UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended May 31, 2007.

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

For the transition period from [     ] to [     ].

KB HOME

(Exact name of registrant as specified in its charter)

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

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

(Address and telephone number of principal 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 þ     No o

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

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

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

Yes o     No þ

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of May 31, 2007.

Common stock, par value $1.00 per share, 89,514,200 shares outstanding, including 12,314,882 shares held by the Registrant’s Grantor Stock Ownership Trust and excluding 25,358,823 shares held in treasury.

 

 

KB HOME
FORM 10-Q
INDEX

		Page
		Number(s)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations — Six Months and Three Months Ended May 31, 2007 and 2006		3
Consolidated Balance Sheets — May 31, 2007 and November 30, 2006		4
Consolidated Statements of Cash Flows — Six Months Ended May 31, 2007 and 2006		5
Notes to Consolidated Financial Statements		6-26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27-40
Item 3. Quantitative and Qualitative Disclosures About Market Risk		41
Item 4. Controls and Procedures		41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		42-43
Item 1A. Risk Factors		43
Item 4. Submission of Matters to a Vote of Security Holders		43
Item 5. Other Information		43-44
Item 6. Exhibits		44
SIGNATURES		45
INDEX OF EXHIBITS		46
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KB HOME

CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts — Unaudited)

		Six Months Ended May 31,								Three Months Ended May 31,
		2007				2006				2007				2006
Total revenues		$	2,802,046			$	4,084,546			$	1,413,208			$	2,202,275
Construction:
Revenues		$	2,794,635			$	4,075,362			$	1,409,986			$	2,197,417
Construction and land costs			(2,655,684	)			(3,031,710	)			(1,479,405	)			(1,636,331	)
Selling, general and administrative expenses			(398,807	)			(504,999	)			(193,585	)			(267,554	)
Operating income (loss)			(259,856	)			538,653				(263,004	)			293,532
Interest income			10,268				2,015				5,600				1,009
Interest expense, net of amounts capitalized			—				(13,337	)			—				(9,157	)
Equity in pretax loss of unconsolidated joint ventures			(41,700	)			(1,198	)			(39,495	)			(2,740	)
Construction pretax income (loss)			(291,288	)			526,133				(296,899	)			282,644
Financial services:
Revenues			7,411				9,184				3,222				4,858
Expenses			(2,411	)			(3,237	)			(1,071	)			(1,490	)
Equity in pretax income of unconsolidated joint venture			10,191				3,867				3,396				2,717
Financial services pretax income			15,191				9,814				5,547				6,085
Income (loss) from continuing operations before income taxes			(276,097	)			535,947				(291,352	)			288,729
Income tax benefit (expense)			112,600				(192,400	)			117,200				(104,300	)
Income (loss) from continuing operations			(163,497	)			343,547				(174,152	)			184,429
Income from discontinued operations, net of income taxes			42,348				35,232				25,466				21,016
Net income (loss)		$	(121,149	)		$	378,779			$	(148,686	)		$	205,445
Basic earnings (loss) per share
Continuing operations		$	(2.12	)		$	4.28			$	(2.26	)		$	2.33
Discontinued operations			.55				.44				.33				.26
Basic earnings (loss) per share		$	(1.57	)		$	4.72			$	(1.93	)		$	2.59
Diluted earnings (loss) per share
Continuing operations		$	(2.12	)		$	4.04			$	(2.26	)		$	2.20
Discontinued operations			.55				.41				.33				.25
Diluted earnings (loss) per share		$	(1.57	)		$	4.45			$	(1.93	)		$	2.45
Basic average shares outstanding			77,046				80,268				77,102				79,522
Diluted average shares outstanding			77,046				85,112				77,102				83,978
Cash dividends per common share		$	.50			$	.50			$	.25			$	.25

See accompanying notes.

KB HOME

CONSOLIDATED BALANCE SHEETS
(In Thousands — Unaudited)

		May 31,				November 30,
		2007				2006
Assets
Construction:
Cash and cash equivalents		$	272,088			$	550,487
Trade and other receivables			235,274				224,077
Inventories			5,238,312				5,751,643
Investments in unconsolidated joint ventures			379,334				381,242
Deferred income taxes			548,440				430,806
Goodwill			177,333				177,333
Other assets			159,325				160,197
			7,010,106				7,675,785
Financial services			34,269				44,024
Assets of discontinued operations			1,570,084				1,394,375
Total assets		$	8,614,459			$	9,114,184
Liabilities and Stockholders’ Equity
Construction:
Accounts payable		$	399,022			$	476,689
Accrued expenses and other liabilities			1,273,373				1,600,617
Mortgages and notes payable			2,811,932				2,920,334
			4,484,327				4,997,640
Financial services			28,500				26,276
Liabilities of discontinued operations			1,322,981				1,167,520
Stockholders’ equity:
Common stock			114,873				114,649
Paid-in capital			840,272				825,958
Retained earnings			2,815,783				2,975,465
Accumulated other comprehensive income			68,153				63,197
Grantor stock ownership trust, at cost			(133,821	)			(134,150	)
Treasury stock, at cost			(926,609	)			(922,371	)
Total stockholders’ equity			2,778,651				2,922,748
Total liabilities and stockholders’ equity		$	8,614,459			$	9,114,184

See accompanying notes.

