feline Prides			$	189,750		$	—

See accompanying notes.

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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.	Basis of Presentation
	The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended November 30, 2000 contained in the Company’s 2000 Annual Report to Stockholders.
	In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of August 31, 2001, the results of its consolidated operations for the nine months and three months ended August 31, 2001 and 2000, and its consolidated cash flows for the nine months ended August 31, 2001 and 2000. The results of operations for the nine months and three months ended August 31, 2001 are not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet at November 30, 2000 has been taken from the audited financial statements as of that date.
2.	Inventories
	Inventories consist of the following (in thousands):

		August 31,		November 30,
		2001		2000
Homes, lots and improvements in production		$	1,484,913	$	1,115,824
Land under development			484,762		541,577
	Total inventories	$	1,969,675	$	1,657,401

The impact of capitalizing interest costs on consolidated pretax income is as follows (in thousands):

		Nine Months Ended						Three Months Ended
		August 31,						August 31,
		2001			2000			2001			2000
Interest incurred		$	78,533		$	68,224		$	26,222		$	23,834
Interest expensed			(30,723	)		(22,327	)		(11,424	)		(9,145	)
Interest capitalized			47,810			45,897			14,798			14,689
Interest amortized			(43,480	)		(28,362	)		(16,230	)		(10,965	)
	Net impact on consolidated pretax income	$	4,330		$	17,535		$	(1,432	)	$	3,724

3.	Earnings Per Share
	Basic earnings per share is calculated by dividing net income by the average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income by the average number of common shares outstanding including all dilutive potentially issuable shares under various stock option plans and stock purchase contracts.

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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.	Earnings Per Share (continued)
	The following table presents a reconciliation of average shares outstanding (in thousands):

	Nine Months Ended				Three Months Ended
	August 31,				August 31,
	2001		2000		2001		2000
Basic average shares outstanding		35,897		40,240		37,016		38,267
Net effect of stock options assumed to be exercised		1,474		949		1,183		951
Diluted average shares outstanding		37,371		41,189		38,199		39,218

4.	Comprehensive Income
	The following table presents the components of comprehensive income (in thousands):

		Nine Months Ended						Three Months Ended
		August 31,						August 31,
		2001			2000			2001			2000
Net income		$	125,709		$	136,553		$	60,387		$	44,639
Foreign currency translation adjustment			4,408			(7,400	)		7,411			(4,606	)
Net derivative losses			(2,017	)		—			(2,635	)		—
	Comprehensive income	$	128,100		$	129,153		$	65,163		$	40,033

5.	Segment Information
	The Company has identified two reportable segments: construction and mortgage banking. Information for the Company’s reportable segments is presented in its consolidated statements of income and consolidated balance sheets included herein. The Company’s reporting segments follow the same accounting policies used for the Company’s consolidated financial statements. Management evaluates a segment’s performance based upon a number of factors including pretax results.
6.	Recent Accounting Pronouncements
	Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” was issued in June 1998. This statement addresses the accounting for and disclosure of derivative instruments, including derivative instruments imbedded in other contracts, and hedging activities. The statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change is recognized in earnings. The adoption of the new statement as of December 1, 2000 has not had a significant impact on the earnings or financial position of the Company. As of August 31, 2001, the Company had $2.0 million in net derivative losses included in other comprehensive income.

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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6.	Recent Accounting Pronouncements (continued)
	The Company manages its interest rate risk on mortgage loans held for sale and its estimated future commitments to originate and close mortgage loans at fixed prices through the use of mandatory forward commitments to sell mortgage-backed securities and best-efforts whole loan delivery commitments. The Company estimates the portion of the locked mortgage loan pipeline that is expected to close in order to determine the amount of hedging instruments. These hedging instruments are classified as cash flow hedges, generally have maturities of three months or less, and are effective as hedges for interest rate market risk on mortgage loans held for sale and estimated future commitments. Accordingly, gains and losses are included in other comprehensive income until the ultimate disposition of the contract.
	In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations, (“SFAS No. 141”) and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, (“SFAS No. 142”). SFAS No. 141 requires all business combinations to be accounted for using the purchase method of accounting and is effective for all business combinations with a closing date after June 30, 2001. SFAS No. 142 requires goodwill to be tested for impairment under certain circumstances, and written off when impaired, rather than being amortized as previous standards required. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Early application is permitted for entities, like the Company, with fiscal years beginning after March 15, 2001 provided that the first interim period financial statements have not been previously issued. The adoption of SFAS No. 141 did not have a material effect on the Company’s operating results or financial condition. The Company plans to early adopt SFAS No. 142 in the first quarter of its 2002 fiscal year. Application of the nonamortization provisions of SFAS No. 142 by the Company is expected to result in the elimination of amortization expense of approximately $28.0 million per year. The Company will perform the first of the required impairment tests of goodwill as of December 1, 2001 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.
7.	Mortgages and Notes Payable
	On February 8, 2001, pursuant to its universal shelf registration statement filed with the Securities and Exchange Commission on December 5, 1997 (the “1997 Shelf Registration”), the Company issued $250.0 million of 9 1/2% senior subordinated notes at 100% of the principal amount of the notes. The notes, which are due February 15, 2011 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 redeemable at the option of the Company, in whole, or in part, at 104.750% of their principal amount beginning February 15, 2006, and thereafter at prices declining annually to 100% on and after February 15, 2009. Proceeds from the issuance of the notes were used to pay down bank borrowings.
	On May 24, 2001, the Company’s mortgage banking subsidiary renewed its Master Loan and Security Agreement with an investment bank. The agreement, which expires on May 25, 2002, provides for a facility fee based on the $200.0 million maximum amount available and provides for interest to be paid monthly at the Eurodollar Rate plus an applicable spread on amounts borrowed. The amounts outstanding under the Master Loan and Security Agreement are secured by a borrowing base, which includes certain mortgage loans held under commitments of sale and are repayable from sales proceeds. There are no compensating balance requirements under the agreement. The agreement includes financial covenants and restrictions which, among other things, require the maintenance of certain financial statement ratios, a minimum tangible net worth and a minimum net income.
8.	Restricted Stock Award
	Effective July 11, 2001, the Company awarded 350,000 shares of restricted common stock to its Chairman and Chief Executive Officer in accordance with the terms and conditions of his amended and restated employment

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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8.	Restricted Stock Award (continued)
	agreement. The restrictions imposed with respect to the shares covered by the award lapse on December 31, 2008 if certain conditions are met. During the restriction period, the executive is entitled to vote and receive dividends on such shares. Upon issuance of the 350,000 shares, a deferred compensation expense equivalent to the market value of the shares on the date of grant was charged to stockholders’ equity and will be amortized over the restriction period. The compensation expense with respect to the restricted shares during the quarter ended August 31, 2001 was $.2 million.
9.	Acquisition
	On July 19, 2001, the Company acquired Trademark Home Builders, Inc. (“Trademark”), a builder of single-family homes in Jacksonville, Florida. The acquisition marks the Company’s entry into the Florida market. Trademark was acquired for approximately $30.1 million, including the assumption of approximately $16.3 million in debt, and was accounted for under the purchase method of accounting. The excess of the purchase price over the estimated fair value of net assets acquired was $9.2 million and was allocated to goodwill. In accordance with SFAS No. 142, the goodwill amount will not be amortized but will be reviewed for impairment on an annual basis. The results of Trademark were included in the Company’s consolidated financial statements as of the acquisition date. The proforma results of the Company for the nine months ended August 31, 2001 and 2000, assuming this acquisition had been made at the beginning of each year, would not be materially different from reported results.
10.	Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Debentures of the Company (Feline Prides)
	On August 16, 2001, the Company’s Feline Prides, in the amount of $189.8 million, mandatorily converted into 5,977,109 shares of the Company’s common stock. In connection with the conversion, all of the 8% debentures held by KBHC Financing I, a Delaware statutory business trust wholly owned by the Company, were retired.
11.	Reclassifications
	Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to the 2001 presentation.
12.	Subsequent Events
	On October 4, 2001, the Company’s Board of Directors approved a stock repurchase authorization of up to 4.0 million shares of the Company’s common stock, or approximately 9.0% of total outstanding shares. The authorization positions management to opportunistically purchase common shares from time-to-time on the open market or in privately negotiated transactions. No shares had been repurchased under this authorization as of the date of filing this report.
	On or about October 15, 2001, the Company expects to file a universal shelf registration statement (the “2001 Shelf Registration”) with the Securities and Exchange Commission for up to $500.0 million of the Company’s debt and equity securities. The remaining capacity under the 1997 Shelf Registration together with the 2001 Shelf Registration is expected to provide the Company with a total issuance capacity of $750.0 million. The 2001 Shelf Registration is expected to provide 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, preferred stock, common stock, stock purchase contracts, stock purchase units and/or warrants to purchase such securities.

9

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

Results of Operations

OVERVIEW

Total revenues for the three months ended August 31, 2001 rose $254.3 million, or 25.9%, to $1.24 billion from $981.0 million for the three months ended August 31, 2000. For the nine months ended August 31, 2001, total revenues increased $436.5 million, or 16.2%, to $3.12 billion from $2.69 billion in the year-earlier period. The increases in total revenues for the three-month and nine-month periods of 2001 compared to 2000 were primarily due to higher housing revenues. Net income for the third quarter of 2001 totaled $60.4 million, or $1.58 per diluted share and compared favorably with third quarter 2000 net income of $44.6 million or $1.14 per diluted share. For the nine months ended August 31, 2001, net income totaled $125.7 million or $3.36 per diluted share compared with $136.6 million or $3.32 per diluted share for the nine months ended August 31, 2000. Results for the first nine months of 2000 included a one-time gain of $39.6 million, or $.97 per diluted share, on the issuance of stock by the Company’s French subsidiary in an initial public offering (the French IPO) in February 2000. Excluding the French IPO gain, net income was $96.9 million, or $2.35 per diluted share, for the nine months ended August 31, 2000. The increases in diluted earnings per share in the third quarter and first nine months of 2001 were principally driven by higher unit volume, a higher operating income margin and an increase in pretax income from mortgage banking operations.

CONSTRUCTION

Revenues reached an all-time third quarter high of $1.22 billion in 2001, increasing 25.9% or $249.8 million from $965.4 million in the third quarter of 2000 mainly due to an increase in housing revenues. Housing revenues for the period rose 21.0%, or $201.9 million, to $1.16 billion from $959.7 million in the year-earlier period as unit deliveries, excluding joint ventures, increased 13.4% to 6,473 units and the Company’s average selling price advanced 6.8%. Unit deliveries for the third quarter of 2001 were the highest for any third quarter in the Company’s history and reflected year-over-year gains in delivery volume in all of the Company’s geographic regions. Housing revenues in the United States of $1.04 billion for the third quarter were up 23.2% from $845.2 million for the corresponding quarter of 2000 as unit deliveries rose to 5,675 from 4,984. Housing revenues from the West Coast region (California operations) for the third quarter of 2001 totaled $440.7 million, increasing 19.4% from $369.2 million in the year-earlier period. Unit deliveries in the West Coast region in the third quarter of 2001 rose 7.6% to 1,553 units from 1,444 units in the third quarter of 2000. Housing revenues from the Southwest region (Nevada, Arizona and New Mexico operations) totaled $264.2 million for the three months ended August 31, 2001 compared to $226.6 million for the same period a year ago, an increase of 16.6%. Unit deliveries in the Southwest region increased to 1,690 units in the third quarter of 2001 from 1,596 units in the third quarter 2000. In the Central region (Texas, Colorado and Florida operations), housing revenues rose 34.9% to $336.4 million in the third quarter of 2001 from $249.4 million in the year-earlier quarter as unit deliveries increased 25.1% to 2,432 units from 1,944 in the year-earlier quarter. Revenues from French housing operations during the three months ended August 31, 2001 increased to $120.3 million on 798 units from $114.6 million on 726 units in the year-earlier period.

During the third quarter of 2001, the Company’s overall average selling price increased 6.8% to $179,500, from $168,100 in the same quarter a year ago. The Company’s domestic average selling price rose 8.2% to $183,500 in the third quarter of 2001 from $169,600 in the same period of 2000 as a result of price increases implemented in certain markets within each region. For the three months ended August 31, 2001, the average selling price in the Company’s West Coast region increased 11.0% to $283,800 from $255,700 for the same period a year ago and the average selling price in the Southwest region rose 10.1% to $156,300 from $142,000. In the Central region, the average selling price increased 7.8% to $138,300 in the third quarter of 2001 from $128,300 in the third quarter of 2000. In France, the average selling price in the third quarter of 2001 decreased 4.4% to $150,800 from $157,800 in the year-earlier quarter primarily due to a higher proportion of deliveries generated from condominiums, which are typically priced below single-family homes.

The Company’s commercial activities in France generated revenues of $37.2 million in the third quarter of 2001. By comparison, the Company recorded no commercial revenues in the third quarter of 2000. Revenues from Company-wide land sales totaled $16.3 million in the third quarter of 2001 compared to $5.6 million in the third quarter of 2000.

For the first nine months of 2001, construction revenues increased by $430.0 million, or 16.3%, to $3.08 billion, from $2.65 billion for the same period a year ago mainly as a result of higher housing revenues. Housing revenues totaled $2.97 billion on 16,724 units in the first nine months of 2001 compared to $2.57 billion on 15,317 units for

10

the same period a year ago. Housing operations in the United States produced revenues of $2.67 billion on 14,662 units in the first nine months of 2001 and $2.27 billion on 13,469 units in the comparable period of 2000. During the first nine months of 2001, housing revenues from the West Coast region increased 14.9% to $1.10 billion from $961.4 million in the first nine months of 2000, on a 3.8% increase in unit deliveries during the period to 3,922 units from 3,779 units in 2000. Housing revenues from the Southwest region increased 14.4% to $693.7 million in the first nine months of 2001 from $606.4 million in the prior year’s period as unit deliveries in the region rose 5.5% to 4,441 from 4,209. In the Central region, housing revenues increased 24.2% to $869.8 million in the nine-month period of 2001 from $700.2 million in the same period of 2000 with deliveries in the region increasing 14.9% to 6,299 from 5,481. French housing revenues totaled $301.5 million on 2,062 units in the first nine months of 2001 compared to $298.0 million on 1,844 units in the corresponding period of 2000.

The Company-wide average new home price increased 6.0% to $177,600 in the first nine months of 2001 from $167,600 in the year-earlier period. For the first nine months of 2001, the average selling price in the West Coast region increased 10.7% to $281,700 from $254,400 for the first nine months of 2000 and the average selling price in the Southwest region rose 8.4% to $156,200 from $144,100. The average selling price in the Central region increased 8.1% in the first nine months of 2001 to $138,100 from $127,800 in the same period of 2000. The higher average selling prices in each of the Company’s domestic regions in the first nine months of 2001 resulted from selected increases in sales prices in certain markets. In France, the average selling price for the nine-month period decreased 9.5% to $146,200 in 2001 compared to $161,600 in 2000, primarily due to an increase in the proportion of deliveries generated from condominiums, as well as an adverse foreign currency translation impact.

The Company’s commercial activities in France generated revenues of $53.6 million in the first nine months of 2001, while no commercial revenues were generated in the same period a year ago. The Company’s commercial activities in France increased in 2001 due to more favorable commercial market conditions. Company-wide revenues from land sales decreased to $51.8 million in the first nine months of 2001 from $78.2 million in the first nine months of 2000. Land sales were higher in the first nine months of 2000 than in 2001 as the Company was actively executing its asset repositioning strategy which included land sales in various markets.

Operating income increased by $23.9 million to $99.8 million in the third quarter of 2001 from $75.9 million in the third quarter of 2000. The construction operating income margin for the three months ended August 31, 2001 rose .3 percentage points to 8.2% from 7.9% in the year-earlier period, with a higher housing gross margin accounting for most of the increase. Gross profits increased by $47.9 million, or 25.2%, to $238.2 million in the third quarter of 2001 from $190.3 million in the prior year’s period. During this same period, housing gross profits increased by $42.1 million to $232.1 million from $190.0 million. The housing gross margin rose to 20.0% in the third quarter of 2001 from 19.8% in the year-earlier quarter, primarily due to higher average selling prices. Commercial activities in France generated gross profits of $5.8 million during the quarter ended August 31, 2001, while no commercial profits were included in the same quarter a year ago. Land sales generated nominal profits in the third quarters of both 2001 and 2000.

Selling, general and administrative expenses totaled $138.4 million in the three-month period ended August 31, 2001 compared to $114.4 million in the same period a year ago. As a percentage of housing revenues, selling, general and administrative expenses in the third quarter of 2001 were flat with the same period a year ago at 11.9%. As a percentage of housing and commercial revenues, selling, general and administrative expenses improved .4 percentage points to 11.5% in the third quarter of 2001 from 11.9% in the third quarter of 2000.

For the first nine months of 2001, operating income increased by $50.1 million to $217.2 million from $167.1 million in the corresponding period of 2000. As a percentage of construction revenues, operating income increased .8 percentage points to 7.1% in the first nine months of 2001 from 6.3% in the same period of 2000 due to both a higher housing gross margin and an improved selling, general and administrative expense ratio. Housing gross profits increased by $90.3 million, or 18.2%, to $586.0 million in the first nine months of 2001 from $495.7 million in the first nine months of 2000 with the housing gross margin increasing to 19.7% from 19.3%. The increase in the Company’s housing gross margin for the nine months ended August 31, 2001 resulted primarily from higher average selling prices and lower construction costs. Commercial activities in France produced gross profits of $8.3 million in the first nine months of 2001 while there were no commercial activities in 2000. Company-wide land sales generated nominal profits for the first nine months of both 2001 and 2000.

Selling, general and administrative expenses rose by $48.7 million to $377.6 million for the first nine months of 2001 from $328.9 million for the same period of 2000. As a percentage of housing revenues, selling, general and administrative expenses improved by .1 percentage point to 12.7% for the nine months ended August 31, 2001 from 12.8% for the corresponding period of 2000. As a percentage of housing and commercial revenues, selling, general

11

and administrative expenses improved .3 percentage points to 12.5% in the nine-month period of 2001 from 12.8% in the nine-month period of 2000.

Interest income totaled $.8 million in the third quarter of 2001 compared to $1.3 million in the third quarter of 2000. For the first nine months, interest income totaled $2.6 million in 2001 and $5.0 million in 2000. The decline in interest income in the third quarter and first nine months of 2001 reflected a decrease in the interest bearing average balances of short-term investments and mortgages receivable as compared to the same periods a year ago.

Interest expense (net of amounts capitalized) increased by $2.3 million to $11.4 million in the third quarter of 2001 from $9.1 million in the third quarter of 2000. For the nine months ended August 31, 2001, interest expense increased by $8.4 million to $30.7 million from $22.3 million for the nine months ended August 31, 2000. Gross interest incurred in the three months and nine months ended August 31, 2001 was higher than that incurred in the corresponding year-ago periods by $2.4 million and $10.3 million, respectively, due to increased debt levels associated with higher inventory balances and the share repurchases executed by the Company throughout 2000. Also contributing to the increase in net interest expense was a decrease in the percentage of interest capitalized resulting from a lower proportion of land under development in 2001 compared to 2000. During the three months ended August 31, 2001, the percentage of interest capitalized decreased to 56.4% from 61.6% in the same period of 2000. For the nine-month periods ended August 31, this percentage decreased to 60.9% in 2001 from 67.3% in 2000.

Minority interests totaled $8.0 million in the third quarter of 2001 and $8.4 million in the third quarter of 2000. For the first nine months of 2001, minority interests totaled $20.3 million compared to $20.9 million for the first nine months of 2000. Minority interests for the three months and nine months ended August 31, 2001 were comprised of two major components: income from consolidated subsidiaries and joint ventures related to residential and commercial activities, and distributions associated with the Company’s Feline Prides. For the three months ended August 31, 2001 and 2000, distributions associated with the Feline Prides totaled $3.8 million in both years. For the nine months ended August 31, 2001 and 2000, these distributions totaled $11.4 million. Since the Feline Prides mandatorily converted into common stock of the Company on August 16, 2001, minority interests of future periods will no longer include distributions associated with the Feline Prides.

Equity in pretax income of unconsolidated joint ventures totaled $.8 million in the third quarters of 2001 and 2000. The Company’s joint ventures generated combined revenues of $17.4 million during the three months ended August 31, 2001 compared with $24.2 million in the corresponding period of 2000. For the first nine months of 2001, the Company’s equity in pretax income of unconsolidated joint ventures totaled $2.4 million compared to $2.3 million for the same period of 2000. Combined revenues from these joint ventures totaled $59.1 million in the first nine months of 2001 and $87.8 million in the first nine months of 2000. Revenues from unconsolidated joint ventures were lower in the three-month and nine-month periods ended August 31, 2001 due to a decrease in joint venture unit deliveries. All of the joint venture revenues in the 2001 and 2000 periods were generated from residential properties.

MORTGAGE BANKING

Interest income and interest expense increased by $1.1 million and $.9 million, respectively, in the third quarter as compared to the same quarter a year ago. For the first nine months of 2001, interest income from mortgage banking activities was essentially unchanged from the same period a year ago and related interest expense increased by $.2 million. Interest income for the three-month period ended August 31, 2001 was higher primarily due to an increase in the balance of first mortgages held under commitments of sale and other receivables outstanding as compared to the same period a year earlier. Similarly, interest expense was higher in the three-month and nine-month periods of 2001, mainly due to an increase in the amount of notes payable outstanding during the periods.

Other mortgage banking revenues increased by $3.4 million to $14.0 million in the third quarter of 2001 from $10.6 million in the prior year’s third quarter. For the first nine months of 2001, other mortgage banking revenues totaled $32.2 million, an increase of $6.6 million from $25.6 million in the first nine months of 2000. The increases were primarily the result of higher gains on the sale of servicing rights partly due to higher volume and increased retention. Also contributing to the increase for the third quarter of 2001 was a shift in product mix toward a higher proportion of fixed rate loans.

General and administrative expenses associated with mortgage banking activities increased by $.3 million to $5.2 million in the third quarter of 2001 from $4.9 million for the same period a year ago. For the nine-month period, these expenses totaled $14.3 million in 2001 and $11.4 million in 2000. The increase in general and administrative expenses in 2001 was due to the expansion of certain ancillary business, higher staff levels in place to accommodate

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the Company’s higher backlog and the overall growth of the mortgage banking operations in anticipation of higher origination volumes.

INCOME TAXES

Income tax expense totaled $31.1 million and $21.8 million in the third quarter of 2001 and 2000, respectively. For the first nine months of 2001, income tax expense totaled $64.8 million compared to $50.0 million in the same period of 2000. The income tax amounts represented an effective income tax rate of approximately 34% in 2001 and 2000 (excluding the French IPO gain).

