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 August 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 August 31, 2007.

Common stock, par value $1.00 per share, 102,703,573 shares outstanding, including 12,238,982 shares held by the Registrant’s Grantor Stock Ownership Trust and excluding 25,378,058 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 — Nine Months and Three Months Ended August 31, 2007 and 2006			3
		Consolidated Balance Sheets — August 31, 2007 and November 30, 2006			4
		Consolidated Statements of Cash Flows — Nine Months Ended August 31, 2007 and 2006			5
		Notes to Consolidated Financial Statements			6-27
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			28-41
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			42
Item 4.		Controls and Procedures			42
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			43-44
Item 1A.		Risk Factors			44
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 5.		Other Information			44-46
Item 6.		Exhibits			47
SIGNATURES					48
INDEX OF EXHIBITS					49
EXHIBIT 10.40
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)

		Nine Months Ended August 31,								Three Months Ended August 31,
		2007				2006				2007				2006
Total revenues		$	4,345,946			$	6,368,411			$	1,543,900			$	2,283,865
Construction:
Revenues		$	4,335,242			$	6,354,799			$	1,540,607			$	2,279,437
Construction and land costs			(4,658,065	)			(4,832,018	)			(2,002,381	)			(1,800,308	)
Selling, general and administrative expenses			(595,971	)			(792,014	)			(197,164	)			(287,015	)
Goodwill impairment			(107,926	)			—				(107,926	)			—
Operating income (loss)			(1,026,720	)			730,767				(766,864	)			192,114
Interest income			18,882				3,147				8,614				1,132
Loss on early redemption/interest expense, net of amounts capitalized			(12,990	)			(16,678	)			(12,990	)			(3,341	)
Equity in pretax income (loss) of unconsolidated joint ventures			(62,727	)			7,845				(21,027	)			9,043
Construction pretax income (loss)			(1,083,555	)			725,081				(792,267	)			198,948
Financial services:
Revenues			10,704				13,612				3,293				4,428
Expenses			(3,524	)			(4,629	)			(1,113	)			(1,392	)
Equity in pretax income of unconsolidated joint venture			14,558				8,925				4,367				5,058
Financial services pretax income			21,738				17,908				6,547				8,094
Income (loss) from continuing operations before income taxes			(1,061,817	)			742,989				(785,720	)			207,042
Income tax benefit (expense)			419,700				(270,100	)			307,100				(77,700	)
Income (loss) from continuing operations			(642,117	)			472,889				(478,620	)			129,342
Income from discontinued operations, net of income taxes			47,252				59,104				4,904				23,872
Gain on sale of discontinued operations, net of income taxes			438,104				—				438,104				—
Net income (loss)		$	(156,761	)		$	531,993			$	(35,612	)		$	153,214
Basic earnings (loss) per share
Continuing operations		$	(8.32	)		$	5.96			$	(6.19	)		$	1.66
Discontinued operations			6.29				.74				5.73				.31
Basic earnings (loss) per share		$	(2.03	)		$	6.70			$	(.46	)		$	1.97
Diluted earnings (loss) per share
Continuing operations		$	(8.32	)		$	5.65			$	(6.19	)		$	1.60
Discontinued operations			6.29				.71				5.73				.30
Diluted earnings (loss) per share		$	(2.03	)		$	6.36			$	(.46	)		$	1.90
Basic average shares outstanding			77,120				79,414				77,265				77,724
Diluted average shares outstanding			77,120				83,705				77,265				80,618
Cash dividends per common share		$	.75			$	.75			$	.25			$	.25

See accompanying notes.

KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands — Unaudited)

		August 31,				November 30,
		2007				2006
Assets
Construction:
Cash and cash equivalents		$	645,933			$	700,041
Trade and other receivables			229,138				224,077
Inventories			4,422,198				5,751,643
Investments in unconsolidated joint ventures			368,756				381,242
Deferred income taxes			668,676				430,806
Goodwill			69,407				177,333
Other assets			148,179				160,197
			6,552,287				7,825,339
Financial services			35,392				44,024
Assets of discontinued operations			—				1,394,375
Total assets		$	6,587,679			$	9,263,738
Liabilities and Stockholders’ Equity
Construction:
Accounts payable		$	597,744			$	626,243
Accrued expenses and other liabilities			1,138,769				1,600,617
Mortgages and notes payable			2,161,423				2,920,334
			3,897,936				5,147,194
Financial services			28,467				26,276
Liabilities of discontinued operations			—				1,167,520
Stockholders’ equity:
Common stock			114,943				114,649
Paid-in capital			845,749				825,958
Retained earnings			2,760,860				2,975,465
Accumulated other comprehensive income			—				63,197
Grantor stock ownership trust, at cost			(132,996	)			(134,150	)
Treasury stock, at cost			(927,280	)			(922,371	)
Total stockholders’ equity			2,661,276				2,922,748
Total liabilities and stockholders’ equity		$	6,587,679			$	9,263,738

See accompanying notes.