KB HOME

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands — Unaudited)

		Six Months Ended May 31,
		2007				2006
Cash flows from operating activities:
Net income (loss)		$	(121,149	)		$	378,779
Income from discontinued operations, net of income taxes			(42,348	)			(35,232	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Equity in pretax loss (income) of unconsolidated joint ventures			41,804				(2,669	)
Distributions of earnings from unconsolidated joint ventures			12,427				1,866
Amortization of discounts and issuance costs			1,274				1,187
Depreciation and amortization			9,060				9,231
Provision for deferred income taxes			(117,634	)			(1,190	)
Excess tax benefit associated with exercise of stock options			(705	)			(8,192	)
Stock-based compensation expense			3,561				10,439
Inventory impairments and land option cost write-offs			316,882				19,359
Change in assets and liabilities:
Receivables			(9,104	)			6,922
Inventories			76,307				(1,097,893	)
Accounts payable, accrued expenses and other liabilities			(236,394	)			195,647
Other, net			2,711				3,847
Net cash used by operating activities — continuing operations			(63,308	)			(517,899	)
Net cash provided by operating activities — discontinued operations			186,734				63,352
Net cash provided (used) by operating activities			123,426				(454,547	)
Cash flows from investing activities:
Investments in unconsolidated joint ventures			(86,730	)			(111,344	)
Purchases of property and equipment, net			(3,891	)			(8,848	)
Other, net			—				34
Net cash used by investing activities – continuing operations			(90,621	)			(120,158	)
Net cash used by investing activities – discontinued operations			(14,720	)			(2,542	)
Net cash used by investing activities			(105,341	)			(122,700	)
Cash flows from financing activities:
Net proceeds from credit agreements and other short term borrowings			—				332,200
Proceeds from term loan			—				400,000
Proceeds from issuance of senior notes			—				298,458
Payments on mortgages, land contracts and other loans			(113,246	)			(21,826	)
Issuance of common stock under employee stock plans			8,276				58,082
Excess tax benefit associated with exercise of stock options			705				8,192
Payments of cash dividends			(38,533	)			(39,726	)
Repurchases of common stock			(4,238	)			(299,949	)
Net cash provided (used) by financing activities – continuing operations			(147,036	)			735,431
Net cash used by financing activities – discontinued operations			(172,550	)			(56,591	)
Net cash provided (used) by financing activities			(319,586	)			678,840
Net increase (decrease) in cash and cash equivalents			(301,501	)			101,593
Cash and cash equivalents, beginning of period			654,628				153,990
Cash and cash equivalents, end of period		$	353,127			$	255,583
Summary of cash and cash equivalents:
Construction		$	272,088			$	147,756
Financial services			14,951				25,065
Discontinued operations			66,088				82,762
Total cash and cash equivalents		$	353,127			$	255,583

See accompanying notes.

KB HOME

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		Basis of Presentation and Significant Accounting Policies
		The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, 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.
		In the opinion of KB Home (the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s consolidated financial position as of May 31, 2007, the results of its consolidated operations for the six months and three months ended May 31, 2007 and 2006, and its consolidated cash flows for the six months ended May 31, 2007 and 2006. The results of operations for the six months and three months ended May 31, 2007 are not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet at November 30, 2006 has been taken from the audited consolidated financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended November 30, 2006, which are contained in the Company’s 2006 Annual Report on Form 10-K. However, beginning with this report, the Company’s French operations, which were sold on July 10, 2007, are presented as discontinued operations and financial results of prior periods have been reclassified to conform to this new presentation.
		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 for the period including all potentially dilutive shares issuable under outstanding stock options. Stock options are not considered in the diluted earnings per share calculation when the Company has a loss from continuing operations. The anti-dilutive stock options excluded from the computation of diluted earnings per share for the three months and six months ended May 31, 2007 totaled 3.1 million and 3.4 million, respectively.
		The following table presents a reconciliation of average shares outstanding (in thousands):

		Six Months Ended May 31,								Three Months Ended May 31,
		2007				2006				2007				2006
Basic average shares outstanding			77,046				80,268				77,102				79,522
Net effect of stock options assumed to be exercised			—				4,844				—				4,456
Diluted average shares outstanding			77,046				85,112				77,102				83,978

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

		Six Months Ended May 31,								Three Months Ended May 31,
		2007				2006				2007				2006
Net income (loss)		$	(121,149	)		$	378,779			$	(148,686	)		$	205,445
Foreign currency translation adjustment			4,956				23,908				5,353				20,821
Comprehensive income (loss)		$	(116,193	)		$	402,687			$	(143,333	)		$	226,266