Liquidity and Capital Resources

The Company assesses its liquidity in terms of its ability to generate cash to fund its operating and investing activities. Historically, the Company has funded its construction and mortgage banking concerns with internally generated operating results and external sources of debt and equity financing. For the nine months ended August 31, 2001, net cash provided by operating, investing and financing activities totaled $12.1 million compared to $16.8 million provided in the nine months ended August 31, 2000.

Operating activities used $144.7 million of cash during the first nine months of 2001 compared to $6.0 million used during the same period of 2000. The Company’s uses of operating cash in the first nine months of 2001 included investments in inventories of $255.3 million (excluding $33.6 million of inventories acquired through seller financing) and an increase in receivables of $167.4 million. Partially offsetting these uses was cash provided from nine months’ earnings of $125.7 million, an increase in accounts payable, accrued expenses and other liabilities of $78.9 million, other operating sources of $14.7 million and various noncash items deducted from net income.

Operating activities for the first nine months of 2000 used cash to fund an investment of $224.6 million in inventories (excluding $12.4 million of inventories acquired through seller financing), a gain on the issuance of French subsidiary stock of $39.6 million and other operating uses of $29.8 million. Sources of operating cash in the first nine months of 2000 included nine months’ earnings of $136.6 million, a decrease in receivables of $74.3 million, an increase in accounts payable, accrued expenses and other liabilities of $16.9 million and various noncash items deducted from net income.

Investing activities used $22.3 million of cash in the first nine months of 2001 compared to $5.5 million used in the year-earlier period. In the first nine months of 2001, $29.1 million, net of cash acquired, was used for the acquisition of Trademark and $5.8 million was used for net purchases of property and equipment. Partially offsetting these uses were proceeds of $6.4 million received from mortgage-backed securities, which were principally used to pay down the collateralized mortgage obligations for which the mortgage-backed securities had served as collateral, distributions of $4.1 million relating to investments in unconsolidated joint ventures and net sales of $2.1 million of mortgages held for long term investment. In the first nine months of 2000, $11.6 million was used for net purchases of property and equipment. Partially offsetting this use were proceeds of $5.2 million received from mortgage-backed securities, sales of mortgages held for long-term investment of $.7 million and investments in unconsolidated joint ventures of $.2 million.

Financing activities in the first nine months of 2001 provided $179.1 million of cash compared to $28.3 million provided in the first nine months of 2000. In the first nine months of 2001, $247.5 million of cash was provided from the issuance of 9 1/2% senior subordinated notes. Partially offsetting the cash provided were net payments on borrowings of $36.7 million, payments to minority interests of $17.7 million, cash dividend payments of $8.0 million and payments on collateralized mortgage obligations of $6.0 million. Pursuant to its 1997 Shelf Registration, the Company issued the 9 1/2% senior subordinated notes at 100% of the principal amount of the notes. The notes, which are due February 15, 2011 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 redeemable at the option of the Company, in whole, or in part, at 104.750% of their principal amount beginning February 15, 2006, and thereafter at prices declining annually to 100% on and after February 15, 2009.

Financing activities in the first nine months of 2000 resulted in net cash inflows due to proceeds from the issuance of French subsidiary stock of $113.1 million and net proceeds from borrowings of $82.6 million, partially offset by repurchases of common stock of $137.5 million, payments to minority interests of $16.0 million, cash dividend payments of $8.9 million and payments on collateralized mortgage obligations of $5.0 million.

On May 24, 2001, the Company’s mortgage banking subsidiary renewed its Master Loan and Security Agreement with an investment bank. The agreement, which expires on May 25, 2002, provides for a facility fee based on the

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$200.0 million maximum amount available and provides for interest to be paid monthly at the Eurodollar Rate plus an applicable spread on amounts borrowed. The amounts outstanding under the Master Loan and Security Agreement are secured by a borrowing base, which includes certain mortgage loans held under commitments of sale and are repayable from sales proceeds. There are no compensating balance requirements under the agreement. The agreement includes financial covenants and restrictions which, among other things, require the maintenance of certain financial statement ratios, a minimum tangible net worth and a minimum net income.

On July 19, 2001, the Company acquired Trademark Home Builders, Inc. (“Trademark”), a builder of single-family homes in Jacksonville, Florida. The acquisition marks the Company’s entry into the Florida market. Trademark was acquired for approximately $30.1 million, including the assumption of approximately $16.3 million in debt, and was accounted for under the purchase method of accounting. The excess of the purchase price over the estimated fair value of net assets acquired was $9.2 million and was allocated to goodwill. In accordance with SFAS No. 142, the goodwill amount will not be amortized but will be reviewed for impairment on an annual basis. The results of Trademark were included in the Company’s consolidated financial statements as of the acquisition date.

On August 16, 2001, the Company’s Feline Prides, in the amount of $189.8 million, mandatorily converted into 5,977,109 shares of the Company’s common stock. In connection with the conversion, all of the 8% debentures held by KBHC Financing I, a Delaware statutory business trust wholly owned by the Company, were retired.

As of August 31, 2001, the Company had a total of $539.4 million available under its $732.0 million domestic unsecured revolving credit facility. The Company’s French unsecured financing agreements, totaling $304.8 million, had in the aggregate $108.2 million available at August 31, 2001. In addition, the Company’s mortgage banking operations had $10.7 million available under its $300.0 million Mortgage Warehouse Facility and $3.6 million available under its $200.0 million Master Loan and Security Agreement at quarter-end. The Company’s financial leverage, as measured by the ratio of debt to total capital, was 53.4% at August 31, 2001 compared to 53.1% at August 31, 2000.

On October 4, 2001, the Company’s Board of Directors approved a stock repurchase authorization of up to 4.0 million shares of the Company’s common stock, or approximately 9.0% of total outstanding shares. The authorization positions management to opportunistically purchase common shares from time-to-time on the open market or in privately negotiated transactions. No shares had been repurchased under this authorization as of the date of filing this report.

On or about October 15, 2001, the Company expects to file a universal shelf registration statement (the “2001 Shelf Registration”) with the Securities and Exchange Commission for up to $500.0 million of the Company’s debt and equity securities. The remaining capacity under the 1997 Shelf Registration together with the 2001 Shelf Registration is expected to provide the Company with a total issuance capacity of $750.0 million. The 2001 Shelf Registration is expected to provide 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, preferred stock, common stock, stock purchase contracts, stock purchase units and/or warrants to purchase such securities.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.141, Business Combinations, (“SFAS No. 141”) and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, (“SFAS No. 142”). SFAS No. 141 requires all business combinations to be accounted for using the purchase method of accounting and is effective for all business combinations with a closing date after June 30, 2001. SFAS No. 142 requires goodwill to be tested for impairment under certain circumstances, and written off when impaired, rather than being amortized as previous standards required. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Early application is permitted for entities, like the Company, with fiscal years beginning after March 15, 2001 provided that the first interim period financial statements have not been previously issued. The adoption of SFAS No. 141 did not have a material effect on the Company’s operating results or financial condition. The Company plans to early adopt SFAS No. 142 in the first quarter of its 2002 fiscal year. Application of the nonamortization provisions of SFAS No. 142 by the Company is expected to result in the elimination of amortization expense of approximately $28.0 million per year. The Company will perform the first of the required impairment tests of goodwill as of December 1, 2001 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.

The Company believes it has adequate resources and sufficient credit line facilities to satisfy its current and reasonably anticipated future requirements for funds to acquire capital assets and land, to construct homes, to fund its mortgage banking operations and to meet any other needs of its business, both on a short and long-term basis.

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Outlook

The Company’s residential backlog, excluding joint ventures, as of August 31, 2001 consisted of 13,464 units, representing aggregate future revenues of approximately $2.31 billion, up 11.1% and 13.4%, respectively, from 12,115 units, representing aggregate future revenues of approximately $2.03 billion, a year earlier. Company-wide net orders for the third quarter of 2001 totaled 5,665 compared to 5,357 net orders in the third quarter of 2000. The Company’s backlog ratio (defined as the ratio of beginning backlog to deliveries in the succeeding quarter) at the end of the third quarter of 2001 was approximately 220.5% compared with 214.9% a year earlier.

The Company’s domestic operations accounted for approximately $2.00 billion of backlog value on 11,429 units at August 31, 2001, up from $1.72 billion on 10,217 units at August 31, 2000. Backlog in the West Coast region decreased to approximately $653.5 million on 2,298 units at August 31, 2001 from $737.9 million on 2,920 units at August 31, 2000, reflecting a 16.8% decrease in net orders to 1,082 in the third quarter of 2001 from 1,301 for the same quarter a year ago. The year-over-year decrease in West Coast net orders in the third quarter of 2001 was partly due to an 8.8% decline in the average number of active communities in the region. The Company’s Southwest operations demonstrated significant year-over-year growth in backlog levels with the backlog value at August 31, 2001 increasing to approximately $497.7 million on 3,192 units from $377.3 million on 2,597 units at August 31, 2000, while net orders rose 14.8% to 1,494 in the third quarter of 2001 from 1,301 in the year-earlier quarter. Backlog in the Company’s Central region totaled approximately $847.6 million on 5,939 units at the end of the third quarter of 2001 compared to $607.8 million on 4,700 units a year earlier. Central region net orders for the third quarter 2001 were up 8.1% to 2,369 units from 2,191 units in the same period of 2000, reflecting a 22.1% increase in the average number of active communities in the region. The average number of active communities in the Company’s domestic operations for the third quarter of 2001 was 273, essentially flat when compared to 270 for the same quarter a year ago.

In France, the value of residential backlog at August 31, 2001 was approximately $306.5 million on 2,035 units, down from $310.0 million on 1,897 units a year earlier. The Company’s net orders in France increased by 27.9% to 720 units in the third quarter of 2001 from 563 units in the third quarter of 2000, as the average number of active communities rose 21.4%. The value of backlog associated with the Company’s French commercial development activities rose to approximately $16.9 million at August 31, 2001 from approximately $7.0 million at August 31, 2000.

The Company’s optimism going into the remainder of the year has been tempered by the tragic events of September 11, 2001 and the U.S. military response initiated on October 6, 2001, and it is still too early to determine what the overall economic impact of these events will be. Historically, the Company has delivered substantially all of the homes in its residential backlog; however, the Company has experienced some increase in cancellation rates since September 11, 2001. It is still too early to determine whether this increase will continue on a longer-term basis; if economic conditions worsen or interest rates increase, additional cancellations could occur.

Prior to September 11, 2001, demand in all of the Company’s regions was healthy as evidenced by the Company’s overall net orders for the month of August 2001 increasing 12.2% from the same month a year earlier. Year-over-year net order comparisons remained positive up until September 11, 2001. However, a decline in net orders in the weeks immediately following the acts of terrorism resulted in Company-wide net orders, excluding joint ventures, for the month of September 2001 decreasing 13.9% to 1,321, from the 1,535 net orders posted in the comparable period of 2000. During this same period, domestic net orders fell 20.5%, reflecting year-over-year decreases of 49.6%, 4.0% and 8.9% in the West Coast, Southwest and Central regions, respectively. The decline in net orders in the West Coast region was also partly due to the number of active communities in the region decreasing approximately 15.0% from the year-earlier period. In France, net orders for the month of September 2001 increased 55.6% compared to the same period a year ago mainly due to acquisitions completed in the previous year as well as a strong promotional campaign. The Company is hopeful that its domestic net orders will improve over time, particularly in light of the recent actions taken by the Federal Reserve Board to lower interest rates.

Despite the heightened economic uncertainty resulting from the recent acts of terrorism and the commencement of the U.S. military response, the Company believes that it is on track to meet its projections for the remainder of the 2001 fiscal year, with appropriate caution that the homebuilding industry may be negatively impacted by a variety of economic factors possibly including the erosion of consumer confidence and employment levels stemming from the current international conflict. The Company currently expects to deliver approximately 24,400 homes for the full year 2001 and anticipates another record level of earnings in 2001 based upon such projected deliveries; however, these goals could be materially affected by various risk factors such as the continued impact of terrorist activities and U.S. response, accelerating recessionary trends and other adverse changes in economic conditions either

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nationally, in the U.S. or France, or in the localized regions in which the Company operates; continued diminution in domestic job growth or employment levels; a continued downturn in the economy’s pace; continued uncertainties associated with California’s electricity supply problems; changes in home mortgage interest rates or consumer confidence, among other things. The Company currently believes that even in the aftermath of the events of September 11, 2001, it remains well-positioned to meet its financial goals for the remainder of fiscal year 2001 due to the year-over-year earnings growth achieved in the first nine months of 2001 and the backlog of homes in place at the beginning of the fourth quarter. In the fourth quarter of 2001, the Company intends to continue to focus on high-growth markets while at the same time looking for ways to increase efficiencies and leverage its volume to take advantage of economies of scale.

With the heightened uncertainty surrounding the overall economy, for the time being, the Company plans to take a more conservative posture with regard to cash expenditures, including renegotiating or extending option periods on land purchases and terminating certain discretionary expenditures, among other things. The Company believes that having increased cash available will allow it to better operate in a challenging environment and pursue opportunities to reduce debt, repurchase stock and acquire land and/or businesses in the future. To prepare for the possibility of a prolonged economic downturn, the Company is also currently conducting contingency planning. As part of this planning process, the Company is reviewing its overhead structure to identify non-essential expenditures and to determine appropriate actions to take to reduce costs, depending on how long the economic uncertainty continues.

Although the Company has conservatized its cash expenditures in the wake of the acts of terrorism and military response during September and October 2001, the Company still intends to increase overall unit delivery growth in future years through the well-developed, long-term strategies it has in place. The Company’s growth strategies include the expansion of existing operations to achieve optimal market volume levels and the possible entry into new geographic markets through acquisitions or de novo entry. Growth in the Company’s existing markets will be driven by the Company’s ability to increase the average number of active communities in its major markets balanced against the U.S. political and economic environment.

Safe Harbor Statement

Investors are cautioned that certain statements contained in this document, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to securities analysts and stockholders during presentations about the Company are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which 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 performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management 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 the Company, economic and market factors and the homebuilding industry, among other things. These statements are not guaranties of future performance, and the Company has no specific intention to update these statements.

Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements made by the Company or Company officials due to a number of factors. The principal important risk factors that could cause the Company’s actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to the continued impact of the recent terrorist activities and U.S. response, accelerating recessionary trends and other adverse changes in general economic conditions, material prices, labor costs, interest rates, uncertainties associated with California’s electricity supply problems, the secondary market for loans, consumer confidence, competition, currency exchange rates (insofar as they affect the Company’s operations in France), environmental factors, government regulations affecting the Company’s operations, the availability and cost of land in desirable areas, unanticipated violations of Company policy, unanticipated legal proceedings, and conditions in the capital, credit and homebuilding markets. See the Company’s Annual Report on Form 10-K for the year ended November 30, 2000 and other Company filings with the Securities and Exchange Commission for a further discussion of risks and uncertainties applicable to the Company’s business. The Company undertakes no obligation to update any forward-looking statements in this Report on Form 10-Q or elsewhere.

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PART II.  OTHER INFORMATION

Item 5.  Other Information

Geographical Information

The following table presents residential information in terms of unit deliveries to home buyers and net orders taken by geographical market for the three months and nine months ended August 31, 2001 and 2000, together with backlog data in terms of units and value by geographical market as of August 31, 2001 and 2000.

		Three Months Ended August 31,
		Deliveries				Net Orders
Market		2001		2000		2001		2000
West Coast			1,553		1,444		1,082		1,301
Southwest			1,690		1,596		1,494		1,301
Central			2,432		1,944		2,369		2,191
Foreign			798		726		720		564
	Total		6,473		5,710		5,665		5,357
Unconsolidated Joint Ventures			79		102		64		102

		Nine Months Ended August 31,								August 31,
																Backlog — Value
		Deliveries				Net Orders				Backlog — Units						In Thousands
Market		2001		2000		2001		2000		2001			2000			2001			2000
West Coast			3,922		3,779		3,799		4,820		2,298			2,920		$	653,487		$	737,912
Southwest			4,441		4,209		5,322		4,699		3,192			2,597			497,700			377,324
Central			6,299		5,481		7,978		6,982		5,939	*		4,700			847,614	*		607,767
Foreign			2,062		1,848		2,280		2,018		2,035			1,898	*		306,470			310,240	*
	Total		16,724		15,317		19,379		18,519		13,464	*		12,115	*	$	2,305,271	*	$	2,033,243	*
Unconsolidated Joint Ventures			261		362		203		338		150			195		$	30,000		$	35,880

* Backlog amounts for 2001 have been adjusted to reflect the acquisition of Trademark Home Builders, Inc. Therefore, backlog amounts at November 30, 2000 combined with net order and delivery activity for the first nine months of 2001 will not equal ending backlog at August 31, 2000. Similarly, backlog amounts for 2000 have been adjusted to reflect the acquisition of two France-based builders.

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Item 6.  Exhibits and Reports on Form 8-K

Exhibits

10.1	Amended and Restated Employment Agreement of Bruce Karatz, dated July 11, 2001.
24	The consent of Ernst & Young LLP, independent auditors, filed as an exhibit to the Company’s 2000 Annual Report on Form 10-K, is incorporated by reference herein.

Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended August 31, 2001.

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SIGNATURES

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

		KB HOME Registrant
Dated	October 12, 2001	/s/  BRUCE KARATZ Bruce Karatz Chairman and Chief Executive Officer (Principal Executive Officer)
Dated	October 12, 2001	/s/  WILLIAM R. HOLLINGER William R. Hollinger Senior Vice President and Controller (Principal Accounting Officer)

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INDEX OF EXHIBITS

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10.1	Amended and Restated Employment Agreement of Bruce Karatz, dated July 11, 2001