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

		Nine Months Ended August 31,
		2007				2006
Cash flows from operating activities:
Net income (loss)		$	(156,761	)		$	531,993
Income from discontinued operations, net of income taxes			(47,252	)			(59,104	)
Gain on sale of discontinued operations, net of income taxes			(438,104	)			—
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Equity in pretax loss (income) of unconsolidated joint ventures			48,169				(16,770	)
Distributions of earnings from unconsolidated joint ventures			27,215				7,708
Gain on sale of investment in unconsolidated joint ventures			—				(27,612	)
Amortization of discounts and issuance costs			1,898				1,810
Depreciation and amortization			13,361				13,381
Provision for deferred income taxes			(237,870	)			(1,190	)
Excess tax benefit associated with exercise of stock options			(714	)			(8,872	)
Stock-based compensation expense			6,103				15,525
Goodwill impairment			107,926				—
Inventory and joint venture impairments and land option abandonments			1,006,969				87,910
Change in assets and liabilities:
Receivables			(3,207	)			5,096
Inventories			205,221				(1,455,915	)
Accounts payable, accrued expenses and other liabilities			(498,970	)			123,460
Other, net			37,402				(7,606	)
Net cash provided (used) by operating activities — continuing operations			71,386				(790,186	)
Net cash provided by operating activities — discontinued operations			297,397				123,225
Net cash provided (used) by operating activities			368,783				(666,961	)
Cash flows from investing activities:
Sale of discontinued operations, net of cash divested			739,764				—
Sale of investment in unconsolidated joint ventures			—				57,767
Investments in unconsolidated joint ventures			(115,404	)			(129,437	)
Purchases of property and equipment, net			(2,582	)			(12,304	)
Other, net			—				102
Net cash provided (used) by investing activities — continuing operations			621,778				(83,872	)
Net cash used by investing activities — discontinued operations			(12,112	)			(3,561	)
Net cash provided (used) by investing activities			609,666				(87,433	)
Cash flows from financing activities:
Net proceeds from credit agreements and other short term borrowings			—				560,900
Proceeds from (redemption of) term loan			(400,000	)			400,000
Redemption of senior subordinated notes			(250,000	)			—
Proceeds from issuance of senior notes			—				298,458
Payments on mortgages, land contracts and other loans			(114,119	)			(36,269	)
Issuance of common stock under employee stock plans			10,823				63,827
Excess tax benefit associated with exercise of stock options			714				8,872
Payments of cash dividends			(57,844	)			(58,983	)
Repurchases of common stock			(4,909	)			(389,934	)
Net cash provided (used) by financing activities — continuing operations			(815,335	)			846,871
Net cash used by financing activities — discontinued operations			(306,527	)			(106,573	)
Net cash provided (used) by financing activities			(1,121,862	)			740,298
Net decrease in cash and cash equivalents			(143,413	)			(14,096	)
Cash and cash equivalents, beginning of period			804,182				324,973
Cash and cash equivalents, end of period		$	660,769			$	310,877

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 August 31, 2007, the results of its consolidated operations for the nine months and three months ended August 31, 2007 and 2006, and its consolidated cash flows for the nine months ended August 31, 2007 and 2006. The results of operations for the nine months and three months ended August 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 Annual Report on Form 10-K for that period. In this report, however, 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 the current period presentation.
		Use of Estimates
		The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on informed estimates and judgments of management. Actual results could differ from these estimates.
		Earnings(Loss) Per Share
		Basic earnings (loss) per share is calculated by dividing net income (loss) by the average number of common shares outstanding for the period. Diluted earnings 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 (loss) per share calculation when the Company has a loss from continuing operations. The anti-dilutive stock options excluded from the computation of diluted earnings (loss) per share for the three months and nine months ended August 31, 2007 totaled 1.97 million and 2.80 million, respectively.
		The following table presents a reconciliation of average shares outstanding (in thousands):

		Nine Months Ended August 31,								Three Months Ended August 31,
		2007				2006				2007				2006
Basic average shares outstanding			77,120				79,414				77,265				77,724
Net effect of stock options assumed to be exercised			—				4,291				—				2,894
Diluted average shares outstanding			77,120				83,705				77,265				80,618