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		Basis of Presentation and Significant Accounting Policies (continued)
		The accumulated balances of other comprehensive income in the balance sheets as of May 31, 2007 and November 30, 2006 are comprised solely of cumulative foreign currency translation adjustments of $68.2 million and $63.2 million, respectively, related to the French discontinued operations.
		Reclassifications and Restatement
		Certain amounts in the consolidated financial statements of prior periods have been reclassified to conform to the 2007 presentation. Also, prior period amounts have been restated, as described in the Company’s 2006 Annual Report on Form 10-K.
2.		Stock-Based Compensation
		Effective December 1, 2005, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), “Share Based Payment” (“SFAS No. 123(R)”), using the modified prospective transition method. Under that transition method, compensation cost recognized in the three months and six months ended May 31, 2007 and 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of December 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and (b) compensation cost for all share-based payments granted subsequent to December 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). The fair value for each option was estimated on the date of grant using the Black-Scholes option-pricing model. There were no stock option grants to employees during the three months or six months ended May 31, 2007.
		The following table summarizes the stock options outstanding as of May 31, 2007 as well as activity during the six months then ended:

						Weighted
						Average Exercise
		Options				Price
Options outstanding, beginning of period			8,354,276			$	28.71
Exercised			(224,419	)			26.15
Cancelled			(515,749	)			34.64
Options outstanding, end of period			7,614,108				29.84
Options exercisable, end of period			6,810,438			$	27.33

As of May 31, 2007, the weighted average remaining contractual life of both options outstanding and options exercisable was 10.6 years. There was $4.8 million of total unrecognized compensation cost related to unvested stock option awards as of May 31, 2007. For the three months ended May 31, 2007 and 2006, stock-based compensation expense totaled $1.7 million and $4.8 million, respectively. For the six months ended May 31, 2007 and 2006, stock-based compensation expense totaled $3.5 million and $10.4 million, respectively. The aggregate intrinsic value of options outstanding and options exercisable was $131.4 million and $129.8 million, respectively, as of May 31, 2007. (The intrinsic value of a stock option is the amount by which the market value of a share of the Company’s common stock exceeds the exercise price of the option.) The intrinsic value of stock options exercised during the six months ended May 31, 2007 was $4.2 million. Based on the irrevocable election of each of the Company’s non-employee directors to receive payouts in cash of all

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2.		Stock-Based Compensation (continued)
		outstanding stock-based awards granted to them under the Company’s Non-Employee Director Stock Plan, stock option awards granted to such directors have been deducted from the aggregate number of stock options outstanding. A total of 371,399 options were cancelled as a result of this election. The effect of the director election on the Company’s diluted average shares outstanding and related diluted earnings (loss) per share is not material.
3.		Financial Services
		Financial information related to the Company’s financial services segment is as follows (in thousands):

		Six Months Ended May 31,								Three Months Ended May 31,
		2007				2006				2007				2006
Revenues:
Interest income		$	83			$	117			$	40			$	62
Title services			2,639				3,168				1,222				1,907
Insurance commissions			4,100				4,419				1,903				2,146
Escrow coordination fees			589				1,480				57				743
Total revenues			7,411				9,184				3,222				4,858
Expenses:
Interest			—				(29	)			—				(14	)
General and administrative			(2,411	)			(3,208	)			(1,071	)			(1,476	)
			5,000				5,947				2,151				3,368
Equity in pretax income of unconsolidated joint venture			10,191				3,867				3,396				2,717
Pretax income		$	15,191			$	9,814			$	5,547			$	6,085

		May 31,				November 30,
		2007				2006
Assets
Cash and cash equivalents		$	14,951			$	15,417
First mortgages held under commitments of sale and other			819				2,911
Investment in unconsolidated joint venture			18,396				25,296
Other assets			103				400
Total assets		$	34,269			$	44,024
Liabilities
Accounts payable and accrued expenses		$	28,500			$	26,276
Total liabilities		$	28,500			$	26,276

4.		Inventories
		Inventories consist of the following (in thousands):

		May 31,				November 30,
		2007				2006
Homes, lots and improvements in production		$	3,960,624			$	3,834,969
Land under development			1,277,688				1,916,674
Total inventories		$	5,238,312			$	5,751,643

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4.