20 EX-10.1 3 v76292ex10-1.txt EXHIBIT 10.1 1 EXHIBIT 10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is dated as of JULY 11, 2001 (the "Effective Date"), between KB Home, a Delaware corporation (the "Company"), and Bruce Karatz (the "Executive"). WHEREAS, the Company and the Executive previously have entered into that certain letter agreement, dated as of December 1, 1995 (the "1995 Letter Agreement"), pursuant to which the Company currently employs the Executive; and WHEREAS, the Company and the Executive each have determined that it would be to the advantage and best interest of the Company and the Executive to enter into this Agreement to extend the Executive's employment term and to modify certain of the Executive's and the Company's obligations and responsibilities under the 1995 Letter Agreement; and WHEREAS, the Company and the Executive desire to have this Agreement amend and restate the 1995 Letter Agreement in its entirety and supersede the 1995 Letter Agreement in all respects effective as of the Effective Date, except as expressly provided otherwise by this Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto do hereby agree as follows: 1. Employment. As of the Effective Date, the Company hereby employs the Executive and the Executive hereby accepts employment by the Company in accordance with the terms and provisions of this Agreement. The Executive shall be an employee exclusively of the Company and shall serve the Company to the best of the Executive's abilities, devoting the Executive's full productive time, energies, and abilities to the fulfillment of the Executive's obligations hereunder, except for the Executive's (a) service on corporate, civic or charitable boards or committees which does not significantly interfere with the performance of the Executive's responsibilities hereunder; provided, however, that the Executive shall not serve as a member of the board of directors of any corporation whose activities involve or relate to the Company's business without the prior approval of the Compensation Committee of the Board and (b) management of the Executive's personal investments. All improvements, discoveries, business relationships, corporate opportunities, management procedures, and goodwill conceived, divested, established, developed, or perfected by the Executive during the period of the Executive's employment and related in any way to the business of the Company or any of its affiliates shall promptly be disclosed to and be the exclusive property of the Company. 2. Term. The term of this Agreement shall commence on the Effective Date, and, subject to earlier termination as provided herein, shall continue until the seventh year anniversary of the Effective Date; provided, however, that on January 1, 2002, the term shall automatically 2 be extended until December 31, 2008, unless the Executive shall give the Company prior written notice to the contrary. By mutual agreement in writing, at anytime during the period beginning on January 1, 2008 and ending on December 31, 2008, the term may be extended for any period agreed to by the Company and the Executive. 3. Duties and Responsibilities. The Executive shall be employed as the Chairman and Chief Executive Officer of the Company, and as such shall have responsibility for the supervision and management of the world-wide activities of the Company and its subsidiaries. The Executive shall manage such activities and perform such duties in accordance with the Executive's judgment and in the best interests of the Company and its shareholders, subject to such policies and directives as promulgated by the Board. 4. Compensation. For all services to be rendered by the Executive to the Company and its affiliates hereunder, including without limitation, services as an officer, director, or member of any committee, the Executive shall be compensated as follows: (a) Base Salary. The Executive shall receive a fixed base salary, which shall be payable in semi-monthly installments, in accordance with the customary payroll practices of the Company. For the calendar year ending December 31, 2001, the Executive's base salary shall be at an annual rate of $900,000 and commencing January 1, 2002 and annually thereafter, the Executive's salary shall be adjusted in accordance with the judgment and discretion of the Compensation Committee of the Board, provided that in no event shall the Executive's base salary during the term of this Agreement be less than at the annual rate of $900,000. (b) Incentive Compensation. The Executive shall be entitled to earn annual incentive compensation for the fiscal year ending November 30, 2001, and each subsequent fiscal year during the term of this Agreement. All incentive compensation, including restricted stock awards, to which the Executive is entitled under this subsection (b), shall be made under and subject to the terms of the Performance-Based Incentive Plan for Senior Management (the "Plan") or other Company plan pursuant to which such incentive compensation constitutes "qualified performance-based compensation" ("QPBC") within the meaning of Treasury Regulation Section 1.162-27(e). (i) For the fiscal year ending November 30, 2001, the Executive shall be entitled to earn the incentive compensation set forth in Section 4(b)(i) of the 1995 Letter Agreement. (ii) For the fiscal year ending November 30, 2002 and each subsequent fiscal year during the term of this Agreement, the Executive shall be entitled to earn the following incentive compensation: (aa) Subject to approval by the Company's shareholders of an amendment to the Plan increasing the maximum cash incentive payable to any person under the Plan from $3,000,000 to $5,000,000 or of an amendment to an other Company plan which permits an aggregate amount of $5,000,000 of annual cash compensation to qualify as QPBC (the "QPBC Amendment"), the Executive shall be entitled to the following annual incentive compensation based on the 2 3 return on equity on a net income basis ("ROE") of the Company, as defined and further described in Appendix A, payable in cash and shares of restricted stock as provided below: (1) If the ROE of the Company is at least 6.5% but less than 10%, then an annual incentive compensation equal to 1% of the pretax, preincentive income ("PPI") of the Company; (2) If the ROE of the Company is at least 10% but less than 15%, then an annual incentive compensation equal to 1.25% of the PPI of the Company plus .05% of PPI for each additional whole percentage of ROE in excess of 10%; (3) If the ROE of the Company is at least 15% but less than 20%, then an annual incentive compensation equal to 1.50% of PPI plus .10% of PPI for each additional whole percentage of ROE in excess of 15%; and (4) If the ROE of the Company equals or exceeds 20%, then an annual incentive compensation equal to 2% of the PPI of the Company. (5) On the Payment Date (as defined in subsection (iii) below), the annual incentive compensation payable to the Executive under clauses (1) through (4) shall be paid to the Executive 75% in cash and 25% in shares of restricted stock based on the fair market value of the stock (without regard on any restrictions on the stock) on the last date of the fiscal year for which the payment is being made; provided, however, that in no event shall the amount of the cash incentive compensation to be paid to the Executive be greater in any fiscal year than $5,000,000 (the "Maximum Limit"). If the cash portion of the annual incentive compensation earned by the Executive exceeds the Maximum Limit, the Executive shall be paid the excess amount in shares of restricted stock. (6) Notwithstanding any other provisions of this Agreement, if the Company's shareholders fail to approve the QPBC Amendment, the Executive shall be entitled to earn the incentive compensation provided by Section 4(b)(i) of the 1995 Letter Agreement for each fiscal year during the term of this Agreement. (7) The shares of restricted stock granted under clause (5) vest upon the third anniversary of the date of grant, provided the Executive is still employed by the Company on such date and shall vest earlier upon the Executive's termination of employment due to death, disability, involuntary termination of employment by the Company without Cause, or voluntary termination of employment for Good Reason. Such shares of restricted stock shall be forfeited upon the termination of the Executive employment for Cause or by the Executive's voluntary termination of employment without Good Reason before the third anniversary of the date of grant. The terms and conditions of the 3 4 shares of restricted stock are more fully defined in Appendix B. No fractional shares shall be issued hereunder. (iii) By no later than February 1, 2002, and each anniversary thereof, the Personnel, Compensation and Stock Plan Committee of the Board, or its successor committee (the "Committee"), will certify the amount of incentive compensation to which the Executive is entitled, if any, for the preceding fiscal year under subsections (b)(i) and (ii) above as required under the applicable plan. Promptly following the effective date of the certification and in accordance with the Company's incentive compensation payout policy in effect from time to time and on the date that the Company pays the annual bonuses to other participants in the applicable plan (the "Payment Date"), the Company will deliver any cash award and prepare an agreement substantially in the form of Appendix B, evidencing the restricted stock award earned under subsection (b)(ii). The grant date of any shares of restricted stock awarded under subsection (b)(ii)(aa)(5) shall be the Payment Date. (c) Retention Grant of Restricted Stock. In order to induce the Executive to enter into this Agreement and to agree to continue in the Company's employment during the term of this Agreement, as of the Effective Date, the Company shall grant the Executive a grant of 350,000 shares of restricted stock which shall vest 100% upon the occurrence of any of the following: (i) on December 31, 2008 provided the Executive is still employed by the Company on such date and shall vest earlier upon the Executive's termination of employment due to death, disability, involuntary termination of employment by the Company without Cause, or voluntary termination of employment for Good Reason, or (ii) upon a Change of Ownership (as defined below). Except as provided above, the shares of restricted stock granted under this subsection (c) shall be forfeited upon the termination of the Executive employment for Cause or by the Executive's voluntary termination of employment without Good Reason before December 31, 2008. The terms and conditions of the shares of restricted stock are more fully defined in Appendix C. (d) Employment Benefits. The Executive shall also be entitled to receive during the term of this Agreement all other employee benefits, including reimbursement for bona fide business expenses, club membership fees paid by the Company, a car leased by the Executive and paid for by the Company, all automobile expenses, vacations, life and medical insurance, key man motivational programs, the deferred profit sharing program, and stock option, restricted stock and similar plans as may be offered by the Company to its key executive personnel. The Executive shall further be entitled to receive up to $50,000 per year to pay for personal financial management services, in addition to tax and financial counseling services which will be offered to the Executive on the same basis as offered by the Company to its key executives. (e) Vacation. The Executive shall receive four (4) weeks paid vacation annually, subject to the terms of the Company's vacation policies as they relate to senior executive officers. 4 5 (f) SERP Benefits. The Executive shall be entitled to receive a benefit under a defined benefit supplemental retirement plan (the "SERP") which shall provide an annual retirement benefit for a period of 25 years to the Executive equal to 100% of the Executive's annual average base salary during the final three years of the Executive's employment if the Executive retires on or after November 30, 2008. The terms and conditions of this SERP are more fully defined in Appendix D. The SERP may be funded with a rabbi trust which may own a life insurance policy on the Executive's life as described in Appendix D. In the event of a Change of Ownership, the Company shall fund the SERP with a rabbi trust. (g) Terms of Stock Options and Restricted Stock. (i) The terms and conditions of any stock options and shares of restricted stock granted to the Executive prior to the Effective Date shall be subject to Section 4(d) of the 1995 Letter Agreement. (ii) All stock options and shares of restricted stock granted to the Executive after the Effective Date shall provide that such options and restricted stock shall be 100% vested upon the Executive's termination of employment due to death, disability, involuntary termination of employment by the Company without Cause, or voluntary termination of employment for Good Reason. In addition, such stock options shall provide that if the Executive retires on or after November 30, 2008, such options shall continue to be exercisable until the earlier of their original expiration dates or the 5th anniversary of such retirement. 5. Termination. (a) Death. (i) In the event of the Executive's death, this Agreement and all the Executive's unearned rights hereunder shall terminate immediately. In such event, the Company shall promptly pay to the Executive's estate all earned but unpaid incentive compensation. In addition, the Company shall pay the Executive's estate the current year incentive compensation as if the Executive survived until November 30 of that year and any amounts due under the SERP. Any unvested stock options or restricted stock which the Executive then holds shall become vested upon the Executive's death. The Company shall also pay to the Executive's estate an additional death benefit equal to two times the sum of the Executive's average annual base salary and the average "Value of the Incentive Compensation Earned" (as defined in Section 5(f) below) in each case, for the three fiscal years prior to the date of termination, which will be payable by the Company in a lump sum to the Executive's estate. (ii) In lieu of payments to the Executive's estate following the Executive's death, the Executive may designate a beneficiary or beneficiaries to whom all payments which may be due under this Agreement will be made in the event of the Executive's death. Such designation shall be made on a form delivered to the Company. The Executive shall have the right to change or revoke any such designation from time to time by filing a new designation or notice of revocation with the Company, and no notice 5 6 to any beneficiary nor consent by any beneficiary shall be required to effect any such change or revocation. If the Executive shall fail to designate a beneficiary before the Executive's death, or if no designated beneficiary survives the Executive, any payments which may be due under this Agreement following the Executive's death will be paid to the Executive's estate. (b) Disability. In the event the Executive shall become unable to perform the services contemplated by this Agreement due to a physical or mental disability for a continuous period of six months or an aggregate of six months in any eighteen month period, the Company may, to the extent consistent with the federal Family and Medical Leave Act and the California Family Rights Act, terminate this Agreement by giving written notice of such termination to the Executive. In the event of any such termination by the Company, the Company shall promptly pay to the Executive all earned but unpaid incentive compensation. In addition, the Company shall pay the Executive the current year incentive compensation as if the disability did not occur until November 30 of that year. The Company shall also pay to the Executive an amount equal to two times the sum of the Executive's average annual base salary and the average Value of the Incentive Compensation Earned, in each case, for the three fiscal years prior to the date of termination, reduced by amounts paid under a Company disability or income replacement plan, in twelve monthly installments following this termination. The Company may condition the payments set forth above upon securing from the Executive an appropriate release of claims under the federal Family and Medical Leave Act and the California Family Rights Act. (c) Without Cause; Good Reason. If the Company shall terminate the Executive's employment without Cause or the Executive shall terminate the Executive's employment for Good Reason (in each case, other than within 18 months following a Change of Ownership as provided in subsection (d) below), the Company shall pay the Executive a lump sum payment in an amount equal to three times the sum of the Executive's average annual base salary and the average Value of the Incentive Compensation Earned, in each case, for the three fiscal years prior to date of termination. (d) Termination Following a Change of Ownership. (i) If, within 18 months following a "Change of Ownership" (as defined below), the Company shall terminate the Executive's employment without Cause or the Executive shall terminate the Executive's employment for Good Reason, the Company shall pay the Executive, within 10 days following the termination of the Executive's employment, a lump sum payment in an amount equal to three times the sum of the Executive's average annual base salary and the average Value of the Incentive Compensation Earned, in each case, for the three fiscal years prior the fiscal year in which the Change of Ownership occurs. In the event payment is made under this subsection (d), no amount shall be payable under subsection (c) above. (ii) Anything in this Agreement to the contrary notwithstanding, if it shall be determined that any payment or distribution to the Executive or for the Executive's benefit (whether paid or payable or distributed or distributable) pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, 6 7 stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (the "Payments") would be subject to the excise tax imposed by section 4999 of the Code by reason of being "contingent on a change in the ownership or control" of the Company, within the meaning of Section 280G of the Code or to any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest or penalties, are collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive from the Company an additional payment (the "Gross-Up Payment") in an amount such that the net amount of the Payments and the Gross-Up Payment retained by the Executive after the calculation and deduction of all Excise Taxes (including any interest or penalties imposed with respect to such taxes) on the payment and all federal, state and local income tax, employment tax and Excise Tax (including any interest or penalties imposed with respect to such taxes) on the Gross-Up Payment provided for in this Section 5(d)(ii), and taking into account any lost or reduced tax deductions on account of the Gross-Up Payment, shall be equal to the Payments; (aa) All determinations required to be made under this Section 5(d)(ii), including whether and when the Gross-Up Payment is required and the amount of such Gross-Up Payment, and the assumptions to be utilized in arriving at such determinations shall be made by the Accountants (as defined below) which shall provide the Executive and the Company with detailed supporting calculations with respect to such Gross-Up Payment within fifteen (15) business days of the receipt of notice from the Executive or the Company that the Executive has received or will receive a Payment. For purposes of making the determinations and calculations required herein, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code, provided that the Accountant's determinations must be made on the basis of "substantial authority" (within the meaning of Section 6662 of the Code). For the purposes of this Section 5(d)(ii), the "Accountants" shall mean the Company's independent certified public accountants serving immediately prior to the Change of Ownership. In the event that the Accountants are also serving as accountant or auditor for the individual, entity or group effecting the Change of Ownership, the Executive shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accountants hereunder). All fees and expenses of the Accountants shall be borne solely by the Company. (bb) For the purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, such Payments will be treated as "parachute payments" within the meaning of section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that in the opinion of the Accountants such Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for services actually 7 8 rendered (within the meaning of section 280G(b)(4) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax. For purposes of determining the amount of the Gross-Up Payment the Executive shall be deemed to pay Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Gross-Up Payment is to be made and to pay any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of the Executive 's adjusted gross income); and to have otherwise allowable deductions for Federal, state and local income tax purposes at least equal to those disallowed because of the inclusion of the Gross-Up Payment in the Executive 's adjusted gross income. To the extent practicable, any Gross-Up Payment with respect to any Payment shall be paid by the Company at the time the Executive is entitled to receive the Payments and in no event will any Gross-Up Payment be paid later than five days after the receipt by the Executive of the Accountant's determination. Any determination by the Accountants shall be binding upon the Company and the Executive. (cc) As a result of uncertainty in the application of section 4999 of the Code at the time of the initial determination by the Accountants hereunder, it is possible that the Gross-Up Payment made will have been an amount less than the Company should have paid pursuant to this Section 5(d)(ii) (the "Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 5(d)(ii)(bb) and the Executive is required to make a payment of any Excise Tax, the Underpayment shall be promptly paid by the Company to or for the Executive 's benefit. (dd) The Executive and the Company shall each provide the Accountants access to and copies of any books, records and documents in the possession of the Company or the Executive , as the case may be, reasonably requested by the Accountants, and otherwise cooperate with the Accountants in connection with the preparation and issuance of the determination contemplated by this Section 5(d)(ii). (ee) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. the Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive give such notice to the Company (or such shorter period ending on the date that any payment of taxes, interest and/or penalties with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: 8 9 (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claims; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify the Executive for and hold the Executive harmless from, on an after-tax basis, any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of all related costs and expenses. Without limiting the foregoing provisions of this Section 5(d)(ii), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive , on an interest-free basis, and shall indemnify the Executive for and hold the Executive harmless from, on an after-tax basis, any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance (including as a result of any forgiveness by the Company of such advance); provided, further, that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 9 10 (e) For Cause; Without Good Reason. In the event of the termination of the Executive's employment by the Company for Cause or by the Executive without Good Reason, this Agreement and all the Executive's unearned rights hereunder shall terminate immediately. (f) Value of the Incentive Compensation Earned. For purposes of this Section 5, the "Value of the Incentive Compensation Earned" for the fiscal year ending on November 30, 2001 and for any fiscal year ending thereafter if the Company's shareholders do not approve the QPBC Amendment shall be determined by multiplying 1.75% times PPI for the applicable fiscal year, provided that the ROE of the Company (as defined in the 1995 Letter Agreement) was equal to or greater than ten percent (10%) for the applicable fiscal year. For purposes of this Section 5, the "Value of Incentive Compensation Earned" for the fiscal year ending on November 30, 2002 and for any fiscal year ending thereafter if the Company's shareholders approve the QPBC Amendment shall be determined pursuant to Section 4(b)(ii) for the applicable fiscal year. (g) Change of Ownership. A "Change of Ownership" shall mean any change in control of the Company of a nature that would be required to be reported in response to Item 1(a) of the Current Report on Form 10-K, as in effect on the Effective Date, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Act"); provided that, without limitation, such a "Change of Ownership" shall be deemed to have occurred if: (i) a third person, including a "group" as such term is used in Section 13(d)(3) of the Act, becomes the beneficial owner, directly or indirectly, of 20% or more of the combined voting power of the Company's outstanding voting securities ordinarily having the right to vote for the election of directors of the Company, unless such acquisition of beneficial ownership is approved by a majority of the Incumbent Board (as such term is defined in clause (ii) below); or (ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is 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-11 of Regulation 14A promulgated under the Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board. For purposes of any incentive compensation paid to the Executive pursuant to this Agreement, the definition of "Change of Ownership" set forth herein shall prevail over the definition of "Change of Ownership", or any similar term, contained in any applicable plan, or any other employee compensation plan, under which such incentive compensation may be granted. 10 11 (h) Cause. "Cause" shall mean (i) acts of fraud or misappropriation committed by the Executive and intended to result in substantial personal enrichment at the expense of the Company or (ii) repeated violations by the Executive of the Executive's obligations under this Agreement which are demonstrably willful and deliberate and which result in material injury to the Company; provided that, in each case, the Executive has received written notice of the described activity, has been afforded a period of 30 days to cure or correct the activity described in the notice, and has failed to cure, correct or cease the activity, as appropriate. The Executive's employment shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board (excluding the Executive), finding that in the Board's good faith opinion the Executive was guilty of conduct set forth above in this Section and specifying the particulars thereof in reasonable detail. (i) Good Reason. "Good Reason" shall mean, without the consent of the Executive, (i) any changes in the duties and responsibilities of the Executive which are materially inconsistent with the duties and responsibilities contemplated in Section 3 hereof, (ii) any reduction of the Executive's salary, aggregate incentive compensation opportunities (excluding any reduction in incentive compensation awards due to the economic performance of the Company) or aggregate benefits, (iii) any required relocation of the Executive's office beyond a 50 mile radius from the present location of the Executive's office, (iv) the Company's material breach of the terms of this Agreement, (v) a failure to re-elect the Executive as a member of the Board, (v) any failure by the Company to obtain the assumption of this Agreement by a successor of the Company and (vi) the Company's requiring the Executive to travel materially in excess of current business travel obligations. Any good faith determination by the Executive that Good Reason exists shall be presumed correct and shall be binding on the Company. 6. Benefits After Retirement. In the event the Executive's employment with the Company terminates at or after the term of this Agreement or the Executive retires earlier with the prior consent of the Board, to be determined in its sole discretion (provided, however, that in the event of a Change of Ownership, such consent of the Board shall not be required), the Company shall continue to provide to the Executive and his eligible dependents for the period of the Executive's lifetime medical and dental benefits at least equal to those which would have been provided to the Executive and his eligible dependents under the Company's plan had he not retired, and in the event the Executive and his eligible dependents are not eligible under the terms of the Company's plans to continue to be covered, in such event, the Company shall provide the Executive with substantially equivalent coverage through other sources; provided, however, that if the Executive becomes re-employed with another employer and is eligible to receive medical and dental benefits under another employer's plans, the Company's obligations under this Section 6 shall be reduced to the extent comparable benefits are actually received by the Executive, and any such benefits actually received by the Executive shall be reported promptly to the Company. In addition, at the reasonable request of the Executive, the Company shall provide to the Executive an appropriate office and administrative support commensurate with the Executive's former status as Chief Executive Officer of the Company plus reimbursement of reasonable expenses attendant to the maintenance of such office and retention of such administrative support. At the request of the Executive, the Company shall, in lieu of providing 11 12 such office and administrative support, reimburse the Executive for expenses of such office and administrative support. 7. Exclusive Benefit. (a) The Executive and the Company have agreed that a primary material element of this contract is the desire of the Company to insure to itself and its affiliates the sole and exclusive right to receive the full benefit of the Executive's time, skill, and opportunities until the date of termination of this Agreement, as the same may be extended. Subject only to the Company's payment to the Executive of the compensation provided hereunder, the Executive has agreed that until said date the Executive will not, as a director, officer, agent, employee, partner, owner, five or more percent shareholder, or otherwise, enter into or conduct any business venture which may be competitive, directly or indirectly, with that of the Company or any affiliate. A business or activity shall be deemed to be competitive if it is substantially similar to one engaged in or conducted by the Company or any affiliate and is conducted within a radius of one hundred fifty (150) miles from any location in which such business or activity is engaged in or conducted by the Company or an affiliate. It is understood that passive investments in income producing properties are permitted by this subsection. Furthermore, the Executive has agreed that the Executive will not, during the term of this Agreement or for a period of two years thereafter, employ or seek to employ any person employed by the Company or any of its affiliates in connection with any business activities in which the Executive may engage. (b) During the performance of the Executive's duties on behalf of the Company, the Executive shall receive and be entrusted with certain confidential and/or secret information of a proprietary nature. The Executive shall not discuss or use, during the term of this employment agreement or any time thereafter, any such information which is not otherwise publicly available. (c) The Executive acknowledges that the Executive's extensive experience and knowledge of the Company and relationship with its employees make the services to be performed by the Executive hereunder of a special, unusual, and peculiar value to the Company, not readily replaceable, and that by reason of the Executive's continued employment the Executive will continue to acquire additional confidential information and trade secrets. The loss of the Executive's services hereunder or the disclosure of such confidential information and trade secrets or solicitation by the Executive of employees of the Company cannot be reasonably or adequately compensated for in money damages. Accordingly, we have agreed that in addition to any other legal remedies available, the Company shall be entitled to seek equitable relief to enjoin any violation by the Executive of this Agreement. 8. Miscellaneous. (a) Reimbursement for Legal Fees. The Company shall reimburse the Executive for all reasonable legal fees and expenses incurred by the Executive in connection with the negotiation and preparation of this Agreement. (b) Waiver. The waiver of either party hereto of a breach of any provision of this Agreement by the other party shall not operate or be construed to operate as a waiver of any subsequent breach by the other party. 12 13 (c) No Mitigation. The Executive shall not be required to mitigate the amount of any payment provided for in Section 5 or Section 6 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in Section 5 or Section 6 be reduced by any compensation earned by the Executive as the result of employment by another employer or self-employment, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise, except as expressly provided by Section 6. (d) Entire Agreement. This Agreement contains the entire agreement between the Executive and the Company concerning the Executive's employment during the term hereof. On and after the Effective Date, this Agreement shall supersede the 1995 Letter Agreement, except as expressly provided otherwise in this Agreement. This Agreement may not be changed orally but only by an agreement, in writing, signed by the Executive and approved by the Board. (e) Severability. If any of the provisions of this Agreement shall be unlawful, void, or for any reason unenforceable, they shall be deemed separate from and in no way affect the validity or enforceability of the remaining provisions of the Agreement. (f) Notice. All notices and other communications under this Agreement shall be in writing and shall be delivered by hand delivery to the other party, by telegraph or mailed by certified or registered mail with return receipt, and shall be deemed delivered when actually received or upon refusal if properly delivered to the respective persons named below: If to the Company: KB Home 10990 Wilshire Boulevard Los Angeles, California 90024 If to the Executive: Bruce Karatz 10990 Wilshire Boulevard Los Angeles, California 90024 (g) Governing Law. This Agreement is entered into in Los Angeles, California and shall be construed and enforced under the laws of the State of California. (h) Dispute. In the event any legal action or arbitration shall be brought for the enforcement of this Agreement, or because of any alleged dispute, breach, or default hereunder, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in such legal action or arbitration, in addition to any other relief to which it or he may be entitled. Nothing hereunder, however, shall be construed to authorize filing suit in court with regard to any dispute which is to be resolved by arbitration pursuant to Section 9 of this Agreement. (i) Successors. The Agreement shall bind and benefit the Company, its successors and assigns and shall inure to the benefit of and be binding on the Executive, the Executive's heirs, executors and administrators, provided that the Executive's duties and responsibilities hereunder may not be assigned or delegated by the Executive. 13 14 (j) Withholding. All payments made by the Company under this Agreement shall be subject to normal deductions and withholding to the extent required by law. (k) Indemnification. The Company shall indemnify the Executive to the fullest extent permitted by applicable law as a director, executive officer or employee of the Company. (l) Modifications and Amendments. This Agreement may not be modified, amended, changed or supplemented, nor may any obligations hereunder be waived, except by written instrument signed by both parties. 9. Arbitration. (a) In the event that any controversy or dispute between the Executive and the Company arising out of or relating to the employment relationship, including, but not limited to any disputes in connection with the validity, construction, application or enforcement of the terms of this Agreement or the SERP, occurs, any such controversy or dispute shall be submitted to final and binding arbitration pursuant to the then most applicable Rules of the American Arbitration Association; provided, however, that unless the parties otherwise agree, the arbitration shall be before a single arbitrator selected either by mutual agreement or, failing agreement, from a list of seven arbitrators provided by AAA, four of whom shall be retired judges of the Superior or Appellate Courts of California who are residents of Los Angeles or Orange County and, if such list exists at the time of the dispute, who are members of the Independent List of Retired Judges and three of whom shall be members of the National Academy of Arbitrators, resident in Los Angeles or Orange Counties. In the event the parties are unable to agree upon such an arbitrator from such list of seven, each party shall strike one name in turn with the first to strike being chosen by lot. When only one name remains, that person shall be the parties' arbitrator. The parties hereto expressly waive their rights, if any, to have such matters heard by a jury or a judge, whether in state or federal court. (b) The cost of the arbitration, including, but not limited to, any reasonable legal fees or other expenses incident thereto incurred in connection with such arbitration, shall be determined by the arbitrator(s) and shall be borne by the nonprevailing party. During the pendency of any arbitration concerning the propriety of the Executive's termination and up to the date of the arbitrator's award, the Executive shall participate in all employee benefit programs of the Company (other than the 401(k) plan) as provided in Section 4(d) above. (c) The Company agrees to pay interest on any amounts payable to the Executive under this Agreement which are not paid within sixty (60) days after the date when due and on any money judgment which is awarded to the Executive following a proceeding to enforce any portion of the Agreement from the date that payments should have been made under this Agreement. Such interest shall be calculated at the prime rate offered by Bank of America, or its successor from the date that payments should have been made under this Agreement to the time of actual payment. (Signature Page Follows) 14 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. KB HOME /s/ RAY R. IRANI ----------------------------------------- Name: Title: EXECUTIVE /s/ BRUCE KARATZ ----------------------------------------- Bruce Karatz 16 EXHIBIT A ROE. A ratio, stated as a percentage, which measures the Company's return on equity, or the Company's profitability for a given period as it relates to its shareholders' capital investments. The percentage is calculated by dividing the Company's consolidated net income for a given fiscal year by the average consolidated shareholders' equity balance. The average consolidated shareholders' equity balance is one-half the sum of the Company's consolidated shareholders' equity balance at the beginning of the given year plus the Company's consolidated shareholders' equity balance at the end of the same year. PPI. Total consolidated revenues of the Company and related entities less total associated consolidated expenses for a given fiscal year determined in accordance with generally accepted accounting principles, exclusive of all income taxes and incentive compensation costs.