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

		Nine Months Ended August 31,								Three Months Ended August 31,
		2007				2006				2007				2006
Net income (loss)		$	(156,761	)		$	531,993			$	(35,612	)		$	153,214
Foreign currency translation adjustment			—				23,800				—				(108	)
Comprehensive income (loss)		$	(156,761	)		$	555,793			$	(35,612	)		$	153,106

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		Basis of Presentation and Significant Accounting Policies (continued)
		The accumulated balance of other comprehensive income in the balance sheet as of November 30, 2006 is comprised solely of cumulative foreign currency translation adjustments of $63.2 million related to the French discontinued operations. Due to the sale of the French operations on July 10, 2007, there was no accumulated balance of other comprehensive income as of August 31, 2007.
		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 Annual Report on Form 10-K for the year ended November 30, 2006.
2.		Stock-Based Compensation
		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 effective December 1, 2005. SFAS No. 123(R) requires a public entity to measure compensation cost associated with awards of equity instruments based on the grant-date fair value of the awards, over the requisite service period. SFAS No. 123(R) requires public entities to initially measure compensation cost associated with awards of liability instruments based on their current fair value; the fair value of that award is to be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period.
		Stock Options
		In accordance with SFAS No. 123(R), the Company estimates the grant date fair value of its stock options using the Black-Scholes option-pricing model, which takes into account assumptions regarding the dividend yield, the risk-free interest rate, the expected stock price volatility and the expected term of the options. The following table summarizes the stock options outstanding as of August 31, 2007 as well as activity during the nine months then ended:

						Weighted Average
		Options				Exercise Price
Options outstanding, beginning of period			8,354,276			$	28.71
Granted			650,100				36.19
Exercised			(293,951	)			25.25
Cancelled			(568,731	)			36.17
Options outstanding, end of period			8,141,694			$	30.27
Options exercisable, end of period			6,727,550			$	27.35

As of August 31, 2007, the weighted average remaining contractual lives of options outstanding and options exercisable were 10.3 years and 10.4 years, respectively. There was $9.3 million of total unrecognized compensation cost related to unvested stock option awards as of August 31, 2007. For the three months ended August 31, 2007 and 2006, stock-based compensation expense associated with stock options totaled $2.6 million and $5.1 million, respectively. For the nine months ended August 31, 2007 and 2006, stock-based compensation expense totaled $6.1 million and $15.5 million, respectively.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2.		Stock-Based Compensation (continued)
		The aggregate intrinsic values of options outstanding and options exercisable were each $44.6 million as of August 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 nine months ended August 31, 2007 was $5.1 million. A total of 371,399 options were cancelled as a result of the irrevocable election of each of the Company’s non-employee directors to receive payouts in cash of all outstanding stock-based awards granted to them under the Company’s Non-Employee Director Stock Plan.
		Other Stock-Based Awards
		On July 12, 2007, the Company’s Chief Executive Officer was awarded 54,000 shares of restricted common stock of the Company (the “Performance Shares”) subject to the terms of the KB Home Amended and Restated 1999 Incentive Plan, the Chief Executive Officer’s Performance Stock Agreement dated July 12, 2007 and his Employment Agreement dated February 28, 2007. None to 150% of the Performance Shares will vest and become unrestricted depending on the Company’s total shareholder return over the three-year period ending on November 30, 2009 relative to a group of peer companies. In accordance with SFAS No. 123(R), the Company used a Monte Carlo simulation model to estimate the grant-date fair value of the Performance Shares. Based on this model, a total grant-date fair value of $2.0 million will be recognized over the requisite service period. During the third quarter of 2007, the Company recognized compensation expense of $.1 million associated with the Performance Shares.
		During the quarter ended August 31, 2007, the Company issued certain awards that are accounted for as liabilities in its consolidated financial statements because such awards provide for settlement in cash. On July 12, 2007, the Company granted 536,974 phantom shares and 282,284 stock appreciation rights (SARs) to various employees. Each phantom share represents the right to receive a cash payment equal to the closing price of the Company’s common stock on the applicable vesting date, plus the cumulative value of all cash dividends or other distributions paid in respect of one share of the Company’s common stock from and including the grant date through and including the vesting date. Each SAR represents a right to receive a cash payment equal to the positive difference, if any, between the grant price and the fair market value of a share of the Company’s common stock on the date of exercise, up to a maximum payout of four times the grant price. The phantom shares vest in full at the end of three years while the SARs vest in equal annual installments over three years. Phantom shares granted to senior management and all of the SARs require the achievement of a performance goal related to the Company’s cash flow as an additional condition to vesting. The Company recognized compensation expense of $.9 million during the third quarter of 2007 associated with the phantom shares and SARs.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