Inventories (continued)

The Company’s interest costs are as follows (in thousands):

		Six Months Ended May 31,								Three Months Ended May 31,
		2007				2006				2007				2006
Capitalized interest, beginning of period		$	326,250			$	228,163			$	357,515			$	251,563
Interest incurred			102,889				100,905				51,340				55,359
Interest expensed			—				(13,337	)			—				(9,157	)
Interest amortized			(53,598	)			(51,732	)			(27,825	)			(28,951	)
Discontinued operations			4,024				4,100				(1,465	)			(715	)
Capitalized interest, end of period		$	379,565			$	268,099			$	379,565			$	268,099

5.		Impairments and Abandonments
		The Company evaluates its inventory and joint venture investments for recoverability in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) on a quarterly basis, or more frequently if impairment indicators exist. During the three months ended May 31, 2007, the Company recognized a non-cash charge of $261.2 million for the impairment of inventory. During the six months ended May 31, 2007, the inventory impairment charge recorded by the Company totaled $266.3 million. The impaired inventory is located in markets where conditions have become increasingly challenging, mainly as a result of excess supply of inventory in the marketplace combined with housing affordability issues and tighter credit conditions that are keeping prospective buyers out of the market. During the second quarter of 2007, competition and pricing pressure intensified in certain of the Company’s markets and caused a decline in the fair value of certain inventory positions and prompted changes in the Company’s strategy concerning projects that no longer met its internal investment standards. The Company also recognized non-cash charges of $41.3 million in the three months and six months ended May 31, 2007 associated with the impairment of its investment in certain unconsolidated joint ventures which operate in markets that have become increasingly difficult. There were no inventory or joint venture impairment charges in the three months or six months ended May 31, 2006.
		From time to time, the Company will write off costs, including earnest money deposits and pre-acquisition costs, associated with land purchase option contracts which the Company no longer plans to exercise due to market conditions and/or changes in market strategy. During the three months ended May 31, 2007 and 2006, the Company recognized abandonment charges associated with land purchase option contracts of $5.7 million and $11.4 million, respectively. During the six months ended May 31, 2007 and 2006, the Company’s abandonment charges totaled $9.3 million and $19.4 million, respectively.
		The inventory impairment charges and land option contract abandonment charges are included in construction and land costs in the Company’s consolidated statements of operations. The joint venture impairment charges are included in equity in pretax loss from unconsolidated joint ventures in the Company’s consolidated statements of operations.
6.		Consolidation of Variable Interest Entities
		In the ordinary course of its business, the Company enters into land option contracts in order to procure land for the construction of homes. Under such land option contracts, the Company will fund a specified option deposit or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. Under the requirements of FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities”

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6.		Consolidation of Variable Interest Entities (continued)
		(“FASB Interpretation No. 46(R)”), certain of the Company’s land option contracts may create a variable interest for the Company, with the land seller being identified as a variable interest entity (“VIE”).
		In compliance with FASB Interpretation No. 46(R), the Company analyzed its land option contracts and other contractual arrangements and has consolidated the fair value of certain VIEs from which the Company is purchasing land under option contracts. The consolidation of these VIEs, where the Company was determined to be the primary beneficiary, added $49.8 million to inventory and other liabilities in the Company’s consolidated balance sheet at May 31, 2007. The Company’s cash deposits related to these land option contracts totaled $7.1 million at May 31, 2007. Creditors, if any, of these VIEs have no recourse against the Company. As of May 31, 2007, excluding consolidated VIEs, the Company had cash deposits totaling $86.5 million which were associated with land option contracts having an aggregate purchase price of $1.88 billion.
7.		Commitments and Contingencies
		The Company provides a limited warranty on all of its homes. The specific terms and conditions of warranties vary depending upon the market in which the Company does business. For homes sold in the United States, the Company generally provides a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home such as appliances. The Company estimates the costs that may be incurred under each limited warranty and records a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Factors that affect the Company’s warranty liability include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
		The changes in the Company’s warranty liability are as follows (in thousands):

		Six Months Ended May 31,
		2007				2006
Balance, beginning of period		$	152,467			$	131,875
Warranties issued			26,478				33,766
Payments and adjustments			(26,863	)			(30,997	)
Discontinued operations			(11,407	)			(9,372	)
Balance, end of period		$	140,675			$	125,272

		In the normal course of its business, the Company issues certain representations, warranties and guarantees related to its home sales, land sales and commercial construction that may be affected by FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Based on historical experience, the Company does not believe any of these representations, warranties or guarantees would result in a material effect on its consolidated financial position or results of operations.
		The Company is often required to obtain bonds and letters of credit in support of its obligations to various municipalities and other government agencies with respect to subdivision improvements, including roads, sewers and water, among other things. At May 31, 2007, the Company had outstanding approximately $1.15 billion and $307.9 million of performance bonds and letters of credit, respectively. In the event any such bonds or letters of credit are called, the Company would be obligated to reimburse the issuer of the bond or letter of