INCENTIVE PAYOUT PERCENTAGE SCHEDULE PRETAX PRE-INCENTIVE ROE PAYOUT PERCENTAGE ----------------- -------------------- *6.50% to 9.99% 1.00% 10.00% to 10.99% 1.25% 11.00% to 11.99% 1.30% 12.00% to 12.99% 1.35% 13.00% to 13.99% 1.40% 14.00% to 14.99% 1.45% 15.00% to 15.99% 1.50% 16.00% to 16.99% 1.60% 17.00% to 17.99% 1.70% 18.00% to 18.99% 1.80% 19.00% to 19.99% 1.90% 20.00% and higher 2.00%

*If ROE is less than 6.50%, the payout percentage is 0.00% 17 Appendix B STOCK RESTRICTION AGREEMENT THIS STOCK RESTRICTION AGREEMENT (this "Agreement") is made as of _______________, 200__ (herein the "Effective Date") by and between KB HOME, a Delaware corporation (the "Company") and Bruce Karatz (the "Participant"). R E C I T A L S By action of the Personnel, Compensation and Stock Plan Committee (the "Committee") taken on the Effective Date (the "Committee Action") and in accordance with the terms and conditions of the Amended and Restated Employment Agreement entered into between the Participant and the Company on July 11, 2001 (the "Employment Agreement"), the Company desires to award the Participant shares of restricted common stock of the Company, par value $1.00 per share ("Stock") under the [NAME OF PLAN] (the "Plan"). A G R E E M E N T In consideration of the provisions contained in this Agreement and with reference to the foregoing Recitals, the Company and the Participant agree as follows: 1. Award. As of the Effective Date, the Company shall issue to the Participant ______________ shares of Stock (the "Award"), subject to the terms and conditions set forth in this Agreement, the Plan, the Employment Agreement and the Committee Action. The certificate(s) representing shares of Stock granted pursuant to the Award shall not be delivered to the Participant until the lapse of the restrictions on transferability in accordance with Paragraphs 2, 4 and 5 of this Agreement. Prior to such lapse, the certificate(s) shall be held by the Company in escrow pursuant to Section [7(d)] of the Plan along with a stock power duly endorsed in blank by the Participant. 2. Lapse of Restrictions. The restrictions imposed by this Agreement, the Employment Agreement and the Plan with respect to the shares covered by this Award shall lapse on the business day next following the third anniversary of the Effective Date. 18 3. Parties' Obligations. Following the lapse of restrictions, the Company shall deliver to the Participant as soon as practicable certificate(s) representing those shares as to which restrictions have lapsed in accordance with Paragraphs 2, 4 or 5, as the case may be. 4. Termination of Employment. Except as set forth in Paragraph 5 below, upon termination of the Participant's employment with the Company by the Company for "Cause" (as defined in the Employment Agreement) or by the Participant without "Good Reason" (as defined in the Employment Agreement), the Participant's right, title and interest in those shares granted pursuant to the Award as to which the restrictions shall not have lapsed at the time of such termination of employment shall immediately terminate. The Participant shall forthwith execute such further assignments or endorsements as the Company may require to effect the transfer of beneficial ownership to those shares granted pursuant to the Award back to the KB HOME Grantor Stock Trust (the "Trust"), if the shares were issued to Participant out of the Trust and the Trust continues to exist at such time, or otherwise back to the Company. Upon the termination of the Participant's employment with the Company by reason of the Participant's death or disability, by the Company without "Cause" or by the Participant for "Good Reason," the restrictions set forth herein and Section [7] of the Plan shall lapse immediately upon such termination of employment. 5. Lapse of Restrictions Upon Change of Ownership. Notwithstanding any provision of Paragraph 2, but subject to Paragraph 4, all of the restrictions set forth herein and in Section [7] of the Plan on the shares of Stock granted under this Award shall lapse as contemplated in Section 4(c) of the Employment Agreement. 6. Dividends. Cash dividends or other distributions paid on or in respect of any shares of Stock subject to the Award shall be paid directly to Participant at the same time any such dividends or distributions are paid to holders of shares of Stock that are not restricted and are freely tradeable ("Other Holders"). Any stock or other non-cash distributions issued on or in respect of any shares of Stock subject to the Award shall be issued at the same time any such distributions are issued to Other Holders, but shall be held in escrow and shall be subject to the same restrictions as the shares of Stock subject to the Award. 7. Tax Withholding Election. At Participant's discretion, he may direct the Company to withhold shares of Stock otherwise deliverable upon the lapse of restrictions on the Award to satisfy any withholding tax liability that may arise upon such lapse of restrictions, provided that such Stock withholding complies with Section 16(b) of the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder. 19 8. Adjustments. The number of shares granted pursuant to the Award shall be adjusted by the Board, whose determination shall be conclusive, to reflect any stock split, stock dividend, reorganization, recapitalization, merger, consolidation, combination or exchange of shares or similar event. The Committee shall make any adjustments or modifications, and its determination thereof shall be conclusive, in the lapse of restrictions set forth in Section 2 or Section 5 to give effect to the intent of the Plan and the Employment Agreement in connection with any event affecting the Award, 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 the Participant under this Award. 9. No Assignment. This Agreement may not be assigned by the Participant by operation of law or otherwise. Notwithstanding, this Agreement shall be binding upon and shall inure to the benefit of the personal representatives, heirs, legatees, successors and assigns of the Company and the Participant. 10. Governing Law. This Agreement and the legal relations between the parties shall be governed by and construed in accordance with the laws of the State of California. 11. Conflict in Terms. In the event there shall be a conflict in terms between this Agreement, the Plan, the Employment Agreement and/or the Committee Action, the terms of the Employment Agreement shall prevail. IN WITNESS WHEREOF, the Company and the Participant have duly executed and delivered this Agreement as of the date first above written. KB HOME By: ----------------------------------- Gary Ray SVP, Human Resources ----------------------------------- Bruce Karatz 20 Appendix C STOCK RESTRICTION AGREEMENT THIS STOCK RESTRICTION AGREEMENT (this "Agreement") is made as of July 11, 2001 (herein the "Effective Date") by and between KB HOME, a Delaware corporation (the "Company") and Bruce Karatz (the "Participant"). R E C I T A L S A. By action of the Personnel, Compensation and Stock Plan Committee (the "Committee") taken on the Effective Date (the "Committee Action") and in accordance with the terms and conditions of the Amended and Restated Employment Agreement entered into between the Participant and the Company on the Effective Date (the "Employment Agreement"), the Company desires to award the Participant 350,000 shares of restricted common stock of the Company, par value $1.00 per share ("Stock"). B. The Stock issued pursuant to this Agreement will not be issued under an employee stock plan, however, the Stock will be subject to the restrictions, conditions and administrative provisions set forth in the Company's 2001 Stock Incentive Plan (the "Plan") to the same extent as though the Stock were issued thereunder; further, the Stock shall be subject to such additional restrictions as maybe set forth in this Agreement, in the Employment Agreement and the Committee Action. A G R E E M E N T In consideration of the provisions contained in this Agreement and with reference to the foregoing Recitals, the Company and the Participant agree as follows: 1. Award. Effective as of the execution of this Agreement, the Company shall issue to the Participant 350,000 shares of Stock (the "Award"), subject to the terms and conditions set forth in this Agreement, the Plan, the Employment Agreement and the Committee Action. The certificate(s) representing shares of Stock granted pursuant to the Award shall not be delivered to the Participant until the lapse of the restrictions on transferability in accordance with Paragraphs 2, 4 and 5 of this Agreement. Prior to such lapse, the certificate(s) shall be held by the Company in escrow pursuant to Section 7(d) of the Plan along with a stock power duly endorsed in blank by the Participant. 2. Lapse of Restrictions. The restrictions imposed by this Agreement, the Employment Agreement and the Plan with respect to the shares covered by this Award shall lapse on December 31, 2008. 21 3. Parties' Obligations. Following the lapse of restrictions, the Company shall deliver to the Participant as soon as practicable certificate(s) representing those shares as to which restrictions have lapsed in accordance with Paragraphs 2, 4 or 5, as the case may be. 4. Termination of Employment. Except as set forth in Paragraph 5 below, upon termination of the Participant's employment with the Company by the Company for "Cause" (as defined in the Employment Agreement) or by the Participant without "Good Reason" (as defined in the Employment Agreement), the Participant's right, title and interest in those shares granted pursuant to the Award as to which the restrictions shall not have lapsed at the time of such termination of employment shall immediately terminate. The Participant shall forthwith execute such further assignments or endorsements as the Company may require to effect the transfer of beneficial ownership to those shares granted pursuant to the Award back to the KB HOME Grantor Stock Trust (the "Trust"), if the Trust continues to exist at such time, or otherwise back to the Company. Upon the termination of the Participant's employment with the Company by reason of the Participant's death or disability, by the Company without "Cause" or by the Participant for "Good Reason," the restrictions set forth herein and Section 7 of the Plan shall lapse immediately upon such termination of employment. 5. Lapse of Restrictions Upon Change of Ownership. Notwithstanding any provision of Paragraph 2, but subject to Paragraph 4, all of the restrictions set forth herein and in Section 7 of the Plan on the shares of Stock granted under this Award shall lapse as contemplated in Section 4(c) of the Employment Agreement. 6. Dividends. Cash dividends or other distributions paid on or in respect of any shares of Stock subject to the Award shall be paid directly to Participant at the same time any such dividends or distributions are paid to holders of shares of Stock that are not restricted and are freely tradeable ("Other Holders"). Any stock or other non-cash distributions issued on or in respect of any shares of Stock subject to the Award shall be issued at the same time any such distributions are issued to Other Holders, but shall be held in escrow and shall be subject to the same restrictions as the shares of Stock subject to the Award. 7. Tax Withholding Election. At Participant's discretion, he may direct the Company to withhold shares of Stock otherwise deliverable upon the lapse of restrictions on the Award to satisfy any withholding tax liability that may arise upon such lapse of restrictions, provided that such Stock withholding complies with Section 16(b) of the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder. 22 8. Adjustments. The number of shares granted pursuant to the Award shall be adjusted by the Board, whose determination shall be conclusive, to reflect any stock split, stock dividend, reorganization, recapitalization, merger, consolidation, combination or exchange of shares or similar event. The Committee shall make any adjustments or modifications, and its determination thereof shall be conclusive, in the lapse of restrictions set forth in Section 2 or Section 5 to give effect to the intent of the Plan and the Employment Agreement in connection with any event affecting the Award, 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 the Participant under this Award. 9. No Assignment. This Agreement may not be assigned by the Participant by operation of law or otherwise. Notwithstanding, this Agreement shall be binding upon and shall inure to the benefit of the personal representatives, heirs, legatees, successors and assigns of the Company and the Participant. 10. Governing Law. This Agreement and the legal relations between the parties shall be governed by and construed in accordance with the laws of the State of California. 11. Conflict in Terms. In the event there shall be a conflict in terms between this Agreement, the Plan, the Employment Agreement and/or the Committee Action, the terms of the Employment Agreement shall prevail. IN WITNESS WHEREOF, the Company and the Participant have duly executed and delivered this Agreement as of the date first above written. KB HOME By: /s/ GARY A. RAY ----------------------------------- Gary Ray SVP, Human Resources /s/ BRUCE KARATZ ----------------------------------- Bruce Karatz 23 KB HOME SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN, AS RESTATED (Effective July 12, 2001) 24 ARTICLE I THE PLAN 1.1 Establishment of the Plan...........................................................1 1.2 Purpose.............................................................................1 ARTICLE II DEFINITIONS 2.1 Definitions.........................................................................1 2.2 Gender and Number...................................................................2 ARTICLE III PARTICIPATION 3.1 Eligibility for Participation.......................................................2 3.2 Date of Participation...............................................................2 3.3 Duration of Participation...........................................................3 ARTICLE IV SUPPLEMENTAL RETIREMENT BENEFITS 4.1 Supplemental Retirement Benefits....................................................3 4.2 Commencement, Form, and Duration....................................................3 4.3 Reduced Benefit in the Case of Retirement Before December 1, 2005...................3 ARTICLE V PRE-RETIREMENT DEATH BENEFITS 5.1 Eligibility.........................................................................4 ARTICLE VI OPTIONAL FORMS OF BENEFIT 6.1 Lump Sum Option.....................................................................4 6.2 Payment Upon Financial Hardship.....................................................4 -1- 25 TABLE OF CONTENTS (CONTINUED)

ARTICLE VII CHANGE OF OWNERSHIP 7.1 Lump Sum Option Upon Change of Ownership............................................5 7.2 Amount of Lump Sum Benefit..........................................................5 7.3 Definition..........................................................................5 7.4 Advance Election....................................................................6 ARTICLE VIII TRUST 8.1 Establishment of the Trust..........................................................6 8.2 Contributions.......................................................................6 8.3 Payment of Benefits.................................................................7 ARTICLE IX ADMINISTRATION 9.1 Administration......................................................................7 9.2 Decisions and Actions of Committee..................................................7 9.3 Rules and Records of the Committee..................................................7 9.4 Employment of Agents................................................................7 9.5 Agent for Service of Legal Process..................................................7 9.6 Plan Expenses.......................................................................8 9.7 Indemnification.....................................................................8 9.8 Tax Withholding.....................................................................8 9.9 Claims Procedure....................................................................8 ARTICLE X MISCELLANEOUS 10.1 Rights Against the Company..........................................................9 10.2 Rights Under the Company's Other Retirement Plans...................................9 10.3 Payment of Benefits to Incompetent..................................................9 10.4 Missing Person.....................................................................10 10.5 Amendment or Termination...........................................................10 10.6 Merger or Consolidation of Plan and Trust..........................................10 10.7 Arbitration/Interest on Unpaid Amounts/Controlling Law.............................10 10.8 Rights to Trust Fund Assets........................................................11 10.9 Nontransferability.................................................................11

-2- 26 TABLE OF CONTENTS (CONTINUED) 10.10 Illegality of Particular Provision.................................................11 -2- 27 ARTICLE I THE PLAN 1.1 ESTABLISHMENT OF THE PLAN KB Home has previously established an unfunded supplemental executive retirement plan for the benefit of Mr. Bruce Karatz, the Chairman and Chief Executive Officer of Kaufman and Broad Home Corporation. This restated plan is effective as of July 12, 2001 and shall be known as the KB Home Supplemental Executive Retirement Plan. 1.2 PURPOSE The purpose of this Plan is to provide retirement income to Mr. Karatz to supplement the benefits provided under the tax-qualified retirement plans maintained by KB Home. This Plan is intended to satisfy the supplemental retirement provisions of section 4(f) of the Amended and Restated Employment Agreement between Mr. Karatz and KB Home dated as of July 12, 2001. ARTICLE II DEFINITIONS 2.1 DEFINITIONS Whenever capitalized in this document, the following terms shall have the meanings set forth below unless otherwise expressly provided. (a) "ACTUARIAL EQUIVALENT" shall mean a single sum value of a monthly benefit amount otherwise payable, calculated using an interest rate assumption of 5.85%. (b) "BENEFICIARY" shall mean the person or persons designated by the Participant to receive benefits in the event of the death of the Participant. In the event that the Participant failed to designate a beneficiary; or if for any reason such designation shall be legally ineffective, or if all designated beneficiaries predecease him or die simultaneously with him, distribution to which the Participant would have been entitled shall be made to the Participant's surviving spouse or, if none, to the Participant's estate. (c) "BOARD" shall mean the Board of Directors of KB Home. (d) "CHANGE OF OWNERSHIP" shall mean a change in ownership of the Company, as described in Article VIII. (e) "CODE" shall mean the Internal Revenue Code of 1986, as amended. -1- 28 (f) "COMMITTEE" shall mean the Personnel, Compensation and Stock Plan Committee of the Board (or a designee of that Committee), which shall administer the Plan. (g) "COMPANY" shall mean KB Home, and any successor thereto. (h) "PARTICIPANT" shall mean Mr. Bruce Karatz, Chairman and Chief Executive Officer of the Company. (i) "PLAN" shall mean the KB Home Supplemental Executive Retirement Plan. (j) "TERMINATION OF EMPLOYMENT" shall mean termination of employment with the Company, whether voluntary or involuntary. The Participant's termination of employment will be deemed to occur when the Participant ceases to be a full-time employee of the Company, even though the Participant may continue to serve as Chairman of the Board or as a consultant to the Company. (k) "TRUST" shall mean the legal entity organized pursuant to the Trust Agreement between the Company and the Trustee to hold and administer the Trust Fund in which any contributions made by the Company are to be held, invested, and disbursed to, or for the benefit of, the Participant or his Beneficiary. (l) "TRUST AGREEMENT" shall mean the agreement in the nature of a trust entered into between the Company and Trustee. (m) "TRUST FUND" shall mean the assets of every kind and description held in the Trust pursuant to the Trust Agreement. (n) "TRUSTEE" shall mean the entity, not affiliated with the Company, acting as the trustee under the Trust Agreement at the time of reference. 2.2 GENDER AND NUMBER Unless the context clearly requires otherwise, the masculine pronoun whenever used shall include the feminine pronoun, and the singular shall include the plural. ARTICLE III PARTICIPATION 3.1 ELIGIBILITY FOR PARTICIPATION Mr. Bruce Karatz shall be the only employee of the Company eligible to participate in this Plan. 3.2 DATE OF PARTICIPATION Participation commenced December 1, 1995. 2 29 3.3 DURATION OF PARTICIPATION Subject to the provisions of section 10.5, participation in this Plan shall continue while the Participant is an employee of the Company, whether or not there is in effect an employment agreement between the Participant and the Company, and thereafter for so long as he is entitled to receive any benefits hereunder. ARTICLE IV SUPPLEMENTAL RETIREMENT BENEFITS 4.1 SUPPLEMENTAL RETIREMENT BENEFITS Upon Termination of Employment with the Company for reasons other than death, the Participant shall be entitled to a retirement benefit under this Plan. The monthly amount of the Participant's retirement benefit shall be one-twelfth of the Participant's "Average Annual Base Pay" at the time of Termination of Employment. "Average Annual Base Pay" equals the average of the Participant's (1) annual base pay rate at the time of Termination of Employment, (2) the Participant's annual base pay rate in effect 12 months before the Termination of Employment, and (3) the Participant's annual base pay rate in effect 24 months before the Termination of Employment. 4.2 COMMENCEMENT, FORM, AND DURATION Retirement benefit payments under this Plan shall commence upon the first of the month following the Termination of Employment. Benefit payments shall be made monthly for a period of 25 years (300 monthly payments). In the event of the Participant's death while receiving monthly payments, the remaining payments shall be made monthly to the Participant's Beneficiary. 4.3 REDUCED BENEFIT IN THE CASE OF RETIREMENT BEFORE DECEMBER 1, 2005 (a) Except as set forth in subsection (b) below, if the Participant incurs a Termination of Employment before December 1, 2005, the amount of retirement benefit described in Section 4.1 shall be reduced. The reduction shall be calculated by first computing the difference (the "Difference") between Average Annual Base Pay and $492,000, the benefit that would have been payable to participant upon attainment of Normal Retirement Age under this Plan in effect prior to December 1, 2001. The Average Annual Base Pay otherwise payable under Section 4.1 shall be reduced by the following percentage of the Difference: 3 30

TERMINATION PERCENTAGE ----------- ---------- From 7/12/01 through 11/30/02 20% From 12/1/02 through 11/30/03 15% From 12/1/03 through 11/30/04 10% From 12/1/04 through 11/30/05 5%