		Nine Months Ended August 31,								Three Months Ended August 31,
		2007				2006				2007				2006
Revenues:
Interest income		$	124			$	175			$	41			$	58
Title services			4,169				4,866				1,530				1,698
Insurance commissions			5,812				6,240				1,712				1,821
Escrow coordination fees			599				2,331				10				851
Total revenues			10,704				13,612				3,293				4,428
Expenses:
Interest			—				(43	)			—				(14	)
General and administrative			(3,524	)			(4,586	)			(1,113	)			(1,378	)
			7,180				8,983				2,180				3,036
Equity in pretax income of unconsolidated joint venture			14,558				8,925				4,367				5,058
Pretax income		$	21,738			$	17,908			$	6,547			$	8,094

		August 31,				November 30,
		2007				2006
Assets
Cash and cash equivalents		$	14,836			$	15,417
First mortgages held under commitments of sale and other			1,057				2,911
Investment in unconsolidated joint venture			19,367				25,296
Other assets			132				400
Total assets		$	35,392			$	44,024
Liabilities
Accounts payable and accrued expenses		$	28,467			$	26,276
Total liabilities		$	28,467			$	26,276

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

		August 31,				November 30,
		2007				2006
Homes, lots and improvements in production		$	3,403,743			$	3,834,969
Land under development			1,018,455				1,916,674
Total inventories		$	4,422,198			$	5,751,643

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4.		Inventories (continued)
		The Company’s interest costs are as follows (in thousands):

		Nine Months Ended August 31,								Three Months Ended August 31,
		2007				2006				2007				2006
Capitalized interest, beginning of period		$	326,250			$	228,163			$	379,565			$	268,099
Interest incurred			161,410				163,196				58,521				62,291
Loss on early redemption/interest expensed			(12,990	)			(16,678	)			(12,990	)			(3,341	)
Interest amortized			(99,958	)			(81,642	)			(46,360	)			(29,910	)
Discontinued operations			6,770				8,410				2,746				4,310
Capitalized interest, end of period		$	381,482			$	301,449			$	381,482			$	301,449

5.		Inventory 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. Based on the results of its evaluation, the Company recognized non-cash inventory impairment charges of $610.3 million and $13.0 million in the third quarters of 2007 and 2006, respectively. During the nine months ended August 31, the non-cash inventory impairment charges recorded by the Company totaled $876.5 million in 2007 and $13.0 million in 2006. The Company also recognized non-cash charges of $17.1 million and $19.3 million in the three months ended August 31, 2007 and 2006, respectively, associated with the impairment of its investment in certain unconsolidated joint ventures which operate in markets that have become increasingly difficult. Joint venture impairment charges totaled $58.4 million and $19.3 million in the nine months ended August 31, 2007 and 2006, respectively. In accordance with SFAS No. 144, the Company determined the fair value of each impaired asset primarily based on estimated cash flows discounted for inherent risk associated with the asset. Due to the judgment and assumptions applied in the estimation process, it is possible that actual results could differ from those estimated.
		The increased impairment charges in the three-month and nine-month periods ended August 31, 2007 reflect increasingly challenging housing market conditions that have lowered the value of certain assets relative to prior periods. These conditions include a significant oversupply of homes available for sale, housing affordability issues and tighter credit conditions that are keeping prospective buyers from entering the market. Though the Company recorded impairment charges earlier this year, additional impairment charges were recorded in the third quarter of 2007 due to continued housing market deterioration. During the quarter ended August 31, 2007, the oversupply of unsold new and resale homes and downward pressure on home prices worsened in many of the Company’s markets, as tighter lending standards, deteriorating affordability and greater caution on the part of potential homebuyers suppressed demand, and higher foreclosure activity combined with heightened builder and investor efforts to monetize their real estate investments increased supply. As a result, the Company’s sales rates, sales prices and gross margins have declined, lowering the fair value of certain inventory positions, prompting changes in the Company’s strategy concerning projects that no longer meet internal investment standards, and resulting in the impairment of inventory. Further deterioration in housing market conditions may lead to additional non-cash impairment charges in the future or cause the Company to reevaluate its strategy concerning certain assets that could result in future charges associated with the abandonment of land option contracts.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5.		Inventory Impairments and Abandonments (continued)
		The following tables present financial information relating to the non-cash inventory and joint venture impairment charges recognized by reporting segment (in thousands):