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7.		Commitments and Contingencies (continued)
		credit. However, the Company does not believe that any currently outstanding bonds or letters of credit will be called.
		Borrowings outstanding and letters of credit issued under the Company’s $1.50 billion unsecured revolving credit facility (the “$1.5 Billion Credit Facility”) are guaranteed by certain of the Company’s domestic subsidiaries (“the Guarantor Subsidiaries”).
		Under the terms of the Company’s $1.5 Billion Credit Facility and its $400 million term loan, the Company covenants, among other things, to maintain certain financial statement ratios. The Company was in compliance with all such debt covenants as of May 31, 2007. However, based on its current forecast, the Company believes it may not meet its required interest coverage ratio covenant as of August 31, 2007. The interest coverage ratio measures the Company’s consolidated earnings relative to debt interest expense. The Company is currently in the process of negotiating an amendment to its $1.5 Billion Credit Facility to lower the required interest coverage ratio covenant, which is expected to be completed by the end of July 2007. If the amendment is completed as planned, the Company believes that it will remain in compliance with all required covenants under the $1.5 Billion Credit Facility. If the amendment to the $1.5 Billion Credit Facility is not completed as planned, the Company intends to seek a waiver or consent with respect to the interest coverage ratio covenant or restructure the $1.5 Billion Credit Facility. The Company is currently evaluating its options with regard to the $400 million term loan, including amending or repaying the loan. As of May 31, 2007, there were no borrowings outstanding under the $1.5 Billion Credit Facility; however, due to $307.9 million of letters of credit outstanding, the available capacity as of May 31, 2007 was $1.19 billion.
		The Company conducts a portion of its land acquisition, development and other residential activities through participation in unconsolidated joint ventures in which it holds less than a controlling interest. These unconsolidated joint ventures had total assets of $2.80 billion and outstanding secured construction debt of approximately $1.67 billion at May 31, 2007. In certain instances, the Company or its subsidiaries provide varying levels of guarantees on the debt of unconsolidated joint ventures. When the Company or its subsidiaries provide a guarantee, an unconsolidated joint venture generally receives more favorable terms from lenders than would otherwise be available to it. At May 31, 2007, the Company had payment guarantees related to the third-party debt of three of its unconsolidated joint ventures. One of the unconsolidated joint ventures had aggregate third-party debt of $435.1 million at May 31, 2007, of which each of the joint venture partners guaranteed its pro rata share. The Company’s share of the payment guarantee, which is triggered only in the event of bankruptcy of the joint venture, was 49% or approximately $211.0 million. The remaining two unconsolidated joint ventures had total third-party debt of $15.7 million at May 31, 2007, of which each of the joint venture partners guaranteed its pro rata share. The Company’s share of these payment guarantees was 50% or $7.8 million. The Company’s pro rata share of limited maintenance guarantees of unconsolidated entity debt totaled $132.7 million at May 31, 2007. The limited maintenance guarantees apply only if the value of the collateral (generally land and improvements) is less than a specific percentage of the loan balance. When the Company is required to make a payment under a limited maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment would constitute a capital contribution and/or loan to the affected unconsolidated joint venture and entitle the Company to receive a greater aggregate amount of the funds any such unconsolidated joint venture may distribute.
8.		Discontinued Operations
		On May 22, 2007, the Company agreed to sell its entire 49% equity interest in its publicly-traded French subsidiary, Kaufman & Broad SA (“KBSA”) pursuant to a share purchase agreement (the “Share Purchase Agreement”) it entered into with Financière Gaillon 8 SAS (the “Purchaser”), an affiliate of PAI partners, a European private equity firm, and three of the Company’s wholly-owned domestic subsidiaries: Kaufman and Broad Development Group, International Mortgage Acceptance Corporation, and Kaufman and Broad International, Inc. (collectively, the “Selling Subsidiaries”). Under the Share Purchase Agreement, the Purchaser agreed to acquire the entire 49% equity interest (representing 10,921,954 shares, which were held collectively by the Selling Subsidiaries) at a price of 55.00 euros per share. The purchase price consisted of

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8.		Discontinued Operations (continued)
		50.17 euros per share paid by the Purchaser in cash, and a cash dividend of 4.83 euros per share paid by KBSA upon the approval of KBSA’s board of directors. The transaction closed on July 10, 2007 and generated total gross proceeds of approximately $800 million, with the gain from the sale recognized on the closing date.
		As a result of the sale, the French operations, which had previously been presented as a separate construction segment, are included in discontinued operations in the consolidated statements of operations, and any assets and liabilities related to these discontinued operations have been presented separately on the consolidated balance sheets, and any cash flows related to these discontinued operations have been presented separately in the consolidated statements of cash flows. All prior period information has been reclassified to be consistent with the current period presentation.
		The following amounts related to the French operations were derived from historical financial information and have been segregated from continuing operations and reported as discontinued operations (in thousands):

		Six Months Ended May 31,								Three Months Ended May 31,
		2007				2006				2007				2006
Construction:
Revenues		$	843,598			$	699,175			$	465,202			$	389,796
Construction and land costs			(626,583	)			(507,794	)			(346,826	)			(284,858	)
Selling, general and administrative expenses			(114,673	)			(115,964	)			(56,910	)			(57,724	)
Operating income			102,342				75,417				61,466				47,214
Interest income			1,008				278				706				104
Interest expense, net of amounts capitalized			—				(1,682	)			—				(1,109	)
Minority interests			(38,457	)			(29,616	)			(22,988	)			(17,915	)
Equity in pretax income of unconsolidated joint ventures			3,455				6,635				2,282				2,422
Income from discontinued operations before income taxes			68,348				51,032				41,466				30,716
Income tax expense			(26,000	)			(15,800	)			(16,000	)			(9,700	)
Income from discontinued operations, net of income taxes		$	42,348			$	35,232			$	25,466			$	21,016

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

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8.