(b) The reduction in Average Annual Base Pay set forth in subsection (a) above shall not apply if (1) the Company terminates Participant unless such termination is for "Cause" or (2) Participant terminates employment because he has determined in good faith that "Good Reason" exists. The terms "Cause" and "Good Reason" shall have the same meanings as are set forth in Section 5(h) and (i) of Participant's Amended and Restated Employment Agreement, dated as of July 12, 2001. Any good faith determination by Participant that "Good Reason" exists shall be presumed correct and shall be binding on the Company. ARTICLE V PRE-RETIREMENT DEATH BENEFITS 5.1 ELIGIBILITY If the Participant dies while employed by the Company, his Beneficiary shall be entitled to a death benefit from this Plan equal to the retirement benefit that would have been paid the Participant if he had retired on his date of death. The payment of benefits to his Beneficiary shall commence upon the first of the month following the Participant's death and shall be made monthly for a period of 25 years (300 monthly payments). ARTICLE VI OPTIONAL FORMS OF BENEFIT 6.1 LUMP SUM OPTION In lieu of the monthly benefits otherwise payable to the Participant or his Beneficiary under section 4.1 or 5.1, the Participant or his Beneficiary, as applicable, may elect to receive a lump sum payment. Such election may be made prior to the commencement of monthly benefits or at any time during the period of monthly payments. If the Participant has not incurred a Termination of Employment at the time of the election, the election shall be effective as of the first of the month following his Termination of Employment. This election will result in a significant penalty to the Participant or his Beneficiary, since the amount of the lump sum payment determined under this section 6.1 is substantially less than the Actuarial Equivalent of the monthly benefits which would otherwise be payable to the Participant or his Beneficiary. The lump sum amount shall be determined by multiplying the Actuarial Equivalent of the 4 31 remaining payments by .94. The lump sum benefit shall be paid within 30 days of the election by the Participant or Beneficiary. 6.2 PAYMENT UPON FINANCIAL HARDSHIP In the event that the Participant incurs a financial hardship after the commencement of monthly benefits under section 4.2 or section 5.1, he may request that the Committee authorize payment of his remaining benefits in a lump sum. The Committee shall not authorize such payment unless it determines that there is an unforeseeable emergency that is caused by an event beyond the control of the Participant, and such emergency would result in severe financial hardship to the Participant if the lump sum payment is not authorized. If authorized, the amount of the lump sum payment shall be the Actuarial Equivalent value of the remaining monthly payments. Such lump sum payment shall be paid to the Participant as soon as practicable following authorization by the Committee. ARTICLE VII CHANGE OF OWNERSHIP 7.1 LUMP SUM OPTION UPON CHANGE OF OWNERSHIP In the event of a Change of Ownership (as defined below) prior to the commencement of payment of benefits under this Plan, the Participant may elect to receive an immediate lump sum payment in lieu of all benefits otherwise payable to the Participant or his Beneficiary under this Plan. Such election may be made at any time prior to commencement of payment of benefits under this Plan. This election will result in a significant penalty to the Participant, since the amount of the lump sum benefit provided under section 7.2 is substantially less than the Actuarial Equivalent of the monthly benefits which may otherwise be payable to the Participant. 7.2 AMOUNT OF LUMP SUM BENEFIT The amount of the lump sum benefit payable to the Participant pursuant to section 7.1 shall be the amount determined pursuant to section 6.1, assuming that the Participant terminated as of the date of his election. The lump sum benefit shall be paid to the Participant within 30 days of the election by the Participant. 7.3 DEFINITION For purposes of this Article VII, the following definition applies: (a) CHANGE OF OWNERSHIP. A "Change of Ownership" shall mean any change in control of the Company of a nature that would be required to be reported in response to Item 1(a) of the Current Report on Form 10-K, as in effect on July 12, 2001, pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act"); provided that, without limitation, such a "Change in Ownership" shall be deemed to have occurred if: 5 32 (1) a third person, including a "group" as such term is used in section 13(d)(3) of the Act, becomes the beneficial owner, directly or indirectly, of 20 percent or more of the combined voting power of the Company's outstanding voting securities ordinarily having the right to vote for the election of directors of the Company unless such acquisition of beneficial ownership is approved by a majority of the Incumbent Board (as such term is defined in paragraph (2) below); or (2) individuals who, as of July 12, 2001, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to July 12, 2001 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is 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-11 of Regulation 14A promulgated under the Act) shall be, for purposes of this Article, considered as though such person were a member of the Incumbent Board. 7.4 ADVANCE ELECTION In lieu of the lump sum payout described in section 7.2, a Participant may receive a payout equal to the Actuarial Equivalent of his retirement benefit if he has provided the Company an irrevocable election to receive a lump sum election upon a Change of Ownership and such election is provided at least 12 months in advance of the Change of Ownership. ARTICLE VIII TRUST 8.1 ESTABLISHMENT OF THE TRUST The Company shall establish a Trust as a part of the Plan in order to implement and carry out the provisions of the Plan and to finance the benefits under the Plan. The Company shall establish the Trust by entering into a Trust Agreement with a Trustee selected by the Committee. The Trust shall be an irrevocable grantor Trust within the meaning of Code sections 671 through 677, and the Company shall be treated as the owner of the Trust. It is intended that the Trust shall be in such form as may be necessary for the Plan to be deemed unfunded for purposes of the Employee Retirement Income Security Act of 1974, as amended. The Trust shall maintain a Trust Fund. The administration and management of the Trust Fund shall be set forth in the Trust Agreement, the terms of which shall be consistent with the provisions of this Plan. Nothing in the Trust Agreement shall impair the rights of the Participant and his Beneficiary nor shall the agreement limit the obligations of the Company under this Plan. 6 33 8.2 CONTRIBUTIONS The Company shall make an annual contribution to the Trust Fund of $250,000. The first contribution shall be made January 1, 1996 and thereafter a contribution shall be made each January 1 (including, if necessary, years after the Participant has a Termination of Employment) until the Trust Fund holds assets sufficient to satisfy all obligations for benefits under this Plan. Notwithstanding the foregoing, within 30 days of a Change of Ownership as defined in section 7.3, the Company shall (1) make a contribution to the Trust Fund that causes the assets of the Trust Fund to equal the then Actuarial Equivalent of the monthly retirement benefits remaining due under the Plan (or, if the Participant has not yet incurred a Termination of Employment, what would be due if the Participant's retirement occurred on the first day of the month after the Change of Ownership), and (2) by each following January 1, make any additional contribution necessary to cause the assets of the Trust Fund to equal, as of that January 1, the Actuarial Equivalent of the monthly retirement benefits remaining due (or, if the Participant has not yet incurred a Termination of Employment, what would be due if the Participant's retirement occurred on that January 1). 8.3 PAYMENT OF BENEFITS The benefits under this Plan shall be paid from the Trust Fund. To the extent the Trust Fund is insufficient to pay all required benefits under the Plan, payment of benefits shall be made from the general assets of the Company. ARTICLE IX ADMINISTRATION 9.1 ADMINISTRATION The Plan shall be administered by the Committee. The Committee shall be authorized to construe and interpret all of the provisions of the Plan, to adopt procedures and practices concerning the administration of the Plan, and to make any determinations necessary hereunder, which shall be binding and conclusive on all parties. The Committee may appoint one or more individuals and delegate such of its power and duties as it deems desirable to any such individual, in which case every reference herein made to the Committee shall be deemed to mean or include the individuals as to matters within their jurisdiction. 9.2 DECISIONS AND ACTIONS OF COMMITTEE The Committee may act at a meeting or in writing without a meeting. All decisions and actions of the Committee shall be made by vote of the majority, including actions in writing taken without a meeting. 9.3 RULES AND RECORDS OF THE COMMITTEE The Committee may make such rules and regulations in connection with its administration of the Plan as are consistent with the terms and provisions hereof. The 7 34 Committee shall keep a record of the Participant's name, address, social security number, benefit commencement date, and the amount of benefit. 9.4 EMPLOYMENT OF AGENTS The Committee may employ agents, including without limitation, accountants, actuaries, consultants, or attorneys, to exercise and perform the powers and duties of the Committee as the Committee delegates to them, and to render such services to the Committee as the Committee may determine, and the Committee may enter into agreements setting forth the terms and conditions of such service. 9.5 AGENT FOR SERVICE OF LEGAL PROCESS The Chairman of the Committee shall serve as agent for service of legal process. 9.6 PLAN EXPENSES The Company shall pay all expenses reasonably incurred in the administration of the Plan and Trust; provided, however, that the Trustee may pay such expenses from the assets of the Trust, to the extent such expenses have not been paid by the Company. In such event the Company shall reimburse the Trustee promptly for any such expenses paid by the Trustee from the Trust. The members of the Committee shall serve without compensation for their services as such, but all expenses of the Committee shall be paid by the Company. No employee of the Company shall receive compensation from the Plan regardless of the nature of his services to the Plan. 9.7 INDEMNIFICATION To the extent permitted by law, the Committee and all agents and representatives of the Committee shall be indemnified by the Company and saved harmless against any claims, and the expenses of defending against such claims, resulting from any action or conduct relating to the administration of the Plan except claims arising from gross negligence, willful neglect, or willful misconduct. 9.8 TAX WITHHOLDING The Company or Trustee shall withhold from any payment to the Participant or Beneficiary any federal, state, or local taxes required by law to be withheld with respect to such payment. 9.9 CLAIMS PROCEDURE (a) SUBMISSION OF CLAIMS. Claims for benefits under the Plan shall be submitted in writing to the Committee or to an individual designated by the Committee for this purpose. 8 35 (b) DENIAL OF CLAIM. If any claim for benefits is wholly or partially denied, the claimant shall be given written notice within 60 days following the date on which the claim is filed, which notice shall set forth (1) the specific reason or reasons for the denial; (2) specific reference to pertinent Plan and Trust provisions on which the denial is based; (3) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (4) an explanation of the Plan's claim review procedure. If the claim has not been granted, and if written notice of the denial of the claim is not furnished within 60 days following the date on which the claim is filed, the claim shall be deemed denied for the purpose of proceeding to the claim review procedure. (c) CLAIM REVIEW PROCEDURE. The claimant or his authorized representative shall have 60 days after receipt of written notification of denial of a claim to request a review of the denial by making written request to the Committee (or its delegate), and may review pertinent documents and submit issues and comments in writing within such 60-day period. Not later than 60 days after receipt of the request for review, the Committee shall render and furnish to the claimant a written decision which shall include specific reasons for the decision, and shall make specific references to pertinent Plan and Trust provisions on which it is based. The Committee decision shall only be subject to further review as described in section 10.7. If a decision on review is not furnished to a claimant within the specified time period, the claim shall be deemed to have been denied on review. ARTICLE X MISCELLANEOUS 10.1 RIGHTS AGAINST THE COMPANY Neither the establishment of the Plan, nor any modification thereof, nor any payments hereunder, shall be construed to give the Participant the right to be retained in the employ of the Company or to interfere with the right of the Company to discharge the Participant at any time, subject to the terms of any employment agreement between the Participant and the Company. 10.2 RIGHTS UNDER THE COMPANY'S OTHER RETIREMENT PLANS Nothing in this Plan shall be construed to limit, broaden, restrict, grant, or otherwise affect any rights of the Participant or a Beneficiary under the Company's other retirement plans, 9 36 nor grant any additional rights or benefits to the Participant or a Beneficiary under the Company's other retirement plans, nor in any way to limit, modify, repeal, or otherwise affect the Company's or its Board's right to amend or modify any such retirement plan. 10.3 PAYMENT OF BENEFITS TO INCOMPETENT If the Committee receives evidence that -- (a) a person entitled to receive any benefit under the Plan is legally, physically, or mentally incompetent to receive such benefit and to give a valid release therefore, and (b) another person or an institution is then maintaining or has custody of such person and no guardian, committee, or other representative of the estate of such person has been duly appointed by a court of competent jurisdiction, the payment of such benefit may be made to such other person or institution as the Committee may determine. Any such payment shall be a payment on behalf of such person and shall, to the extent thereof, be a complete discharge of any liability under the Plan to such person, and neither the Company, the Trustee, nor any member of the Board or the Committee shall be liable to any person or individual by reason of such payment. 10.4 MISSING PERSON In the event any benefit shall become payable to any person or upon his death to his legal representative and, if after written notice from the Committee mailed to such person's last-known address as shown in the Company's records, such person or his legal representative shall not have presented himself to the Committee within six years after the mailing of such notice, then the Committee may, in its sole discretion, distribute such amount, including any benefit thereafter becoming due to such person or legal representative, among the spouse and blood relatives of such person. Payments made in good faith to any person, to a person's legal representative, or to any individual(s) who have, on the presentation of reasonable proof, established to the satisfaction of the Committee that he is the spouse or blood relative of such person, shall, to the extent of such payments, be a complete discharge of all obligations arising pursuant to the Plan, and neither the Company, the Trustee, nor any member of the Board or the Committee shall be liable to any person or individual by reasons of such payments. 10.5 AMENDMENT OR TERMINATION The Plan may be amended or terminated, in whole or in part, at any time by written action of the Board and with the prior written consent of the Participant (or his Beneficiary or Beneficiaries following the Participant's death). No such amendment or termination shall reduce or diminish the right of the Participant or Beneficiary to receive any benefit accrued hereunder prior to the date of such amendment or termination. 10 37 10.6 MERGER OR CONSOLIDATION OF PLAN AND TRUST Neither the Plan nor the Trust may be merged or consolidated with, nor may its assets or liabilities be transferred to, any other plan or trust without the prior written consent of the Participant (or his Beneficiary or Beneficiaries following the Participant's death). 10.7 ARBITRATION/INTEREST ON UNPAID AMOUNTS/CONTROLLING LAW (a) The Participant may further appeal pursuant to this section a Committee decision under section 9.9(b) on his appeal. The Participant may submit the controversy to final and binding arbitration pursuant to the then most applicable Rules of the American Arbitration Association; provided, however, that unless the parties otherwise agree, the arbitration shall be before a single arbitrator selected either by mutual agreement or, failing agreement, from a list of seven arbitrators provided by AAA, (1) four of whom shall be retired judges of the Superior or Appellate Courts of California who are residents of Los Angeles or Orange County and, if such list exists at the time of the dispute, who are members of the Independent List of Retired Judges, and (2) three of whom shall be members of the National Academy of Arbitrators, resident in Los Angeles or Orange Counties. In the event the parties are unable to agree upon such an arbitrator from such list of seven, each party shall strike one name in turn with the first to strike being chosen by lot. When only one name remains, that person shall be the parties' arbitrator. The parties hereto expressly waive their rights, if any, to have such matters heard by a jury or a judge, whether in state or federal court. The cost of the arbitration, including, but not limited to, any reasonable legal fees or other expenses incident thereto incurred in connection with such arbitration, shall be borne by the Company unless the arbitrators(s) determines that the Participant's claim is frivolous, in which case the Participant shall bear his own legal fees. In the arbitration the Committee's decision on appeal shall not be entitled to a presumption of correctness; rather, the dispute shall be decided de novo. (b) The Company agrees to pay interest on any amounts payable to you under this Agreement which are not paid within 30 days after the date when due and on any money judgment which is awarded to you following a proceeding to enforce any portion of the Agreement from the date that payments should have been made under this Agreement. Such interest shall be calculated at the prime rate offered by Bank of America, or its successor, from the date that payments should have been made under this Agreement to the time of actual payment. (c) The provisions of the Plan shall be construed, interpreted, administered, and enforced according to the laws of the State of California and all applicable Federal laws. 10.8 RIGHTS TO TRUST FUND ASSETS The Participant shall not have any right to, or interest in, any assets of the Trust Fund upon his Termination of Employment or otherwise, except as provided in the Plan, and then only 11 38 to the extent of the benefits payable under the Plan that are payable out of the assets of the Trust Fund. 10.9 NONTRANSFERABILITY In no event shall the Company or Trustee make any payment under this Plan to any assignee or creditor of the Participant or Beneficiary, except as otherwise required by law. Prior to the time of a payment hereunder, the Participant or Beneficiary shall have no rights by way of anticipation or otherwise to assign or otherwise dispose of any interest under this Plan, nor shall rights be assigned or transferred by operation of law. 10.10 ILLEGALITY OF PARTICULAR PROVISION The illegality of any particular provision of this document shall not affect the other provisions, and the document shall be construed in all respects as if such invalid provision were omitted. 12

EX-10.1

   1

                                                                    EXHIBIT 10.1

                    AMENDED AND RESTATED EMPLOYMENT AGREEMENT


                THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this
"Agreement") is dated as of JULY 11, 2001 (the "Effective Date"), between KB
Home, a Delaware corporation (the "Company"), and Bruce Karatz (the
"Executive").


                WHEREAS, the Company and the Executive previously have entered
into that certain letter agreement, dated as of December 1, 1995 (the "1995
Letter Agreement"), pursuant to which the Company currently employs the
Executive; and


                WHEREAS, the Company and the Executive each have determined that
it would be to the advantage and best interest of the Company and the Executive
to enter into this Agreement to extend the Executive's employment term and to
modify certain of the Executive's and the Company's obligations and
responsibilities under the 1995 Letter Agreement; and


                WHEREAS, the Company and the Executive desire to have this
Agreement amend and restate the 1995 Letter Agreement in its entirety and
supersede the 1995 Letter Agreement in all respects effective as of the
Effective Date, except as expressly provided otherwise by this Agreement;


                NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:

        1. Employment. As of the Effective Date, the Company hereby employs the
Executive and the Executive hereby accepts employment by the Company in
accordance with the terms and provisions of this Agreement. The Executive shall
be an employee exclusively of the Company and shall serve the Company to the
best of the Executive's abilities, devoting the Executive's full productive
time, energies, and abilities to the fulfillment of the Executive's obligations
hereunder, except for the Executive's (a) service on corporate, civic or
charitable boards or committees which does not significantly interfere with the
performance of the Executive's responsibilities hereunder; provided, however,
that the Executive shall not serve as a member of the board of directors of any
corporation whose activities involve or relate to the Company's business without
the prior approval of the Compensation Committee of the Board and (b) management
of the Executive's personal investments. All improvements, discoveries, business
relationships, corporate opportunities, management procedures, and goodwill
conceived, divested, established, developed, or perfected by the Executive
during the period of the Executive's employment and related in any way to the
business of the Company or any of its affiliates shall promptly be disclosed to
and be the exclusive property of the Company.

        2. Term. The term of this Agreement shall commence on the Effective
Date, and, subject to earlier termination as provided herein, shall continue
until the seventh year anniversary of the Effective Date; provided, however,
that on January 1, 2002, the term shall automatically



   2

be extended until December 31, 2008, unless the Executive shall give the Company
prior written notice to the contrary. By mutual agreement in writing, at anytime
during the period beginning on January 1, 2008 and ending on December 31, 2008,
the term may be extended for any period agreed to by the Company and the
Executive.

        3. Duties and Responsibilities. The Executive shall be employed as the
Chairman and Chief Executive Officer of the Company, and as such shall have
responsibility for the supervision and management of the world-wide activities
of the Company and its subsidiaries. The Executive shall manage such activities
and perform such duties in accordance with the Executive's judgment and in the
best interests of the Company and its shareholders, subject to such policies and
directives as promulgated by the Board.

        4. Compensation. For all services to be rendered by the Executive to the
Company and its affiliates hereunder, including without limitation, services as
an officer, director, or member of any committee, the Executive shall be
compensated as follows:

                (a) Base Salary. The Executive shall receive a fixed base
salary, which shall be payable in semi-monthly installments, in accordance with
the customary payroll practices of the Company. For the calendar year ending
December 31, 2001, the Executive's base salary shall be at an annual rate of
$900,000 and commencing January 1, 2002 and annually thereafter, the Executive's
salary shall be adjusted in accordance with the judgment and discretion of the
Compensation Committee of the Board, provided that in no event shall the
Executive's base salary during the term of this Agreement be less than at the
annual rate of $900,000.

                (b) Incentive Compensation. The Executive shall be entitled to
earn annual incentive compensation for the fiscal year ending November 30, 2001,
and each subsequent fiscal year during the term of this Agreement. All incentive
compensation, including restricted stock awards, to which the Executive is
entitled under this subsection (b), shall be made under and subject to the terms
of the Performance-Based Incentive Plan for Senior Management (the "Plan") or
other Company plan pursuant to which such incentive compensation constitutes
"qualified performance-based compensation" ("QPBC") within the meaning of
Treasury Regulation Section 1.162-27(e).

                        (i) For the fiscal year ending November 30, 2001, the
        Executive shall be entitled to earn the incentive compensation set forth
        in Section 4(b)(i) of the 1995 Letter Agreement.

                        (ii) For the fiscal year ending November 30, 2002 and
        each subsequent fiscal year during the term of this Agreement, the
        Executive shall be entitled to earn the following incentive
        compensation:

                                (aa) Subject to approval by the Company's
                shareholders of an amendment to the Plan increasing the maximum
                cash incentive payable to any person under the Plan from
                $3,000,000 to $5,000,000 or of an amendment to an other Company
                plan which permits an aggregate amount of $5,000,000 of annual
                cash compensation to qualify as QPBC (the "QPBC Amendment"), the
                Executive shall be entitled to the following annual incentive
                compensation based on the



                                       2
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                return on equity on a net income basis ("ROE") of the Company,
                as defined and further described in Appendix A, payable in cash
                and shares of restricted stock as provided below:

                                        (1) If the ROE of the Company is at
                least 6.5% but less than 10%, then an annual incentive
                compensation equal to 1% of the pretax, preincentive income
                ("PPI") of the Company;

                                        (2) If the ROE of the Company is at
                least 10% but less than 15%, then an annual incentive
                compensation equal to 1.25% of the PPI of the Company plus .05%
                of PPI for each additional whole percentage of ROE in excess of
                10%;

                                        (3) If the ROE of the Company is at
                least 15% but less than 20%, then an annual incentive
                compensation equal to 1.50% of PPI plus .10% of PPI for each
                additional whole percentage of ROE in excess of 15%; and

                                        (4) If the ROE of the Company equals or
                exceeds 20%, then an annual incentive compensation equal to 2%
                of the PPI of the Company.

                                        (5) On the Payment Date (as defined in
                subsection (iii) below), the annual incentive compensation
                payable to the Executive under clauses (1) through (4) shall be
                paid to the Executive 75% in cash and 25% in shares of
                restricted stock based on the fair market value of the stock
                (without regard on any restrictions on the stock) on the last
                date of the fiscal year for which the payment is being made;
                provided, however, that in no event shall the amount of the cash
                incentive compensation to be paid to the Executive be greater in
                any fiscal year than $5,000,000 (the "Maximum Limit"). If the
                cash portion of the annual incentive compensation earned by the
                Executive exceeds the Maximum Limit, the Executive shall be paid
                the excess amount in shares of restricted stock.

                                        (6) Notwithstanding any other provisions
                of this Agreement, if the Company's shareholders fail to approve
                the QPBC Amendment, the Executive shall be entitled to earn the
                incentive compensation provided by Section 4(b)(i) of the 1995
                Letter Agreement for each fiscal year during the term of this
                Agreement.

                                        (7) The shares of restricted stock
                granted under clause (5) vest upon the third anniversary of the
                date of grant, provided the Executive is still employed by the
                Company on such date and shall vest earlier upon the Executive's
                termination of employment due to death, disability, involuntary
                termination of employment by the Company without Cause, or
                voluntary termination of employment for Good Reason. Such shares
                of restricted stock shall be forfeited upon the termination of
                the Executive employment for Cause or by the Executive's
                voluntary termination of employment without Good Reason before
                the third anniversary of the date of grant. The terms and
                conditions of the



                                       3
   4

                shares of restricted stock are more fully defined in Appendix B.
                No fractional shares shall be issued hereunder.

                (iii) By no later than February 1, 2002, and each anniversary
thereof, the Personnel, Compensation and Stock Plan Committee of the Board, or
its successor committee (the "Committee"), will certify the amount of incentive
compensation to which the Executive is entitled, if any, for the preceding
fiscal year under subsections (b)(i) and (ii) above as required under the
applicable plan. Promptly following the effective date of the certification and
in accordance with the Company's incentive compensation payout policy in effect
from time to time and on the date that the Company pays the annual bonuses to
other participants in the applicable plan (the "Payment Date"), the Company will
deliver any cash award and prepare an agreement substantially in the form of
Appendix B, evidencing the restricted stock award earned under subsection
(b)(ii). The grant date of any shares of restricted stock awarded under
subsection (b)(ii)(aa)(5) shall be the Payment Date.