		Nine Months Ended August 31,								Three Months Ended August 31,
		2007				2006				2007				2006
Inventory impairments:
West Coast		$	562,702			$	8,097			$	359,510			$	8,097
Southwest			212,648				—				183,325				—
Central			21,485				4,931				13,281				4,931
Southeast			79,660				—				54,148				—
Total inventory impairments		$	876,495			$	13,028			$	610,264			$	13,028
Joint venture impairments:
West Coast		$	3,650			$	19,334			$	—			$	19,334
Southwest			3,362				—				3,362				—
Central			750				—				—				—
Southeast			50,673				—				13,766				—
Total joint venture impairments		$	58,435			$	19,334			$	17,128			$	19,334

		From time to time, the Company will write off costs, including earnest money deposits and pre-acquisition costs, associated with land purchase option contracts that the Company no longer plans to exercise due to market conditions and/or changes in market strategy. During the three months ended August 31, 2007 and 2006, the Company recognized abandonment charges associated with land purchase option contracts of $62.7 million and $36.2 million, respectively. During the nine months ended August 31, 2007 and 2006, the Company’s abandonment charges totaled $72.0 million and $55.6 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 income (loss) from unconsolidated joint ventures in the Company’s consolidated statements of operations.
6.		Goodwill Impairment
		The Company has recorded goodwill in connection with various acquisitions in prior years. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), the Company tests goodwill for potential impairment annually as of November 30 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the quarter ended August 31, 2007, the Company determined that it was necessary to evaluate goodwill for impairment due to deteriorating conditions in certain housing markets, the significant inventory impairments the Company identified and recognized during the quarter in accordance with SFAS No. 144, and the decline in the market price of the Company’s common stock to a level below its per share book value. The Company evaluated goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is to identify potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. If the fair value of a reporting unit exceeds the book value, goodwill is not considered impaired. If the book value exceeds the fair value, the second step of the impairment test is performed to measure the amount of impairment.
		Based on the results of its evaluation, the Company recorded an impairment charge of $107.9 million in the third quarter of 2007 related to its Southwest reporting segment, where all goodwill previously recorded was determined to be impaired. The charge is recorded at the Company’s corporate level since all goodwill is carried at that level. The Company’s goodwill evaluation utilized discounted cash flow analyses and market multiple analyses of historical and forecasted operating results of its reporting units. Inherent in the Company’s fair value determinations are certain judgments and estimates relating to

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6.		Goodwill Impairment (continued)
		future cash flows, current economic indicators and market valuations, and the Company’s strategic operational plans. A change in such assumptions may cause a change in the results of the analyses performed. In addition, to the extent that there are significant changes in market conditions, overall economic conditions or the Company’s strategic operational plans, it is possible for goodwill that is not currently impaired to become impaired in the future.
		The Company’s goodwill balances by reporting segment are as follows (in thousands):

		August 31,				November 30,
		2007				2006
Southwest		$	—			$	107,926
Central			24,967				24,967
Southeast			44,440				44,440
Total goodwill		$	69,407			$	177,333

7.		Mortgages and Notes Payable
		On July 27, 2007, the Company completed the redemption of all $250 million of its 9 1/2% senior subordinated notes due in 2011 at a price of 103.167% of the principal amount of the notes, plus accrued interest to the date of redemption. In addition, on July 31, 2007, the Company repaid in full its unsecured $400 million term loan (the “$400 Million Term Loan”), together with accrued interest to the date of repayment. The $400 Million Term Loan was scheduled to mature on April 11, 2011. The Company incurred a loss of $13.0 million associated with the early extinguishment of debt, primarily due to the call premium on the senior subordinated notes and the write-off of unamortized debt issuance costs.
		On August 17, 2007, the Company entered into the third amendment (the “Revolver Amendment”) to its $1.5 billion unsecured revolving credit facility dated November 22, 2005 (the “$1.5 Billion Credit Facility”). The Revolver Amendment allows for a reduction of the minimum consolidated interest coverage ratio (the “Coverage Ratio”) otherwise required under the $1.5 Billion Credit Facility for a period of up to nine consecutive quarters (the “Reduction Period”). The Coverage Ratio is the ratio of the Company’s consolidated EBITDA to consolidated interest expense (as defined under the $1.5 Billion Credit Facility). During the Reduction Period, the interest rates applied to borrowings and the unused line fee under the $1.5 Billion Credit Facility, and the maximum ratio of the Company’s consolidated total indebtedness to consolidated tangible net worth are subject to adjustment. The Revolver Amendment also permits the Company to eliminate any minimum Coverage Ratio requirement during the Reduction Period, for a period of up to four quarters, if certain financial criteria are met, and makes permanent amendments to certain provisions of the $1.5 Billion Credit Facility. Consenting lenders to the Revolver Amendment received a fee. The Revolver Amendment was filed with the SEC on August 22, 2007 on a Current Report on Form 8-K.
8.		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” (“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 $35.6