Discontinued Operations (continued)

		May 31,				November 30,
		2007				2006
Assets
Cash		$	66,088			$	88,724
Trade and other receivables			525,797				435,520
Inventories			800,024				703,120
Investments in unconsolidated joint ventures			25,798				16,489
Goodwill			57,386				56,482
Other assets			94,991				94,040
Total assets		$	1,570,084			$	1,394,375
Liabilities
Accounts payable		$	606,300			$	594,576
Accrued expenses and other liabilities			143,390				183,580
Mortgages and notes payable			364,692				205,469
			1,114,382				983,625
Minority interests			208,599				183,895
Total liabilities		$	1,322,981			$	1,167,520

		The Company also has cumulative foreign currency translation adjustments of $68.2 million and $63.2 million related to the French discontinued operations as of May 31, 2007 and November 30, 2006, respectively, that are included in stockholder’s equity.
9.		Legal Matters
		Derivative Litigation
		On July 10, 2006, a shareholder derivative action, Wildt v. Karatz, et al., was filed in Los Angeles Superior Court. On August 8, 2006, a virtually identical shareholder derivative lawsuit, Davidson v. Karatz, et al., was also filed in Los Angeles Superior Court. These actions, which ostensibly are brought on behalf of the Company, allege, among other things, that defendants (various of the Company’s current and former directors and officers) breached their fiduciary duties to the Company by, among other things, backdating grants of stock options to various current and former executives in violation of the Company’s shareholder-approved stock option plans. Defendants have not yet responded to the complaints. The Company and the parties agreed to a stipulation and proposed order that was submitted to the court on January 5, 2007, providing, among other things, that, to preserve the status quo without prejudicing any party’s substantive rights, the Company’s former Chairman and Chief Executive Officer shall not exercise any of his outstanding options, at any price, during the period in which the order is in effect, and that the order would be effective upon entry by the court and expire on March 31, 2007, unless otherwise agreed in writing. The court entered the order on January 22, 2007, and the parties subsequently did agree to extend the order, which now expires on August 1, 2007. In connection with the entry of this order, the plaintiffs agreed to stay their cases while the parallel federal court derivative lawsuits discussed below are pursued. A stipulation and orders effectuating the parties’ agreement to stay the state court actions was entered by the court on February 7, 2007. The parties may extend the agreement that options will not be exercised by the Company’s former Chairman and Chief Executive Officer beyond the current August 1, 2007 expiration date.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9.		Legal Matters (continued)
		On August 16, 2006, a shareholder derivative lawsuit, Redfield v. Karatz, et al., was filed in the United States District Court for the Central District of California. On August 31, 2006, a virtually identical shareholder derivative lawsuit, Staehr v. Karatz, et al., was also filed in the United States District Court for the Central District of California. These actions, which ostensibly are brought on behalf of the Company, allege, among other things, that defendants (various of the Company’s current and former directors and officers) breached their fiduciary duties to the Company by, among other things, backdating grants of stock options to various current and former executives in violation of the Company’s shareholder-approved stock option plans. Unlike Wildt and Davidson, however, these lawsuits also include substantive claims under the federal securities laws. On January 9, 2007, plaintiffs filed a consolidated complaint. All defendants filed motions to dismiss the complaint on April 2, 2007. Subsequently, plaintiffs filed a motion for partial summary judgment against certain of the defendants. Pursuant to a stipulated order, the motions to dismiss and the motion of partial summary judgment were taken off calendar to permit the parties to explore settlement via mediation. The stipulation provides that unless otherwise agreed to by the parties or ordered by the court, the motions shall be back on calendar as of mid-August. Discovery has not commenced.
		Government Investigations
		In August 2006, the Company announced that it had received an informal inquiry from the SEC relating to its stock option grant practices. In January 2007, the Company was informed that the SEC is now conducting a formal investigation of this matter. The Department of Justice (“DOJ”) is also looking into these practices but has informed the Company that it is not a target of this investigation. The Company has cooperated with these government agencies and intends to continue to do so.
		ERISA Litigation
		A complaint dated March 14, 2007 in an action brought under Section 502 of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1132, Bagley et al., v. KB Home, et al., was filed in the United States District Court for the Central District of California. The action is brought against the Company, its directors, and certain of its current and former officers. Plaintiffs allege that they are bringing the action on behalf of all participants in the Company’s 401(k) Savings Plan (the “401(k) Plan”). Plaintiffs allege that the defendants breached their fiduciary duties to members of the 401(k) Plan by virtue of issuing backdated option grants and by failing to disclose this information to the 401(k) Plan participants. Plaintiffs claim that this conduct unjustly enriched certain defendants to the detriment of the 401(k) Plan and its participants, and caused the 401(k) Plan to invest in the Company’s securities at allegedly artificially inflated prices. The action purports to assert three causes of action for various alleged breaches of fiduciary duty. The Company has agreed to accept service of the complaint, and a response is due by July 18, 2007.
		Storm Water Matter
		In January 2003, the Company received a request for information from the Environmental Protection Agency (“EPA”) pursuant to Section 308 of the Clean Water Act. Several other public homebuilders have received similar requests. The request sought information about storm water pollution control program implementation at certain of the Company’s construction sites, and the Company provided information pursuant to the request. In May 2004, on behalf of the EPA, the DOJ tentatively asserted that certain regulatory requirements applicable to storm water discharges had been violated on certain occasions at certain of the Company’s construction sites, and civil penalties and injunctive relief might be warranted. The DOJ has also proposed certain steps it would expect the Company to take in the future relating to compliance with the EPA’s requirements applicable to storm water discharges. The Company has defenses to the claims that have been asserted and is exploring methods of resolving the matter. The Company believes that the costs associated with the claims are not likely to be material to its consolidated financial position or results of operations.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