                (c) Retention Grant of Restricted Stock. In order to induce the
Executive to enter into this Agreement and to agree to continue in the Company's
employment during the term of this Agreement, as of the Effective Date, the
Company shall grant the Executive a grant of 350,000 shares of restricted stock
which shall vest 100% upon the occurrence of any of the following: (i) on
December 31, 2008 provided the Executive is still employed by the Company on
such date and shall vest earlier upon the Executive's termination of employment
due to death, disability, involuntary termination of employment by the Company
without Cause, or voluntary termination of employment for Good Reason, or (ii)
upon a Change of Ownership (as defined below). Except as provided above, the
shares of restricted stock granted under this subsection (c) shall be forfeited
upon the termination of the Executive employment for Cause or by the Executive's
voluntary termination of employment without Good Reason before December 31,
2008. The terms and conditions of the shares of restricted stock are more fully
defined in Appendix C.


                (d) Employment Benefits. The Executive shall also be entitled to
receive during the term of this Agreement all other employee benefits, including
reimbursement for bona fide business expenses, club membership fees paid by the
Company, a car leased by the Executive and paid for by the Company, all
automobile expenses, vacations, life and medical insurance, key man motivational
programs, the deferred profit sharing program, and stock option, restricted
stock and similar plans as may be offered by the Company to its key executive
personnel. The Executive shall further be entitled to receive up to $50,000 per
year to pay for personal financial management services, in addition to tax and
financial counseling services which will be offered to the Executive on the same
basis as offered by the Company to its key executives.

                (e) Vacation. The Executive shall receive four (4) weeks paid
vacation annually, subject to the terms of the Company's vacation policies as
they relate to senior executive officers.



                                       4
   5

                (f) SERP Benefits. The Executive shall be entitled to receive a
benefit under a defined benefit supplemental retirement plan (the "SERP") which
shall provide an annual retirement benefit for a period of 25 years to the
Executive equal to 100% of the Executive's annual average base salary during the
final three years of the Executive's employment if the Executive retires on or
after November 30, 2008. The terms and conditions of this SERP are more fully
defined in Appendix D. The SERP may be funded with a rabbi trust which may own a
life insurance policy on the Executive's life as described in Appendix D. In the
event of a Change of Ownership, the Company shall fund the SERP with a rabbi
trust.


                (g) Terms of Stock Options and Restricted Stock.

                        (i) The terms and conditions of any stock options and
        shares of restricted stock granted to the Executive prior to the
        Effective Date shall be subject to Section 4(d) of the 1995 Letter
        Agreement.

                        (ii) All stock options and shares of restricted stock
        granted to the Executive after the Effective Date shall provide that
        such options and restricted stock shall be 100% vested upon the
        Executive's termination of employment due to death, disability,
        involuntary termination of employment by the Company without Cause, or
        voluntary termination of employment for Good Reason. In addition, such
        stock options shall provide that if the Executive retires on or after
        November 30, 2008, such options shall continue to be exercisable until
        the earlier of their original expiration dates or the 5th anniversary of
        such retirement.

        5. Termination.

                (a) Death.

                        (i) In the event of the Executive's death, this
        Agreement and all the Executive's unearned rights hereunder shall
        terminate immediately. In such event, the Company shall promptly pay to
        the Executive's estate all earned but unpaid incentive compensation. In
        addition, the Company shall pay the Executive's estate the current year
        incentive compensation as if the Executive survived until November 30 of
        that year and any amounts due under the SERP. Any unvested stock options
        or restricted stock which the Executive then holds shall become vested
        upon the Executive's death. The Company shall also pay to the
        Executive's estate an additional death benefit equal to two times the
        sum of the Executive's average annual base salary and the average "Value
        of the Incentive Compensation Earned" (as defined in Section 5(f) below)
        in each case, for the three fiscal years prior to the date of
        termination, which will be payable by the Company in a lump sum to the
        Executive's estate.

                        (ii) In lieu of payments to the Executive's estate
        following the Executive's death, the Executive may designate a
        beneficiary or beneficiaries to whom all payments which may be due under
        this Agreement will be made in the event of the Executive's death. Such
        designation shall be made on a form delivered to the Company. The
        Executive shall have the right to change or revoke any such designation
        from time to time by filing a new designation or notice of revocation
        with the Company, and no notice



                                       5
   6

        to any beneficiary nor consent by any beneficiary shall be required to
        effect any such change or revocation. If the Executive shall fail to
        designate a beneficiary before the Executive's death, or if no
        designated beneficiary survives the Executive, any payments which may be
        due under this Agreement following the Executive's death will be paid to
        the Executive's estate.

                (b) Disability. In the event the Executive shall become unable
to perform the services contemplated by this Agreement due to a physical or
mental disability for a continuous period of six months or an aggregate of six
months in any eighteen month period, the Company may, to the extent consistent
with the federal Family and Medical Leave Act and the California Family Rights
Act, terminate this Agreement by giving written notice of such termination to
the Executive. In the event of any such termination by the Company, the Company
shall promptly pay to the Executive all earned but unpaid incentive
compensation. In addition, the Company shall pay the Executive the current year
incentive compensation as if the disability did not occur until November 30 of
that year. The Company shall also pay to the Executive an amount equal to two
times the sum of the Executive's average annual base salary and the average
Value of the Incentive Compensation Earned, in each case, for the three fiscal
years prior to the date of termination, reduced by amounts paid under a Company
disability or income replacement plan, in twelve monthly installments following
this termination. The Company may condition the payments set forth above upon
securing from the Executive an appropriate release of claims under the federal
Family and Medical Leave Act and the California Family Rights Act.

                (c) Without Cause; Good Reason. If the Company shall terminate
the Executive's employment without Cause or the Executive shall terminate the
Executive's employment for Good Reason (in each case, other than within 18
months following a Change of Ownership as provided in subsection (d) below), the
Company shall pay the Executive a lump sum payment in an amount equal to three
times the sum of the Executive's average annual base salary and the average
Value of the Incentive Compensation Earned, in each case, for the three fiscal
years prior to date of termination.

                (d) Termination Following a Change of Ownership.

                        (i) If, within 18 months following a "Change of
        Ownership" (as defined below), the Company shall terminate the
        Executive's employment without Cause or the Executive shall terminate
        the Executive's employment for Good Reason, the Company shall pay the
        Executive, within 10 days following the termination of the Executive's
        employment, a lump sum payment in an amount equal to three times the sum
        of the Executive's average annual base salary and the average Value of
        the Incentive Compensation Earned, in each case, for the three fiscal
        years prior the fiscal year in which the Change of Ownership occurs. In
        the event payment is made under this subsection (d), no amount shall be
        payable under subsection (c) above.

                        (ii) Anything in this Agreement to the contrary
        notwithstanding, if it shall be determined that any payment or
        distribution to the Executive or for the Executive's benefit (whether
        paid or payable or distributed or distributable) pursuant to the terms
        of this Agreement or otherwise pursuant to or by reason of any other
        agreement, policy, plan, program or arrangement, including without
        limitation any stock option,



                                       6
   7

        stock appreciation right or similar right, or the lapse or termination
        of any restriction on or the vesting or exercisability of any of the
        foregoing (the "Payments") would be subject to the excise tax imposed by
        section 4999 of the Code by reason of being "contingent on a change in
        the ownership or control" of the Company, within the meaning of Section
        280G of the Code or to any similar tax imposed by state or local law, or
        any interest or penalties with respect to such excise tax (such tax or
        taxes, together with any such interest or penalties, are collectively
        referred to as the "Excise Tax"), then the Executive shall be entitled
        to receive from the Company an additional payment (the "Gross-Up
        Payment") in an amount such that the net amount of the Payments and the
        Gross-Up Payment retained by the Executive after the calculation and
        deduction of all Excise Taxes (including any interest or penalties
        imposed with respect to such taxes) on the payment and all federal,
        state and local income tax, employment tax and Excise Tax (including any
        interest or penalties imposed with respect to such taxes) on the
        Gross-Up Payment provided for in this Section 5(d)(ii), and taking into
        account any lost or reduced tax deductions on account of the Gross-Up
        Payment, shall be equal to the Payments;

                                (aa) All determinations required to be made
                under this Section 5(d)(ii), including whether and when the
                Gross-Up Payment is required and the amount of such Gross-Up
                Payment, and the assumptions to be utilized in arriving at such
                determinations shall be made by the Accountants (as defined
                below) which shall provide the Executive and the Company with
                detailed supporting calculations with respect to such Gross-Up
                Payment within fifteen (15) business days of the receipt of
                notice from the Executive or the Company that the Executive has
                received or will receive a Payment. For purposes of making the
                determinations and calculations required herein, the Accountants
                may make reasonable assumptions and approximations concerning
                applicable taxes and may rely on reasonable, good faith
                interpretations concerning the application of Section 280G and
                4999 of the Code, provided that the Accountant's determinations
                must be made on the basis of "substantial authority" (within the
                meaning of Section 6662 of the Code). For the purposes of this
                Section 5(d)(ii), the "Accountants" shall mean the Company's
                independent certified public accountants serving immediately
                prior to the Change of Ownership. In the event that the
                Accountants are also serving as accountant or auditor for the
                individual, entity or group effecting the Change of Ownership,
                the Executive shall appoint another nationally recognized public
                accounting firm to make the determinations required hereunder
                (which accounting firm shall then be referred to as the
                Accountants hereunder). All fees and expenses of the Accountants
                shall be borne solely by the Company.

                                (bb) For the purposes of determining whether any
                of the Payments will be subject to the Excise Tax and the amount
                of such Excise Tax, such Payments will be treated as "parachute
                payments" within the meaning of section 280G of the Code, and
                all "parachute payments" in excess of the "base amount" (as
                defined under section 280G(b)(3) of the Code) shall be treated
                as subject to the Excise Tax, unless and except to the extent
                that in the opinion of the Accountants such Payments (in whole
                or in part) either do not constitute "parachute payments" or
                represent reasonable compensation for services actually



                                       7
   8

                rendered (within the meaning of section 280G(b)(4) of the Code)
                in excess of the "base amount," or such "parachute payments" are
                otherwise not subject to such Excise Tax. For purposes of
                determining the amount of the Gross-Up Payment the Executive
                shall be deemed to pay Federal income taxes at the highest
                applicable marginal rate of Federal income taxation for the
                calendar year in which the Gross-Up Payment is to be made and to
                pay any applicable state and local income taxes at the highest
                applicable marginal rate of taxation for the calendar year in
                which the Gross-Up Payment is to be made, net of the maximum
                reduction in Federal income taxes which could be obtained from
                the deduction of such state or local taxes if paid in such year
                (determined without regard to limitations on deductions based
                upon the amount of the Executive 's adjusted gross income); and
                to have otherwise allowable deductions for Federal, state and
                local income tax purposes at least equal to those disallowed
                because of the inclusion of the Gross-Up Payment in the
                Executive 's adjusted gross income. To the extent practicable,
                any Gross-Up Payment with respect to any Payment shall be paid
                by the Company at the time the Executive is entitled to receive
                the Payments and in no event will any Gross-Up Payment be paid
                later than five days after the receipt by the Executive of the
                Accountant's determination. Any determination by the Accountants
                shall be binding upon the Company and the Executive.

                                (cc) As a result of uncertainty in the
                application of section 4999 of the Code at the time of the
                initial determination by the Accountants hereunder, it is
                possible that the Gross-Up Payment made will have been an amount
                less than the Company should have paid pursuant to this Section
                5(d)(ii) (the "Underpayment"). In the event that the Company
                exhausts its remedies pursuant to Section 5(d)(ii)(bb) and the
                Executive is required to make a payment of any Excise Tax, the
                Underpayment shall be promptly paid by the Company to or for the
                Executive 's benefit.

                                (dd) The Executive and the Company shall each
                provide the Accountants access to and copies of any books,
                records and documents in the possession of the Company or the
                Executive , as the case may be, reasonably requested by the
                Accountants, and otherwise cooperate with the Accountants in
                connection with the preparation and issuance of the
                determination contemplated by this Section 5(d)(ii).

                                (ee) The Executive shall notify the Company in
                writing of any claim by the Internal Revenue Service that, if
                successful, would require the payment by the Company of the
                Gross-Up Payment. Such notification shall be given as soon as
                practicable after the Executive is informed in writing of such
                claim and shall apprise the Company of the nature of such claim
                and the date on which such claim is requested to be paid. the
                Executive shall not pay such claim prior to the expiration of
                the 30-day period following the date on which the Executive give
                such notice to the Company (or such shorter period ending on the
                date that any payment of taxes, interest and/or penalties with
                respect to such claim is due). If the Company notifies the
                Executive in writing prior to the expiration of such period that
                it desires to contest such claim, the Executive shall:



                                       8
   9

                                        (i) give the Company any information
                        reasonably requested by the Company relating to such
                        claim;

                                        (ii) take such action in connection with
                        contesting such claim as the Company shall reasonably
                        request in writing from time to time, including, without
                        limitation, accepting legal representation with respect
                        to such claim by an attorney reasonably selected by the
                        Company;

                                        (iii) cooperate with the Company in good
                        faith in order to effectively contest such claim; and

                                        (iv) permit the Company to participate
                        in any proceedings relating to such claims; provided,
                        however, that the Company shall bear and pay directly
                        all costs and expenses (including additional interest
                        and penalties) incurred in connection with such contest
                        and shall indemnify the Executive for and hold the
                        Executive harmless from, on an after-tax basis, any
                        Excise Tax or income tax (including interest and
                        penalties with respect thereto) imposed as a result of
                        such representation and payment of all related costs and
                        expenses. Without limiting the foregoing provisions of
                        this Section 5(d)(ii), the Company shall control all
                        proceedings taken in connection with such contest and,
                        at its sole option, may pursue or forgo any and all
                        administrative appeals, proceedings, hearings and
                        conferences with the taxing authority in respect of such
                        claim and may, at its sole option, either direct the
                        Executive to pay the tax claimed and sue for a refund or
                        contest the claim in any permissible manner, and the
                        Executive agree to prosecute such contest to a
                        determination before any administrative tribunal, in a
                        court of initial jurisdiction and in one or more
                        appellate courts, as the Company shall determine;
                        provided, however, that if the Company directs the
                        Executive to pay such claim and sue for a refund, the
                        Company shall advance the amount of such payment to the
                        Executive , on an interest-free basis, and shall
                        indemnify the Executive for and hold the Executive
                        harmless from, on an after-tax basis, any Excise Tax or
                        income tax (including interest or penalties with respect
                        thereto) imposed with respect to such advance or with
                        respect to any imputed income with respect to such
                        advance (including as a result of any forgiveness by the
                        Company of such advance); provided, further, that any
                        extension of the statute of limitations relating to the
                        payment of taxes for the taxable year of the Executive
                        with respect to which such contested amount is claimed
                        to be due is limited solely to such contested amount.
                        Furthermore, the Company's control of the contest shall
                        be limited to issues with respect to which a Gross-Up
                        Payment would be payable hereunder and the Executive
                        shall be entitled to settle or contest, as the case may
                        be, any other issue raised by the Internal Revenue
                        Service or any other taxing authority.



                                       9
   10

                (e) For Cause; Without Good Reason. In the event of the
termination of the Executive's employment by the Company for Cause or by the
Executive without Good Reason, this Agreement and all the Executive's unearned
rights hereunder shall terminate immediately.


                (f) Value of the Incentive Compensation Earned. For purposes of
this Section 5, the "Value of the Incentive Compensation Earned" for the fiscal
year ending on November 30, 2001 and for any fiscal year ending thereafter if
the Company's shareholders do not approve the QPBC Amendment shall be determined
by multiplying 1.75% times PPI for the applicable fiscal year, provided that the
ROE of the Company (as defined in the 1995 Letter Agreement) was equal to or
greater than ten percent (10%) for the applicable fiscal year. For purposes of
this Section 5, the "Value of Incentive Compensation Earned" for the fiscal year
ending on November 30, 2002 and for any fiscal year ending thereafter if the
Company's shareholders approve the QPBC Amendment shall be determined pursuant
to Section 4(b)(ii) for the applicable fiscal year.


                (g) Change of Ownership. A "Change of Ownership" shall mean any
change in control of the Company of a nature that would be required to be
reported in response to Item 1(a) of the Current Report on Form 10-K, as in
effect on the Effective Date, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Act"); provided that, without limitation,
such a "Change of Ownership" shall be deemed to have occurred if:

                        (i) a third person, including a "group" as such term is
        used in Section 13(d)(3) of the Act, becomes the beneficial owner,
        directly or indirectly, of 20% or more of the combined voting power of
        the Company's outstanding voting securities ordinarily having the right
        to vote for the election of directors of the Company, unless such
        acquisition of beneficial ownership is approved by a majority of the
        Incumbent Board (as such term is defined in clause (ii) below); or

                        (ii) individuals who, as of the date hereof, constitute
        the Board (the "Incumbent Board") cease for any reason to constitute at
        least a majority of the Board, provided that any person becoming a
        director subsequent to the date hereof whose election, or nomination for
        election by the Company's shareholders, was approved by a vote of at
        least three-quarters of the directors comprising the Incumbent Board
        (other than an election or nomination of an individual whose initial
        assumption of office is 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-11 of Regulation 14A
        promulgated under the Act) shall be, for purposes of this Agreement,
        considered as though such person were a member of the Incumbent Board.


                For purposes of any incentive compensation paid to the Executive
pursuant to this Agreement, the definition of "Change of Ownership" set forth
herein shall prevail over the definition of "Change of Ownership", or any
similar term, contained in any applicable plan, or any other employee
compensation plan, under which such incentive compensation may be granted.



                                       10
   11

                (h) Cause. "Cause" shall mean (i) acts of fraud or
misappropriation committed by the Executive and intended to result in
substantial personal enrichment at the expense of the Company or (ii) repeated
violations by the Executive of the Executive's obligations under this Agreement
which are demonstrably willful and deliberate and which result in material
injury to the Company; provided that, in each case, the Executive has received
written notice of the described activity, has been afforded a period of 30 days
to cure or correct the activity described in the notice, and has failed to cure,
correct or cease the activity, as appropriate. The Executive's employment shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters (3/4) of the entire membership
of the Board at a meeting of the Board (excluding the Executive), finding that
in the Board's good faith opinion the Executive was guilty of conduct set forth
above in this Section and specifying the particulars thereof in reasonable
detail.

                (i) Good Reason. "Good Reason" shall mean, without the consent
of the Executive, (i) any changes in the duties and responsibilities of the
Executive which are materially inconsistent with the duties and responsibilities
contemplated in Section 3 hereof, (ii) any reduction of the Executive's salary,
aggregate incentive compensation opportunities (excluding any reduction in
incentive compensation awards due to the economic performance of the Company) or
aggregate benefits, (iii) any required relocation of the Executive's office
beyond a 50 mile radius from the present location of the Executive's office,
(iv) the Company's material breach of the terms of this Agreement, (v) a failure
to re-elect the Executive as a member of the Board, (v) any failure by the
Company to obtain the assumption of this Agreement by a successor of the Company
and (vi) the Company's requiring the Executive to travel materially in excess of
current business travel obligations. Any good faith determination by the
Executive that Good Reason exists shall be presumed correct and shall be binding
on the Company.

        6. Benefits After Retirement. In the event the Executive's employment
with the Company terminates at or after the term of this Agreement or the
Executive retires earlier with the prior consent of the Board, to be determined
in its sole discretion (provided, however, that in the event of a Change of
Ownership, such consent of the Board shall not be required), the Company shall
continue to provide to the Executive and his eligible dependents for the period
of the Executive's lifetime medical and dental benefits at least equal to those
which would have been provided to the Executive and his eligible dependents
under the Company's plan had he not retired, and in the event the Executive and
his eligible dependents are not eligible under the terms of the Company's plans
to continue to be covered, in such event, the Company shall provide the
Executive with substantially equivalent coverage through other sources;
provided, however, that if the Executive becomes re-employed with another
employer and is eligible to receive medical and dental benefits under another
employer's plans, the Company's obligations under this Section 6 shall be
reduced to the extent comparable benefits are actually received by the
Executive, and any such benefits actually received by the Executive shall be
reported promptly to the Company. In addition, at the reasonable request of the
Executive, the Company shall provide to the Executive an appropriate office and
administrative support commensurate with the Executive's former status as Chief
Executive Officer of the Company plus reimbursement of reasonable expenses
attendant to the maintenance of such office and retention of such administrative
support. At the request of the Executive, the Company shall, in lieu of
providing



                                       11
   12

such office and administrative support, reimburse the Executive for expenses of
such office and administrative support.

        7. Exclusive Benefit.

                (a) The Executive and the Company have agreed that a primary
material element of this contract is the desire of the Company to insure to
itself and its affiliates the sole and exclusive right to receive the full
benefit of the Executive's time, skill, and opportunities until the date of
termination of this Agreement, as the same may be extended. Subject only to the
Company's payment to the Executive of the compensation provided hereunder, the
Executive has agreed that until said date the Executive will not, as a director,
officer, agent, employee, partner, owner, five or more percent shareholder, or
otherwise, enter into or conduct any business venture which may be competitive,
directly or indirectly, with that of the Company or any affiliate. A business or
activity shall be deemed to be competitive if it is substantially similar to one
engaged in or conducted by the Company or any affiliate and is conducted within
a radius of one hundred fifty (150) miles from any location in which such
business or activity is engaged in or conducted by the Company or an affiliate.
It is understood that passive investments in income producing properties are
permitted by this subsection. Furthermore, the Executive has agreed that the
Executive will not, during the term of this Agreement or for a period of two
years thereafter, employ or seek to employ any person employed by the Company or
any of its affiliates in connection with any business activities in which the
Executive may engage.

                (b) During the performance of the Executive's duties on behalf
of the Company, the Executive shall receive and be entrusted with certain
confidential and/or secret information of a proprietary nature. The Executive
shall not discuss or use, during the term of this employment agreement or any
time thereafter, any such information which is not otherwise publicly available.

                (c) The Executive acknowledges that the Executive's extensive
experience and knowledge of the Company and relationship with its employees make
the services to be performed by the Executive hereunder of a special, unusual,
and peculiar value to the Company, not readily replaceable, and that by reason
of the Executive's continued employment the Executive will continue to acquire
additional confidential information and trade secrets. The loss of the
Executive's services hereunder or the disclosure of such confidential
information and trade secrets or solicitation by the Executive of employees of
the Company cannot be reasonably or adequately compensated for in money damages.
Accordingly, we have agreed that in addition to any other legal remedies
available, the Company shall be entitled to seek equitable relief to enjoin any
violation by the Executive of this Agreement.