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8.		Consolidation of Variable Interest Entities (continued)
		million to inventory and other liabilities in the Company’s consolidated balance sheet at August 31, 2007. The Company’s cash deposits related to these land option contracts totaled $6.5 million at August 31, 2007. Creditors, if any, of these VIEs have no recourse against the Company. As of August 31, 2007, excluding consolidated VIEs, the Company had cash deposits totaling $70.4 million which were associated with land option contracts having an aggregate purchase price of $1.45 billion.
9.		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. 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):

		Nine Months Ended August 31,
		2007				2006
Balance, beginning of period		$	152,467			$	131,875
Warranties issued			40,380				51,683
Payments and adjustments			(38,282	)			(44,965	)
Discontinued operations			(11,407	)			(9,372	)
Balance, end of period		$	143,158			$	129,221

		In the normal course of its business, the Company issues certain representations, warranties and guarantees related to its home sales and land sales that may be affected by FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure 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 August 31, 2007, the Company had outstanding approximately $1.16 billion and $302.6 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 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 $1.5 Billion Credit Facility are guaranteed by certain of the Company’s subsidiaries (“the Guarantor Subsidiaries”).
		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 $2.75 billion and outstanding secured construction debt of approximately $1.72 billion at August 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

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9.		Commitments and Contingencies (continued)
		more favorable terms from lenders than would otherwise be available to it. At August 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 $450.6 million at August 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 $218.5 million. The remaining two unconsolidated joint ventures had total third-party debt of $14.6 million at August 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 $7.3 million. The Company’s pro rata share of limited maintenance guarantees of unconsolidated entity debt totaled $126.3 million at August 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 constitutes a capital contribution and/or loan to the affected unconsolidated joint venture and entitles the Company to receive a greater aggregate amount of the funds any such unconsolidated joint venture may distribute.
10.		Discontinued Operations
		On July 10, 2007, the Company completed the sale of its entire 49% equity interest in its publicly traded French subsidiary, Kaufman & Broad SA (“KBSA”). The sale generated total gross proceeds of $807.2 million and a pretax gain of $706.7 million ($438.1 million, net of income taxes), which was recognized in the third quarter of 2007. The sale was made pursuant to a share purchase agreement dated May 22, 2007 (the “Share Purchase Agreement”), among the Company, Financière Gaillon 8 SAS (the “Purchaser”), an affiliate of PAI partners, a European private equity firm, and three of the Company’s wholly owned subsidiaries: Kaufman and Broad Development Group, International Mortgage Acceptance Corporation, and Kaufman and Broad International, Inc. (collectively, the “Selling Subsidiaries”). Under the Share Purchase Agreement, the Purchaser agreed to acquire 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 50.17 euros per share paid by the Purchaser in cash, and a cash dividend of 4.83 euros per share paid by KBSA.
		As a result of the sale, the French operations, which had previously been presented as a separate construction segment, are included in discontinued operations in the Company’s consolidated statements of operations. In addition, any assets and liabilities related to these discontinued operations are presented separately on the consolidated balance sheets, and any cash flows related to these discontinued operations are presented separately in the consolidated statements of cash flows. All prior period information has been reclassified to be consistent with the current period presentation.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

10.		Discontinued Operations (continued)
		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):

		Nine Months Ended August 31,								Three Months Ended August 31,
		2007				2006				2007				2006
Construction:
Revenues		$	911,841			$	1,089,701			$	68,243			$	390,526
Construction and land costs			(680,234	)			(795,436	)			(53,651	)			(287,642	)
Selling, general and administrative expenses			(129,407	)			(173,168	)			(14,734	)			(57,204	)
Operating income (loss)			102,200				121,097				(142	)			45,680
Interest income			1,199				444				191				166
Interest expense, net of amounts capitalized			—				(2,045	)			—				(363	)
Minority interests			(38,665	)			(45,719	)			(208	)			(16,103	)
Equity in pretax income of unconsolidated joint ventures			4,118				8,327				663				1,692
Income from discontinued operations before income taxes			68,852				82,104				504				31,072
Income tax benefit (expense)			(21,600	)			(23,000	)			4,400				(7,200	)
Income from discontinued operations, net of income taxes		$	47,252			$	59,104			$	4,904			$	23,872