10.		Stockholders’ Equity
		The Company’s board of directors authorized a share repurchase program on December 8, 2005 under which the Company may repurchase up to 10 million shares of its common stock. Acquisitions under the share repurchase program may be made in open market or private transactions and will be made from time to time at management’s discretion based on its assessment of market conditions and buying opportunities. The Company did not repurchase any equity securities under its share repurchase program during the six months ended May 31, 2007. At May 31, 2007, the Company was authorized to repurchase four million shares under the December 8, 2005 board authorization. The Company acquired $4.2 million of common stock in the first six months of 2007 in connection with the satisfaction of employee withholding taxes on vested restricted stock.
11.		Recent Accounting Pronouncements
		In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”), which permits entities to choose to measure certain financial assets and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of the adoption of SFAS No. 159; however, it is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
12.		Segment Information
		As of May 31, 2007, the Company has identified five reporting segments, comprised of four construction reporting segments and one financial services segment, within its consolidated continuing operations in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company’s construction reporting segments are: West Coast, Southwest, Central and Southeast. The reporting segments have construction operations in the following U.S. states:
		West Coast: California Southwest: Arizona, Nevada and New Mexico Central: Colorado, Illinois, Indiana, Louisiana and Texas Southeast: Florida, Georgia, Maryland, North Carolina, South Carolina and Virginia
		The Company’s construction operating segments are engaged in the acquisition and development of land primarily for residential purposes and offer a wide variety of homes that are designed to appeal to first-time, move-up and active adult buyers.
		Prior to the fourth quarter of 2006, the Company’s construction operations had been aggregated into a single reporting segment. In the fourth quarter of 2006, the Company reassessed the aggregation of its operating segments and, as a result, revised its reporting segments. In the second quarter of 2007, the Company entered into the Share Purchase Agreement to sell its entire 49% equity interest in its publicly-traded French subsidiary, KBSA, which resulted in the reclassification of the Company’s French construction segment to discontinued operations. Accordingly, the Company has restated the prior year reportable segment information presented herein to conform to the current year presentation.
		The Company’s financial services reporting segment provides title, insurance and escrow coordination services and, indirectly through Countrywide KB Home Loans, a joint venture with Countrywide Financial Corporation, mortgage banking services to the Company’s homebuyers. The Company’s financial services segment operates in the same markets as the Company’s construction reporting segments.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12.		Segment Information (continued)
		The Company’s reporting segments follow the same accounting policies used for the Company’s consolidated financial statements. Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented.
		The following tables present financial information relating to the Company’s reporting segments (in thousands):

		Six Months Ended May 31,								Three Months Ended May 31,
		2007				2006				2007				2006
Revenues:
West Coast		$	922,296			$	1,494,345			$	501,817			$	790,904
Southwest			671,698				1,082,142				332,202				583,139
Central			449,340				642,322				216,678				353,433
Southeast			751,301				856,553				359,289				469,941
Total construction revenues			2,794,635				4,075,362				1,409,986				2,197,417
Financial services			7,411				9,184				3,222				4,858
Total revenues		$	2,802,046			$	4,084,546			$	1,413,208			$	2,202,275
Income (loss) from continuing operations before income taxes:
West Coast		$	(181,716	)		$	277,794			$	(196,289	)		$	142,983
Southwest			29,574				250,974				(2,141	)			128,286
Central			(33,405	)			625				(18,894	)			4,387
Southeast			(38,857	)			92,351				(47,807	)			51,821
Corporate and other (a)			(66,884	)			(95,611	)			(31,768	)			(44,833	)
Total construction pretax income (loss)			(291,288	)			526,133				(296,899	)			282,644
Financial services			15,191				9,814				5,547				6,085
Income (loss) from continuing operations before income taxes		$	(276,097	)		$	535,947			$	(291,352	)		$	288,729
Construction interest cost:
West Coast		$	14,047			$	9,340			$	11,121			$	7,315
Southwest			17,265				21,915				8,230				11,915
Central			11,107				15,266				6,178				8,979
Southeast			9,727				10,689				4,705				6,324
Corporate and other			1,452				7,859				(2,409	)			3,575
Total construction interest cost (b)		$	53,598			$	65,069			$	27,825			$	38,108
Financial services interest income, net		$	83			$	88			$	40			$	48

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12.