        8. Miscellaneous.

                (a) Reimbursement for Legal Fees. The Company shall reimburse
the Executive for all reasonable legal fees and expenses incurred by the
Executive in connection with the negotiation and preparation of this Agreement.

                (b) Waiver. The waiver of either party hereto of a breach of any
provision of this Agreement by the other party shall not operate or be construed
to operate as a waiver of any subsequent breach by the other party.



                                       12
   13

                (c) No Mitigation. The Executive shall not be required to
mitigate the amount of any payment provided for in Section 5 or Section 6 by
seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in Section 5 or Section 6 be reduced by any compensation
earned by the Executive as the result of employment by another employer or
self-employment, by retirement benefits, by offset against any amount claimed to
be owed by the Executive to the Company, or otherwise, except as expressly
provided by Section 6.

                (d) Entire Agreement. This Agreement contains the entire
agreement between the Executive and the Company concerning the Executive's
employment during the term hereof. On and after the Effective Date, this
Agreement shall supersede the 1995 Letter Agreement, except as expressly
provided otherwise in this Agreement. This Agreement may not be changed orally
but only by an agreement, in writing, signed by the Executive and approved by
the Board.

                (e) Severability. If any of the provisions of this Agreement
shall be unlawful, void, or for any reason unenforceable, they shall be deemed
separate from and in no way affect the validity or enforceability of the
remaining provisions of the Agreement.

                (f) Notice. All notices and other communications under this
Agreement shall be in writing and shall be delivered by hand delivery to the
other party, by telegraph or mailed by certified or registered mail with return
receipt, and shall be deemed delivered when actually received or upon refusal if
properly delivered to the respective persons named below:

               If to the Company:   KB Home
                                    10990 Wilshire Boulevard
                                    Los Angeles, California 90024

               If to the Executive: Bruce Karatz
                                    10990 Wilshire Boulevard
                                    Los Angeles, California 90024

                (g) Governing Law. This Agreement is entered into in Los
Angeles, California and shall be construed and enforced under the laws of the
State of California.

                (h) Dispute. In the event any legal action or arbitration shall
be brought for the enforcement of this Agreement, or because of any alleged
dispute, breach, or default hereunder, the successful or prevailing party or
parties shall be entitled to recover reasonable attorneys' fees and other costs
incurred in such legal action or arbitration, in addition to any other relief to
which it or he may be entitled. Nothing hereunder, however, shall be construed
to authorize filing suit in court with regard to any dispute which is to be
resolved by arbitration pursuant to Section 9 of this Agreement.

                (i) Successors. The Agreement shall bind and benefit the
Company, its successors and assigns and shall inure to the benefit of and be
binding on the Executive, the Executive's heirs, executors and administrators,
provided that the Executive's duties and responsibilities hereunder may not be
assigned or delegated by the Executive.



                                       13
   14

                (j) Withholding. All payments made by the Company under this
Agreement shall be subject to normal deductions and withholding to the extent
required by law.

                (k) Indemnification. The Company shall indemnify the Executive
to the fullest extent permitted by applicable law as a director, executive
officer or employee of the Company.

                (l) Modifications and Amendments. This Agreement may not be
modified, amended, changed or supplemented, nor may any obligations hereunder be
waived, except by written instrument signed by both parties.

        9. Arbitration.

                (a) In the event that any controversy or dispute between the
Executive and the Company arising out of or relating to the employment
relationship, including, but not limited to any disputes in connection with the
validity, construction, application or enforcement of the terms of this
Agreement or the SERP, occurs, any such controversy or dispute shall be
submitted to final and binding arbitration pursuant to the then most applicable
Rules of the American Arbitration Association; provided, however, that unless
the parties otherwise agree, the arbitration shall be before a single arbitrator
selected either by mutual agreement or, failing agreement, from a list of seven
arbitrators provided by AAA, four of whom shall be retired judges of the
Superior or Appellate Courts of California who are residents of Los Angeles or
Orange County and, if such list exists at the time of the dispute, who are
members of the Independent List of Retired Judges and three of whom shall be
members of the National Academy of Arbitrators, resident in Los Angeles or
Orange Counties. In the event the parties are unable to agree upon such an
arbitrator from such list of seven, each party shall strike one name in turn
with the first to strike being chosen by lot. When only one name remains, that
person shall be the parties' arbitrator. The parties hereto expressly waive
their rights, if any, to have such matters heard by a jury or a judge, whether
in state or federal court.

                (b) The cost of the arbitration, including, but not limited to,
any reasonable legal fees or other expenses incident thereto incurred in
connection with such arbitration, shall be determined by the arbitrator(s) and
shall be borne by the nonprevailing party. During the pendency of any
arbitration concerning the propriety of the Executive's termination and up to
the date of the arbitrator's award, the Executive shall participate in all
employee benefit programs of the Company (other than the 401(k) plan) as
provided in Section 4(d) above.

                (c) The Company agrees to pay interest on any amounts payable to
the Executive under this Agreement which are not paid within sixty (60) days
after the date when due and on any money judgment which is awarded to the
Executive following a proceeding to enforce any portion of the Agreement from
the date that payments should have been made under this Agreement. Such interest
shall be calculated at the prime rate offered by Bank of America, or its
successor from the date that payments should have been made under this Agreement
to the time of actual payment.

                            (Signature Page Follows)



                                       14
   15

                IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date and year first above written.


                                       KB HOME

                                       /s/ RAY R. IRANI
                                       -----------------------------------------
                                       Name:
                                       Title:


                                       EXECUTIVE

                                        /s/ BRUCE KARATZ
                                       -----------------------------------------
                                       Bruce Karatz



   16

                                    EXHIBIT A


ROE. A ratio, stated as a percentage, which measures the Company's return on
equity, or the Company's profitability for a given period as it relates to its
shareholders' capital investments. The percentage is calculated by dividing the
Company's consolidated net income for a given fiscal year by the average
consolidated shareholders' equity balance. The average consolidated
shareholders' equity balance is one-half the sum of the Company's consolidated
shareholders' equity balance at the beginning of the given year plus the
Company's consolidated shareholders' equity balance at the end of the same year.

PPI. Total consolidated revenues of the Company and related entities less total
associated consolidated expenses for a given fiscal year determined in
accordance with generally accepted accounting principles, exclusive of all
income taxes and incentive compensation costs.






INCENTIVE PAYOUT PERCENTAGE SCHEDULE

                                              PRETAX PRE-INCENTIVE
                ROE                            PAYOUT PERCENTAGE
         -----------------                    --------------------
                                           
         *6.50% to  9.99%                            1.00%

         10.00% to 10.99%                            1.25%

         11.00% to 11.99%                            1.30%

         12.00% to 12.99%                            1.35%

         13.00% to 13.99%                            1.40%

         14.00% to 14.99%                            1.45%

         15.00% to 15.99%                            1.50%

         16.00% to 16.99%                            1.60%

         17.00% to 17.99%                            1.70%

         18.00% to 18.99%                            1.80%

         19.00% to 19.99%                            1.90%

         20.00% and higher                           2.00%



*If ROE is less than 6.50%, the payout percentage is 0.00%



   17

                                   Appendix B


                           STOCK RESTRICTION AGREEMENT

                THIS STOCK RESTRICTION AGREEMENT (this "Agreement") is made as
of _______________, 200__ (herein the "Effective Date") by and between KB HOME,
a Delaware corporation (the "Company") and Bruce Karatz (the "Participant").


                                 R E C I T A L S

                By action of the Personnel, Compensation and Stock Plan
Committee (the "Committee") taken on the Effective Date (the "Committee Action")
and in accordance with the terms and conditions of the Amended and Restated
Employment Agreement entered into between the Participant and the Company on
July 11, 2001 (the "Employment Agreement"), the Company desires to award the
Participant shares of restricted common stock of the Company, par value $1.00
per share ("Stock") under the [NAME OF PLAN] (the "Plan").


                                A G R E E M E N T

                In consideration of the provisions contained in this Agreement
and with reference to the foregoing Recitals, the Company and the Participant
agree as follows:

        1. Award. As of the Effective Date, the Company shall issue to the
Participant ______________ shares of Stock (the "Award"), subject to the terms
and conditions set forth in this Agreement, the Plan, the Employment Agreement
and the Committee Action. The certificate(s) representing shares of Stock
granted pursuant to the Award shall not be delivered to the Participant until
the lapse of the restrictions on transferability in accordance with Paragraphs
2, 4 and 5 of this Agreement. Prior to such lapse, the certificate(s) shall be
held by the Company in escrow pursuant to Section [7(d)] of the Plan along with
a stock power duly endorsed in blank by the Participant.

        2. Lapse of Restrictions. The restrictions imposed by this Agreement,
the Employment Agreement and the Plan with respect to the shares covered by this
Award shall lapse on the business day next following the third anniversary of
the Effective Date.



   18

        3. Parties' Obligations. Following the lapse of restrictions, the
Company shall deliver to the Participant as soon as practicable certificate(s)
representing those shares as to which restrictions have lapsed in accordance
with Paragraphs 2, 4 or 5, as the case may be.

        4. Termination of Employment. Except as set forth in Paragraph 5 below,
upon termination of the Participant's employment with the Company by the Company
for "Cause" (as defined in the Employment Agreement) or by the Participant
without "Good Reason" (as defined in the Employment Agreement), the
Participant's right, title and interest in those shares granted pursuant to the
Award as to which the restrictions shall not have lapsed at the time of such
termination of employment shall immediately terminate. The Participant shall
forthwith execute such further assignments or endorsements as the Company may
require to effect the transfer of beneficial ownership to those shares granted
pursuant to the Award back to the KB HOME Grantor Stock Trust (the "Trust"), if
the shares were issued to Participant out of the Trust and the Trust continues
to exist at such time, or otherwise back to the Company. Upon the termination of
the Participant's employment with the Company by reason of the Participant's
death or disability, by the Company without "Cause" or by the Participant for
"Good Reason," the restrictions set forth herein and Section [7] of the Plan
shall lapse immediately upon such termination of employment.

        5. Lapse of Restrictions Upon Change of Ownership. Notwithstanding any
provision of Paragraph 2, but subject to Paragraph 4, all of the restrictions
set forth herein and in Section [7] of the Plan on the shares of Stock granted
under this Award shall lapse as contemplated in Section 4(c) of the Employment
Agreement.

        6. Dividends. Cash dividends or other distributions paid on or in
respect of any shares of Stock subject to the Award shall be paid directly to
Participant at the same time any such dividends or distributions are paid to
holders of shares of Stock that are not restricted and are freely tradeable
("Other Holders"). Any stock or other non-cash distributions issued on or in
respect of any shares of Stock subject to the Award shall be issued at the same
time any such distributions are issued to Other Holders, but shall be held in
escrow and shall be subject to the same restrictions as the shares of Stock
subject to the Award.

        7. Tax Withholding Election. At Participant's discretion, he may direct
the Company to withhold shares of Stock otherwise deliverable upon the lapse of
restrictions on the Award to satisfy any withholding tax liability that may
arise upon such lapse of restrictions, provided that such Stock withholding
complies with Section 16(b) of the Securities Exchange Act of 1934, as amended,
and the rules promulgated thereunder.



   19

        8. Adjustments. The number of shares granted pursuant to the Award shall
be adjusted by the Board, whose determination shall be conclusive, to reflect
any stock split, stock dividend, reorganization, recapitalization, merger,
consolidation, combination or exchange of shares or similar event.

                The Committee shall make any adjustments or modifications, and
its determination thereof shall be conclusive, in the lapse of restrictions set
forth in Section 2 or Section 5 to give effect to the intent of the Plan and the
Employment Agreement in connection with any event affecting the Award, 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
the Participant under this Award.

        9. No Assignment. This Agreement may not be assigned by the Participant
by operation of law or otherwise. Notwithstanding, this Agreement shall be
binding upon and shall inure to the benefit of the personal representatives,
heirs, legatees, successors and assigns of the Company and the Participant.

        10. Governing Law. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of California.

        11. Conflict in Terms. In the event there shall be a conflict in terms
between this Agreement, the Plan, the Employment Agreement and/or the Committee
Action, the terms of the Employment Agreement shall prevail.

        IN WITNESS WHEREOF, the Company and the Participant have duly executed
and delivered this Agreement as of the date first above written.


                                       KB HOME


                                         By:
                                             -----------------------------------
                                             Gary Ray
                                             SVP, Human Resources


                                             -----------------------------------
                                             Bruce Karatz




   20

                                   Appendix C


                           STOCK RESTRICTION AGREEMENT

                THIS STOCK RESTRICTION AGREEMENT (this "Agreement") is made as
of July 11, 2001 (herein the "Effective Date") by and between KB HOME, a
Delaware corporation (the "Company") and Bruce Karatz (the "Participant").


                                 R E C I T A L S

                A. By action of the Personnel, Compensation and Stock Plan
Committee (the "Committee") taken on the Effective Date (the "Committee Action")
and in accordance with the terms and conditions of the Amended and Restated
Employment Agreement entered into between the Participant and the Company on the
Effective Date (the "Employment Agreement"), the Company desires to award the
Participant 350,000 shares of restricted common stock of the Company, par value
$1.00 per share ("Stock").

                B. The Stock issued pursuant to this Agreement will not be
issued under an employee stock plan, however, the Stock will be subject to the
restrictions, conditions and administrative provisions set forth in the
Company's 2001 Stock Incentive Plan (the "Plan") to the same extent as though
the Stock were issued thereunder; further, the Stock shall be subject to such
additional restrictions as maybe set forth in this Agreement, in the Employment
Agreement and the Committee Action.

                                A G R E E M E N T

                In consideration of the provisions contained in this Agreement
and with reference to the foregoing Recitals, the Company and the Participant
agree as follows:

        1. Award. Effective as of the execution of this Agreement, the Company
shall issue to the Participant 350,000 shares of Stock (the "Award"), subject to
the terms and conditions set forth in this Agreement, the Plan, the Employment
Agreement and the Committee Action. The certificate(s) representing shares of
Stock granted pursuant to the Award shall not be delivered to the Participant
until the lapse of the restrictions on transferability in accordance with
Paragraphs 2, 4 and 5 of this Agreement. Prior to such lapse, the certificate(s)
shall be held by the Company in escrow pursuant to Section 7(d) of the Plan
along with a stock power duly endorsed in blank by the Participant.

        2. Lapse of Restrictions. The restrictions imposed by this Agreement,
the Employment Agreement and the Plan with respect to the shares covered by this
Award shall lapse on December 31, 2008.



   21

        3. Parties' Obligations. Following the lapse of restrictions, the
Company shall deliver to the Participant as soon as practicable certificate(s)
representing those shares as to which restrictions have lapsed in accordance
with Paragraphs 2, 4 or 5, as the case may be.

        4. Termination of Employment. Except as set forth in Paragraph 5 below,
upon termination of the Participant's employment with the Company by the Company
for "Cause" (as defined in the Employment Agreement) or by the Participant
without "Good Reason" (as defined in the Employment Agreement), the
Participant's right, title and interest in those shares granted pursuant to the
Award as to which the restrictions shall not have lapsed at the time of such
termination of employment shall immediately terminate. The Participant shall
forthwith execute such further assignments or endorsements as the Company may
require to effect the transfer of beneficial ownership to those shares granted
pursuant to the Award back to the KB HOME Grantor Stock Trust (the "Trust"), if
the Trust continues to exist at such time, or otherwise back to the Company.
Upon the termination of the Participant's employment with the Company by reason
of the Participant's death or disability, by the Company without "Cause" or by
the Participant for "Good Reason," the restrictions set forth herein and Section
7 of the Plan shall lapse immediately upon such termination of employment.

        5. Lapse of Restrictions Upon Change of Ownership. Notwithstanding any
provision of Paragraph 2, but subject to Paragraph 4, all of the restrictions
set forth herein and in Section 7 of the Plan on the shares of Stock granted
under this Award shall lapse as contemplated in Section 4(c) of the Employment
Agreement.

        6. Dividends. Cash dividends or other distributions paid on or in
respect of any shares of Stock subject to the Award shall be paid directly to
Participant at the same time any such dividends or distributions are paid to
holders of shares of Stock that are not restricted and are freely tradeable
("Other Holders"). Any stock or other non-cash distributions issued on or in
respect of any shares of Stock subject to the Award shall be issued at the same
time any such distributions are issued to Other Holders, but shall be held in
escrow and shall be subject to the same restrictions as the shares of Stock
subject to the Award.

        7. Tax Withholding Election. At Participant's discretion, he may direct
the Company to withhold shares of Stock otherwise deliverable upon the lapse of
restrictions on the Award to satisfy any withholding tax liability that may
arise upon such lapse of restrictions, provided that such Stock withholding
complies with Section 16(b) of the Securities Exchange Act of 1934, as amended,
and the rules promulgated thereunder.



   22

        8. Adjustments. The number of shares granted pursuant to the Award shall
be adjusted by the Board, whose determination shall be conclusive, to reflect
any stock split, stock dividend, reorganization, recapitalization, merger,
consolidation, combination or exchange of shares or similar event.

                The Committee shall make any adjustments or modifications, and
its determination thereof shall be conclusive, in the lapse of restrictions set
forth in Section 2 or Section 5 to give effect to the intent of the Plan and the
Employment Agreement in connection with any event affecting the Award, 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
the Participant under this Award.

        9. No Assignment. This Agreement may not be assigned by the Participant
by operation of law or otherwise. Notwithstanding, this Agreement shall be
binding upon and shall inure to the benefit of the personal representatives,
heirs, legatees, successors and assigns of the Company and the Participant.

        10. Governing Law. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of California.

        11. Conflict in Terms. In the event there shall be a conflict in terms
between this Agreement, the Plan, the Employment Agreement and/or the Committee
Action, the terms of the Employment Agreement shall prevail.

        IN WITNESS WHEREOF, the Company and the Participant have duly executed
and delivered this Agreement as of the date first above written.


                                       KB HOME


                                         By:  /s/ GARY A. RAY
                                             -----------------------------------
                                             Gary Ray
                                             SVP, Human Resources

                                              /s/ BRUCE KARATZ
                                             -----------------------------------
                                             Bruce Karatz





   23

                                     KB HOME
                     SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN,
                                   AS RESTATED
                            (Effective July 12, 2001)



   24
                                                                                        
                                   ARTICLE I

                                    THE PLAN

1.1     Establishment of the Plan...........................................................1
1.2     Purpose.............................................................................1

                                   ARTICLE II

                                  DEFINITIONS

2.1     Definitions.........................................................................1
2.2     Gender and Number...................................................................2

                                  ARTICLE III

                                 PARTICIPATION

3.1     Eligibility for Participation.......................................................2
3.2     Date of Participation...............................................................2
3.3     Duration of Participation...........................................................3

                                   ARTICLE IV

                        SUPPLEMENTAL RETIREMENT BENEFITS

4.1     Supplemental Retirement Benefits....................................................3
4.2     Commencement, Form, and Duration....................................................3
4.3     Reduced Benefit in the Case of Retirement Before December 1, 2005...................3

                                   ARTICLE V

                         PRE-RETIREMENT DEATH BENEFITS

5.1     Eligibility.........................................................................4

                                   ARTICLE VI

                           OPTIONAL FORMS OF BENEFIT

6.1     Lump Sum Option.....................................................................4
6.2     Payment Upon Financial Hardship.....................................................4





                                      -1-
   25

                                TABLE OF CONTENTS
                                   (CONTINUED)




                                                                                        
                                  ARTICLE VII

                              CHANGE OF OWNERSHIP

7.1     Lump Sum Option Upon Change of Ownership............................................5
7.2     Amount of Lump Sum Benefit..........................................................5
7.3     Definition..........................................................................5
7.4     Advance Election....................................................................6

                                  ARTICLE VIII

                                     TRUST

8.1     Establishment of the Trust..........................................................6
8.2     Contributions.......................................................................6
8.3     Payment of Benefits.................................................................7

                                   ARTICLE IX

                                 ADMINISTRATION

9.1     Administration......................................................................7
9.2     Decisions and Actions of Committee..................................................7
9.3     Rules and Records of the Committee..................................................7
9.4     Employment of Agents................................................................7
9.5     Agent for Service of Legal Process..................................................7
9.6     Plan Expenses.......................................................................8
9.7     Indemnification.....................................................................8
9.8     Tax Withholding.....................................................................8
9.9     Claims Procedure....................................................................8

                                   ARTICLE X

                                 MISCELLANEOUS

10.1    Rights Against the Company..........................................................9
10.2    Rights Under the Company's Other Retirement Plans...................................9
10.3    Payment of Benefits to Incompetent..................................................9
10.4    Missing Person.....................................................................10
10.5    Amendment or Termination...........................................................10
10.6    Merger or Consolidation of Plan and Trust..........................................10
10.7    Arbitration/Interest on Unpaid Amounts/Controlling Law.............................10
10.8    Rights to Trust Fund Assets........................................................11
10.9    Nontransferability.................................................................11




                                      -2-
   26

                                TABLE OF CONTENTS
                                   (CONTINUED)

                                                                                       
10.10   Illegality of Particular Provision.................................................11





                                      -2-
   27

                                    ARTICLE I
                                    THE PLAN

        1.1 ESTABLISHMENT OF THE PLAN

        KB Home has previously established an unfunded supplemental executive
retirement plan for the benefit of Mr. Bruce Karatz, the Chairman and Chief
Executive Officer of Kaufman and Broad Home Corporation. This restated plan is
effective as of July 12, 2001 and shall be known as the KB Home Supplemental
Executive Retirement Plan.

        1.2 PURPOSE

        The purpose of this Plan is to provide retirement income to Mr. Karatz
to supplement the benefits provided under the tax-qualified retirement plans
maintained by KB Home. This Plan is intended to satisfy the supplemental
retirement provisions of section 4(f) of the Amended and Restated Employment
Agreement between Mr. Karatz and KB Home dated as of July 12, 2001.


                                   ARTICLE II
                                   DEFINITIONS

        2.1 DEFINITIONS

        Whenever capitalized in this document, the following terms shall have
the meanings set forth below unless otherwise expressly provided.

        (a)     "ACTUARIAL EQUIVALENT" shall mean a single sum value of a
                monthly benefit amount otherwise payable, calculated using an
                interest rate assumption of 5.85%.

        (b)     "BENEFICIARY" shall mean the person or persons designated by the
                Participant to receive benefits in the event of the death of the
                Participant. In the event that the Participant failed to
                designate a beneficiary; or if for any reason such designation
                shall be legally ineffective, or if all designated beneficiaries
                predecease him or die simultaneously with him, distribution to
                which the Participant would have been entitled shall be made to
                the Participant's surviving spouse or, if none, to the
                Participant's estate.