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

		November 30,
		2006
Assets
Cash		$	88,724
Trade and other receivables			435,520
Inventories			703,120
Investments in unconsolidated joint ventures			16,489
Goodwill			56,482
Other assets			94,040
Total assets		$	1,394,375
Liabilities
Accounts payable		$	594,576
Accrued expenses and other liabilities			183,580
Mortgages and notes payable			205,469
			983,625
Minority interests			183,895
Total liabilities		$	1,167,520

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

10.		Discontinued Operations (continued)
		The Company also had cumulative foreign currency translation adjustments of $63.2 million related to the French discontinued operations as of November 30, 2006 that were included in stockholder’s equity.
11.		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 agreed to extend the order, which now expires on December 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 December 1, 2007 expiration date.
		On August 16, 2006, a shareholder derivative lawsuit, Redfield v. Karatz, et al., was filed in the United States District Court for the Central District of California. On August 31, 2006, a virtually identical shareholder derivative lawsuit, Staehr v. Karatz, et al., was also filed in the United States District Court for the Central District of California. These actions, which ostensibly are brought on behalf of the Company, allege, among other things, that defendants (various of the Company’s current and former directors and officers) breached their fiduciary duties to the Company by, among other things, backdating grants of stock options to various current and former executives in violation of the Company’s shareholder-approved stock option plans. Unlike Wildt and Davidson, however, these lawsuits also include substantive claims under the federal securities laws. On January 9, 2007, plaintiffs filed a consolidated complaint. All defendants filed motions to dismiss the complaint on April 2, 2007. Subsequently, plaintiffs filed a motion for partial summary judgment against certain of the defendants. Pursuant to stipulated orders, the motions to dismiss and the motion for partial summary judgment have been taken off calendar to permit the parties to explore settlement via mediation. The latest order provides that unless otherwise agreed to by the parties or ordered by the court, the motions shall be back on calendar as of late October. Discovery has not commenced. At this time, the Company has not concluded whether any potential outcome of the derivative litigation is likely to be material to its consolidated financial position or results of operations.
		Government Investigations
		In August 2006, the Company announced that it had received an informal inquiry from the SEC relating to its stock option grant practices. In January 2007, the Company was informed that the SEC is 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. At this time, the Company has not concluded whether an unfavorable outcome of one or both of the government investigations is likely to be material to its consolidated financial position or results of operations.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11.		Legal Matters (continued)
		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 filed a motion to dismiss all claims against it. A hearing on the motion is scheduled for November 19, 2007. While the Company believes it has strong defenses to the ERISA claims, it has not concluded whether an unfavorable outcome is likely to be material to its consolidated financial position or results of operations.
		Storm Water Matter
		In January 2003, the Company received a request for information from the 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 with the EPA, DOJ and other homebuilders methods of resolving the matter. To resolve the matter, the DOJ will want the Company to pay a civil penalty and sign a consent decree affecting the Company’s storm water pollution practices at construction sites. The Company believes that the costs associated with any resolution of the matter are not likely to be material to its consolidated financial position or results of operations.
12.		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 nine months ended August 31, 2007. At August 31, 2007, the Company was authorized to repurchase four million shares under the December 8, 2005 board authorization. The Company acquired $4.9 million of common stock during the nine months ended August 31, 2007 in connection with the satisfaction of employee withholding taxes on vested restricted stock awards.
13.		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.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

14.		Segment Information
		As of August 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. During the third quarter of 2007, the Company completed the sale of its entire 49% equity interest in KBSA. Therefore, the French construction segment is presented within discontinued operations in the Company’s financial statements. The Company has restated the prior year reportable segment information presented herein to conform to the current year presentation. The revision of the Company’s reporting segments had no impact on the Company’s financial position, results of operations or cash flows for the three months and nine months ended August 31, 2006.
		The Company’s financial services reporting segment provides title and insurance services and, indirectly through Countrywide KB Home Loans, a joint venture with Countrywide Financial Corporation, mortgage banking services to the Company’s homebuyers. This segment also provided escrow coordination services to the Company’s homebuyers until the second quarter of 2007, when the Company terminated the business. The Company’s financial services segment operates in the same markets as the Company’s construction reporting segments.
		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):

		Nine Months Ended August 31,								Three Months Ended August 31,
		2007				2006				2007				2006
Revenues:
West Coast		$	1,475,662			$	2,322,841			$	553,366			$	828,496
Southwest			963,930				1,644,096				292,232				561,954
Central			703,456				1,042,773				254,116				400,451
Southeast			1,192,194				1,345,089				440,893				488,536
Total construction revenues			4,335,242				6,354,799				1,540,607				2,279,437
Financial services			10,704				13,612				3,293				4,428
Total revenues		$	4,345,946			$	6,368,411			$	1,543,900			$	2,283,865

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

14.