Segment Information (continued)

		Six Months Ended May 31,								Three Months Ended May 31,
		2007				2006				2007				2006
Equity in pretax income (loss) of unconsolidated joint ventures:
West Coast		$	(3,715	)		$	716			$	(2,627	)		$	(912	)
Southwest			5,269				(50	)			5,207				(67	)
Central			(1,740	)			(1,409	)			(1,311	)			(1,458	)
Southeast			(37,469	)			(496	)			(37,195	)			(322	)
Corporate and other			(4,045	)			41				(3,569	)			19
Total construction equity in pretax loss of unconsolidated joint ventures		$	(41,700	)		$	(1,198	)		$	(39,495	)		$	(2,740	)
Financial services		$	10,191			$	3,867			$	3,396			$	2,717

		May 31, 2007				November 30, 2006
Assets:
West Coast		$	2,474,577			$	2,851,364
Southwest			1,190,540				1,306,219
Central			767,859				853,873
Southeast			1,385,508				1,466,198
Corporate and other			1,191,622				1,198,131
Total construction assets		$	7,010,106			$	7,675,785
Financial services		$	34,269			$	44,024
Investments in unconsolidated joint ventures:
West Coast		$	67,634			$	48,013
Southwest			174,123				174,168
Central			11,587				14,344
Southeast			119,356				144,717
Corporate and other			6,634				—
Total construction investments unconsolidated joint ventures		$	379,334			$	381,242
Financial services		$	18,396			$	25,296

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

13.		Supplemental Disclosure to Statements of Cash Flows
		The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):

		Six Months Ended May 31,
		2007				2006
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized		$	7,819			$	8,425
Income taxes paid			13,670				212,285
Supplemental disclosures of noncash activities:
Cost of inventories acquired through seller financing		$	4,139			$	85,803
Increase (decrease) in consolidated inventories not owned			(165,588	)			124,716

14.		Supplemental Guarantor Information
		The Company’s obligations to pay principal, premium, if any, and interest under certain debt instruments are guaranteed on a joint and several basis by the Guarantor Subsidiaries. The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by the Company. The Company has determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented. The Condensed Consolidating Statements of Operations for the three months and six months ended May 31, 2006 and the Condensed Consolidating Statement of Cash Flows for the six months ended May 31, 2006 have been restated, as described in the 2006 Annual Report on Form 10-K. In addition, beginning with this report, the Company’s French operations, which were sold on July 10, 2007, are presented as discontinued operations and financial results of prior periods have been reclassified to conform to this new presentation.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

14.		Supplemental Guarantor Information (continued)
		Condensed Consolidating Statements of Operations Six Months Ended May 31, 2007 (in thousands)

		KB Home				Guarantor				Non-Guarantor				Consolidating
		Corporate				Subsidiaries				Subsidiaries				Adjustments				Total
Revenues		$	—			$	2,081,509			$	720,537			$	—			$	2,802,046
Construction:
Revenues		$	—			$	2,081,509			$	713,126			$	—			$	2,794,635
Construction and land costs			—				(2,020,276	)			(635,408	)			—				(2,655,684	)
Selling, general and administrative expenses			(58,734	)			(239,512	)			(100,561	)			—				(398,807	)
Operating loss			(58,734	)			(178,279	)			(22,843	)			—				(259,856	)
Interest income (expense), net of amounts capitalized			96,731				(78,185	)			(18,546	)			—				—
Other income (expense)			7,006				4,430				(42,868	)			—				(31,432	)
Construction pretax income (loss)			45,003				(252,034	)			(84,257	)			—				(291,288	)
Financial services pretax income			—				—				15,191				—				15,191
Income (loss) from continuing operations before income taxes			45,003				(252,034	)			(69,066	)			—				(276,097	)
Income tax benefit (expense)			(18,400	)			102,800				28,200				—				112,600
Income (loss) from continuing operations before equity in net income (loss) of subsidiaries			26,603				(149,234	)			(40,866	)			—				(163,497	)
Income from discontinued operations, net of income taxes			—				—				42,348				—				42,348
Income (loss) before equity in net income (loss) of subsidiaries			26,603				(149,234	)			1,482				—				(121,149	)
Equity in net income (loss) of subsidiaries:
Continuing operations			(190,100	)			—				—				190,100				—
Discontinued operations			42,348				—				—				(42,348	)			—
Net income (loss)		$	(121,149	)		$	(149,234	)		$	1,482			$	147,752			$	(121,149	)