        (c)     "BOARD" shall mean the Board of Directors of KB Home.

        (d)     "CHANGE OF OWNERSHIP" shall mean a change in ownership of the
                Company, as described in Article VIII.

        (e)     "CODE" shall mean the Internal Revenue Code of 1986, as amended.



                                      -1-
   28

        (f)     "COMMITTEE" shall mean the Personnel, Compensation and Stock
                Plan Committee of the Board (or a designee of that Committee),
                which shall administer the Plan.

        (g)     "COMPANY" shall mean KB Home, and any successor thereto.

        (h)     "PARTICIPANT" shall mean Mr. Bruce Karatz, Chairman and Chief
                Executive Officer of the Company.

        (i)     "PLAN" shall mean the KB Home Supplemental Executive Retirement
                Plan.

        (j)     "TERMINATION OF EMPLOYMENT" shall mean termination of employment
                with the Company, whether voluntary or involuntary. The
                Participant's termination of employment will be deemed to occur
                when the Participant ceases to be a full-time employee of the
                Company, even though the Participant may continue to serve as
                Chairman of the Board or as a consultant to the Company.

        (k)     "TRUST" shall mean the legal entity organized pursuant to the
                Trust Agreement between the Company and the Trustee to hold and
                administer the Trust Fund in which any contributions made by the
                Company are to be held, invested, and disbursed to, or for the
                benefit of, the Participant or his Beneficiary.

        (l)     "TRUST AGREEMENT" shall mean the agreement in the nature of a
                trust entered into between the Company and Trustee.

        (m)     "TRUST FUND" shall mean the assets of every kind and description
                held in the Trust pursuant to the Trust Agreement.

        (n)     "TRUSTEE" shall mean the entity, not affiliated with the
                Company, acting as the trustee under the Trust Agreement at the
                time of reference.

        2.2 GENDER AND NUMBER

        Unless the context clearly requires otherwise, the masculine pronoun
whenever used shall include the feminine pronoun, and the singular shall include
the plural.


                                   ARTICLE III
                                  PARTICIPATION

        3.1 ELIGIBILITY FOR PARTICIPATION

        Mr. Bruce Karatz shall be the only employee of the Company eligible to
participate in this Plan.

        3.2 DATE OF PARTICIPATION

        Participation commenced December 1, 1995.



                                       2
   29

        3.3 DURATION OF PARTICIPATION

        Subject to the provisions of section 10.5, participation in this Plan
shall continue while the Participant is an employee of the Company, whether or
not there is in effect an employment agreement between the Participant and the
Company, and thereafter for so long as he is entitled to receive any benefits
hereunder.


                                   ARTICLE IV
                        SUPPLEMENTAL RETIREMENT BENEFITS

        4.1 SUPPLEMENTAL RETIREMENT BENEFITS

        Upon Termination of Employment with the Company for reasons other than
death, the Participant shall be entitled to a retirement benefit under this
Plan. The monthly amount of the Participant's retirement benefit shall be
one-twelfth of the Participant's "Average Annual Base Pay" at the time of
Termination of Employment. "Average Annual Base Pay" equals the average of the
Participant's (1) annual base pay rate at the time of Termination of Employment,
(2) the Participant's annual base pay rate in effect 12 months before the
Termination of Employment, and (3) the Participant's annual base pay rate in
effect 24 months before the Termination of Employment.

        4.2 COMMENCEMENT, FORM, AND DURATION

        Retirement benefit payments under this Plan shall commence upon the
first of the month following the Termination of Employment. Benefit payments
shall be made monthly for a period of 25 years (300 monthly payments). In the
event of the Participant's death while receiving monthly payments, the remaining
payments shall be made monthly to the Participant's Beneficiary.

        4.3 REDUCED BENEFIT IN THE CASE OF RETIREMENT BEFORE DECEMBER 1, 2005

        (a) Except as set forth in subsection (b) below, if the Participant
incurs a Termination of Employment before December 1, 2005, the amount of
retirement benefit described in Section 4.1 shall be reduced. The reduction
shall be calculated by first computing the difference (the "Difference") between
Average Annual Base Pay and $492,000, the benefit that would have been payable
to participant upon attainment of Normal Retirement Age under this Plan in
effect prior to December 1, 2001. The Average Annual Base Pay otherwise payable
under Section 4.1 shall be reduced by the following percentage of the
Difference:



                                       3
   30



                      TERMINATION                                       PERCENTAGE
                      -----------                                       ----------
                                                                     
             From 7/12/01 through 11/30/02                                 20%
             From 12/1/02 through 11/30/03                                 15%
             From 12/1/03 through 11/30/04                                 10%
             From 12/1/04 through 11/30/05                                  5%



        (b) The reduction in Average Annual Base Pay set forth in subsection (a)
above shall not apply if (1) the Company terminates Participant unless such
termination is for "Cause" or (2) Participant terminates employment because he
has determined in good faith that "Good Reason" exists. The terms "Cause" and
"Good Reason" shall have the same meanings as are set forth in Section 5(h) and
(i) of Participant's Amended and Restated Employment Agreement, dated as of July
12, 2001. Any good faith determination by Participant that "Good Reason" exists
shall be presumed correct and shall be binding on the Company.


                                    ARTICLE V
                          PRE-RETIREMENT DEATH BENEFITS

        5.1 ELIGIBILITY

        If the Participant dies while employed by the Company, his Beneficiary
shall be entitled to a death benefit from this Plan equal to the retirement
benefit that would have been paid the Participant if he had retired on his date
of death. The payment of benefits to his Beneficiary shall commence upon the
first of the month following the Participant's death and shall be made monthly
for a period of 25 years (300 monthly payments).


                                   ARTICLE VI
                            OPTIONAL FORMS OF BENEFIT

        6.1 LUMP SUM OPTION

        In lieu of the monthly benefits otherwise payable to the Participant or
his Beneficiary under section 4.1 or 5.1, the Participant or his Beneficiary, as
applicable, may elect to receive a lump sum payment. Such election may be made
prior to the commencement of monthly benefits or at any time during the period
of monthly payments. If the Participant has not incurred a Termination of
Employment at the time of the election, the election shall be effective as of
the first of the month following his Termination of Employment. This election
will result in a significant penalty to the Participant or his Beneficiary,
since the amount of the lump sum payment determined under this section 6.1 is
substantially less than the Actuarial Equivalent of the monthly benefits which
would otherwise be payable to the Participant or his Beneficiary. The lump sum
amount shall be determined by multiplying the Actuarial Equivalent of the



                                       4
   31

remaining payments by .94. The lump sum benefit shall be paid within 30 days of
the election by the Participant or Beneficiary.

        6.2 PAYMENT UPON FINANCIAL HARDSHIP

        In the event that the Participant incurs a financial hardship after the
commencement of monthly benefits under section 4.2 or section 5.1, he may
request that the Committee authorize payment of his remaining benefits in a lump
sum. The Committee shall not authorize such payment unless it determines that
there is an unforeseeable emergency that is caused by an event beyond the
control of the Participant, and such emergency would result in severe financial
hardship to the Participant if the lump sum payment is not authorized. If
authorized, the amount of the lump sum payment shall be the Actuarial Equivalent
value of the remaining monthly payments. Such lump sum payment shall be paid to
the Participant as soon as practicable following authorization by the Committee.


                                   ARTICLE VII
                               CHANGE OF OWNERSHIP

        7.1 LUMP SUM OPTION UPON CHANGE OF OWNERSHIP

        In the event of a Change of Ownership (as defined below) prior to the
commencement of payment of benefits under this Plan, the Participant may elect
to receive an immediate lump sum payment in lieu of all benefits otherwise
payable to the Participant or his Beneficiary under this Plan. Such election may
be made at any time prior to commencement of payment of benefits under this
Plan. This election will result in a significant penalty to the Participant,
since the amount of the lump sum benefit provided under section 7.2 is
substantially less than the Actuarial Equivalent of the monthly benefits which
may otherwise be payable to the Participant.

        7.2 AMOUNT OF LUMP SUM BENEFIT

        The amount of the lump sum benefit payable to the Participant pursuant
to section 7.1 shall be the amount determined pursuant to section 6.1, assuming
that the Participant terminated as of the date of his election. The lump sum
benefit shall be paid to the Participant within 30 days of the election by the
Participant.

        7.3 DEFINITION

        For purposes of this Article VII, the following definition applies:

        (a)     CHANGE OF OWNERSHIP. A "Change of Ownership" shall mean any
                change in control of the Company of a nature that would be
                required to be reported in response to Item 1(a) of the Current
                Report on Form 10-K, as in effect on July 12, 2001, pursuant to
                section 13 or 15(d) of the Securities Exchange Act of 1934 (the
                "Act"); provided that, without limitation, such a "Change in
                Ownership" shall be deemed to have occurred if:



                                       5
   32

                (1)     a third person, including a "group" as such term is used
                        in section 13(d)(3) of the Act, becomes the beneficial
                        owner, directly or indirectly, of 20 percent or more of
                        the combined voting power of the Company's outstanding
                        voting securities ordinarily having the right to vote
                        for the election of directors of the Company unless such
                        acquisition of beneficial ownership is approved by a
                        majority of the Incumbent Board (as such term is defined
                        in paragraph (2) below); or

                (2)     individuals who, as of July 12, 2001, constitute the
                        Board (the "Incumbent Board") cease for any reason to
                        constitute at least a majority of the Board, provided
                        that any person becoming a director subsequent to July
                        12, 2001 whose election, or nomination for election by
                        the Company's shareholders, was approved by a vote of at
                        least three-quarters of the directors comprising the
                        Incumbent Board (other than an election or nomination of
                        an individual whose initial assumption of office is 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-11 of
                        Regulation 14A promulgated under the Act) shall be, for
                        purposes of this Article, considered as though such
                        person were a member of the Incumbent Board.

        7.4 ADVANCE ELECTION

        In lieu of the lump sum payout described in section 7.2, a Participant
may receive a payout equal to the Actuarial Equivalent of his retirement benefit
if he has provided the Company an irrevocable election to receive a lump sum
election upon a Change of Ownership and such election is provided at least 12
months in advance of the Change of Ownership.


                                  ARTICLE VIII
                                      TRUST

        8.1 ESTABLISHMENT OF THE TRUST

        The Company shall establish a Trust as a part of the Plan in order to
implement and carry out the provisions of the Plan and to finance the benefits
under the Plan. The Company shall establish the Trust by entering into a Trust
Agreement with a Trustee selected by the Committee. The Trust shall be an
irrevocable grantor Trust within the meaning of Code sections 671 through 677,
and the Company shall be treated as the owner of the Trust. It is intended that
the Trust shall be in such form as may be necessary for the Plan to be deemed
unfunded for purposes of the Employee Retirement Income Security Act of 1974, as
amended.

        The Trust shall maintain a Trust Fund. The administration and management
of the Trust Fund shall be set forth in the Trust Agreement, the terms of which
shall be consistent with the provisions of this Plan. Nothing in the Trust
Agreement shall impair the rights of the Participant and his Beneficiary nor
shall the agreement limit the obligations of the Company under this Plan.



                                       6
   33

        8.2 CONTRIBUTIONS

        The Company shall make an annual contribution to the Trust Fund of
$250,000. The first contribution shall be made January 1, 1996 and thereafter a
contribution shall be made each January 1 (including, if necessary, years after
the Participant has a Termination of Employment) until the Trust Fund holds
assets sufficient to satisfy all obligations for benefits under this Plan.
Notwithstanding the foregoing, within 30 days of a Change of Ownership as
defined in section 7.3, the Company shall (1) make a contribution to the Trust
Fund that causes the assets of the Trust Fund to equal the then Actuarial
Equivalent of the monthly retirement benefits remaining due under the Plan (or,
if the Participant has not yet incurred a Termination of Employment, what would
be due if the Participant's retirement occurred on the first day of the month
after the Change of Ownership), and (2) by each following January 1, make any
additional contribution necessary to cause the assets of the Trust Fund to
equal, as of that January 1, the Actuarial Equivalent of the monthly retirement
benefits remaining due (or, if the Participant has not yet incurred a
Termination of Employment, what would be due if the Participant's retirement
occurred on that January 1).

        8.3 PAYMENT OF BENEFITS

        The benefits under this Plan shall be paid from the Trust Fund. To the
extent the Trust Fund is insufficient to pay all required benefits under the
Plan, payment of benefits shall be made from the general assets of the Company.


                                   ARTICLE IX
                                 ADMINISTRATION

        9.1 ADMINISTRATION

        The Plan shall be administered by the Committee. The Committee shall be
authorized to construe and interpret all of the provisions of the Plan, to adopt
procedures and practices concerning the administration of the Plan, and to make
any determinations necessary hereunder, which shall be binding and conclusive on
all parties. The Committee may appoint one or more individuals and delegate such
of its power and duties as it deems desirable to any such individual, in which
case every reference herein made to the Committee shall be deemed to mean or
include the individuals as to matters within their jurisdiction.

        9.2 DECISIONS AND ACTIONS OF COMMITTEE

        The Committee may act at a meeting or in writing without a meeting. All
decisions and actions of the Committee shall be made by vote of the majority,
including actions in writing taken without a meeting.

        9.3 RULES AND RECORDS OF THE COMMITTEE

        The Committee may make such rules and regulations in connection with its
administration of the Plan as are consistent with the terms and provisions
hereof. The



                                       7
   34

Committee shall keep a record of the Participant's name, address, social
security number, benefit commencement date, and the amount of benefit.

        9.4 EMPLOYMENT OF AGENTS

        The Committee may employ agents, including without limitation,
accountants, actuaries, consultants, or attorneys, to exercise and perform the
powers and duties of the Committee as the Committee delegates to them, and to
render such services to the Committee as the Committee may determine, and the
Committee may enter into agreements setting forth the terms and conditions of
such service.

        9.5 AGENT FOR SERVICE OF LEGAL PROCESS

        The Chairman of the Committee shall serve as agent for service of legal
process.

        9.6 PLAN EXPENSES

        The Company shall pay all expenses reasonably incurred in the
administration of the Plan and Trust; provided, however, that the Trustee may
pay such expenses from the assets of the Trust, to the extent such expenses have
not been paid by the Company. In such event the Company shall reimburse the
Trustee promptly for any such expenses paid by the Trustee from the Trust. The
members of the Committee shall serve without compensation for their services as
such, but all expenses of the Committee shall be paid by the Company. No
employee of the Company shall receive compensation from the Plan regardless of
the nature of his services to the Plan.

        9.7 INDEMNIFICATION

        To the extent permitted by law, the Committee and all agents and
representatives of the Committee shall be indemnified by the Company and saved
harmless against any claims, and the expenses of defending against such claims,
resulting from any action or conduct relating to the administration of the Plan
except claims arising from gross negligence, willful neglect, or willful
misconduct.

        9.8 TAX WITHHOLDING

        The Company or Trustee shall withhold from any payment to the
Participant or Beneficiary any federal, state, or local taxes required by law to
be withheld with respect to such payment.

        9.9 CLAIMS PROCEDURE

        (a)     SUBMISSION OF CLAIMS. Claims for benefits under the Plan shall
                be submitted in writing to the Committee or to an individual
                designated by the Committee for this purpose.



                                       8
   35

        (b)     DENIAL OF CLAIM. If any claim for benefits is wholly or
                partially denied, the claimant shall be given written notice
                within 60 days following the date on which the claim is filed,
                which notice shall set forth

                (1)     the specific reason or reasons for the denial;

                (2)     specific reference to pertinent Plan and Trust
                        provisions on which the denial is based;

                (3)     a description of any additional material or information
                        necessary for the claimant to perfect the claim and an
                        explanation of why such material or information is
                        necessary; and

                (4)     an explanation of the Plan's claim review procedure.

                If the claim has not been granted, and if written notice of the
                denial of the claim is not furnished within 60 days following
                the date on which the claim is filed, the claim shall be deemed
                denied for the purpose of proceeding to the claim review
                procedure.

        (c)     CLAIM REVIEW PROCEDURE. The claimant or his authorized
                representative shall have 60 days after receipt of written
                notification of denial of a claim to request a review of the
                denial by making written request to the Committee (or its
                delegate), and may review pertinent documents and submit issues
                and comments in writing within such 60-day period. Not later
                than 60 days after receipt of the request for review, the
                Committee shall render and furnish to the claimant a written
                decision which shall include specific reasons for the decision,
                and shall make specific references to pertinent Plan and Trust
                provisions on which it is based. The Committee decision shall
                only be subject to further review as described in section 10.7.
                If a decision on review is not furnished to a claimant within
                the specified time period, the claim shall be deemed to have
                been denied on review.


                                    ARTICLE X
                                  MISCELLANEOUS

        10.1 RIGHTS AGAINST THE COMPANY

        Neither the establishment of the Plan, nor any modification thereof, nor
any payments hereunder, shall be construed to give the Participant the right to
be retained in the employ of the Company or to interfere with the right of the
Company to discharge the Participant at any time, subject to the terms of any
employment agreement between the Participant and the Company.

        10.2 RIGHTS UNDER THE COMPANY'S OTHER RETIREMENT PLANS

        Nothing in this Plan shall be construed to limit, broaden, restrict,
grant, or otherwise affect any rights of the Participant or a Beneficiary under
the Company's other retirement plans,



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   36

nor grant any additional rights or benefits to the Participant or a Beneficiary
under the Company's other retirement plans, nor in any way to limit, modify,
repeal, or otherwise affect the Company's or its Board's right to amend or
modify any such retirement plan.

        10.3 PAYMENT OF BENEFITS TO INCOMPETENT

        If the Committee receives evidence that --

        (a)     a person entitled to receive any benefit under the Plan is
                legally, physically, or mentally incompetent to receive such
                benefit and to give a valid release therefore, and

        (b)     another person or an institution is then maintaining or has
                custody of such person and no guardian, committee, or other
                representative of the estate of such person has been duly
                appointed by a court of competent jurisdiction,

the payment of such benefit may be made to such other person or institution as
the Committee may determine. Any such payment shall be a payment on behalf of
such person and shall, to the extent thereof, be a complete discharge of any
liability under the Plan to such person, and neither the Company, the Trustee,
nor any member of the Board or the Committee shall be liable to any person or
individual by reason of such payment.

        10.4 MISSING PERSON

        In the event any benefit shall become payable to any person or upon his
death to his legal representative and, if after written notice from the
Committee mailed to such person's last-known address as shown in the Company's
records, such person or his legal representative shall not have presented
himself to the Committee within six years after the mailing of such notice, then
the Committee may, in its sole discretion, distribute such amount, including any
benefit thereafter becoming due to such person or legal representative, among
the spouse and blood relatives of such person. Payments made in good faith to
any person, to a person's legal representative, or to any individual(s) who
have, on the presentation of reasonable proof, established to the satisfaction
of the Committee that he is the spouse or blood relative of such person, shall,
to the extent of such payments, be a complete discharge of all obligations
arising pursuant to the Plan, and neither the Company, the Trustee, nor any
member of the Board or the Committee shall be liable to any person or individual
by reasons of such payments.

        10.5 AMENDMENT OR TERMINATION

        The Plan may be amended or terminated, in whole or in part, at any time
by written action of the Board and with the prior written consent of the
Participant (or his Beneficiary or Beneficiaries following the Participant's
death). No such amendment or termination shall reduce or diminish the right of
the Participant or Beneficiary to receive any benefit accrued hereunder prior to
the date of such amendment or termination.



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   37

        10.6 MERGER OR CONSOLIDATION OF PLAN AND TRUST

        Neither the Plan nor the Trust may be merged or consolidated with, nor
may its assets or liabilities be transferred to, any other plan or trust without
the prior written consent of the Participant (or his Beneficiary or
Beneficiaries following the Participant's death).

        10.7 ARBITRATION/INTEREST ON UNPAID AMOUNTS/CONTROLLING LAW

        (a)     The Participant may further appeal pursuant to this section a
                Committee decision under section 9.9(b) on his appeal. The
                Participant may submit the controversy to final and binding
                arbitration pursuant to the then most applicable Rules of the
                American Arbitration Association; provided, however, that unless
                the parties otherwise agree, the arbitration shall be before a
                single arbitrator selected either by mutual agreement or,
                failing agreement, from a list of seven arbitrators provided by
                AAA, (1) four of whom shall be retired judges of the Superior or
                Appellate Courts of California who are residents of Los Angeles
                or Orange County and, if such list exists at the time of the
                dispute, who are members of the Independent List of Retired
                Judges, and (2) three of whom shall be members of the National
                Academy of Arbitrators, resident in Los Angeles or Orange
                Counties. In the event the parties are unable to agree upon such
                an arbitrator from such list of seven, each party shall strike
                one name in turn with the first to strike being chosen by lot.
                When only one name remains, that person shall be the parties'
                arbitrator. The parties hereto expressly waive their rights, if
                any, to have such matters heard by a jury or a judge, whether in
                state or federal court. The cost of the arbitration, including,
                but not limited to, any reasonable legal fees or other expenses
                incident thereto incurred in connection with such arbitration,
                shall be borne by the Company unless the arbitrators(s)
                determines that the Participant's claim is frivolous, in which
                case the Participant shall bear his own legal fees. In the
                arbitration the Committee's decision on appeal shall not be
                entitled to a presumption of correctness; rather, the dispute
                shall be decided de novo.

        (b)     The Company agrees to pay interest on any amounts payable to you
                under this Agreement which are not paid within 30 days after the
                date when due and on any money judgment which is awarded to you
                following a proceeding to enforce any portion of the Agreement
                from the date that payments should have been made under this
                Agreement. Such interest shall be calculated at the prime rate
                offered by Bank of America, or its successor, from the date that
                payments should have been made under this Agreement to the time
                of actual payment.

        (c)     The provisions of the Plan shall be construed, interpreted,
                administered, and enforced according to the laws of the State of
                California and all applicable Federal laws.

        10.8 RIGHTS TO TRUST FUND ASSETS

        The Participant shall not have any right to, or interest in, any assets
of the Trust Fund upon his Termination of Employment or otherwise, except as
provided in the Plan, and then only



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to the extent of the benefits payable under the Plan that are payable out of the
assets of the Trust Fund.

        10.9 NONTRANSFERABILITY

        In no event shall the Company or Trustee make any payment under this
Plan to any assignee or creditor of the Participant or Beneficiary, except as
otherwise required by law. Prior to the time of a payment hereunder, the
Participant or Beneficiary shall have no rights by way of anticipation or
otherwise to assign or otherwise dispose of any interest under this Plan, nor
shall rights be assigned or transferred by operation of law.

        10.10 ILLEGALITY OF PARTICULAR PROVISION

        The illegality of any particular provision of this document shall not
affect the other provisions, and the document shall be construed in all respects
as if such invalid provision were omitted.



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