Segment Information (continued)

		Nine Months Ended August 31,								Three Months Ended August 31,
		2007				2006				2007				2006
Income (loss) from continuing operations before income taxes:
West Coast		$	(532,802	)		$	373,402			$	(351,086	)		$	95,608
Southwest			(150,356	)			343,927				(179,930	)			92,953
Central			(50,281	)			(8,873	)			(16,876	)			(9,498	)
Southeast			(144,945	)			135,791				(106,088	)			43,440
Corporate and other (a)			(205,171	)			(119,166	)			(138,287	)			(23,555	)
Total construction income (loss) from continuing operations before income taxes			(1,083,555	)			725,081				(792,267	)			198,948
Financial services			21,738				17,908				6,547				8,094
Total income (loss) from continuing operations before income taxes		$	(1,061,817	)		$	742,989			$	(785,720	)		$	207,042
Construction interest cost:
West Coast		$	33,220			$	11,860			$	19,173			$	2,520
Southwest			30,842				36,170				13,577				14,255
Central			15,916				24,819				4,809				9,553
Southeast			26,704				13,303				16,977				2,614
Corporate and other			6,266				12,168				4,814				4,309
Total construction interest cost (b)		$	112,948			$	98,320			$	59,350			$	33,251
Financial services interest income, net		$	124			$	175			$	41			$	58
Equity in pretax income (loss) of unconsolidated joint ventures:
West Coast		$	(5,592	)		$	(17,210	)		$	(1,877	)		$	(17,926	)
Southwest			1,942				(31	)			(3,327	)			19
Central			(2,417	)			(2,367	)			(677	)			(958	)
Southeast			(51,725	)			(200	)			(14,256	)			296
Corporate and other			(4,935	)			27,653				(890	)			27,612
Total construction equity in pretax income (loss) of unconsolidated joint ventures		$	(62,727	)		$	7,845			$	(21,027	)		$	9,043
Financial services		$	14,558			$	8,925			$	4,367			$	5,058

(a)		Corporate and other includes corporate general and administrative expenses.
(b)		Construction interest cost for the three months ended August 31, 2007 and 2006 includes $46.4 million and $29.9 million, respectively, of interest amortized in construction and land costs. Construction interest cost for the nine months ended August 31, 2007 and 2006 includes $100.0 million and $81.6 million, respectively, of interest amortized in construction and land costs. Construction interest cost for both the three and nine months ended August 31, 2007 includes $13.0 million related to the loss on early redemption of senior subordinated notes and the $400 Million Term Loan, while construction interest cost for the three months and nine months ended August 31, 2006 includes interest expense of $16.7 million and $3.3 million, respectively.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

14.

Segment Information (continued)

		August 31, 2007				November 30, 2006
Assets:
West Coast		$	2,074,388			$	2,910,764
Southwest			1,025,010				1,324,239
Central			751,967				879,134
Southeast			1,236,483				1,504,333
Corporate and other			1,464,439				1,206,869
Total construction assets		$	6,552,287			$	7,825,339
Financial services		$	35,392			$	44,024
Investments in unconsolidated joint ventures:
West Coast		$	74,836			$	48,013
Southwest			174,750				174,168
Central			10,911				14,344
Southeast			101,037				144,717
Corporate and other			7,222				—
Total construction investments unconsolidated joint ventures		$	368,756			$	381,242
Financial services		$	19,367			$	25,296

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

		Nine Months Ended August 31,
		2007				2006
Summary of cash and cash equivalents:
Construction		$	645,933			$	202,792
Financial services			14,836				16,288
Discontinued operations			—				91,797
Total cash and cash equivalents		$	660,769			$	310,877
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized		$	65,825			$	38,778
Income taxes paid			22,703				321,300
Supplemental disclosures of noncash activities:
Cost of inventories acquired through seller financing		$	4,139			$	113,866
Increase (decrease) in consolidated inventories not owned			(179,829	)			73,437