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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

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

For the Fiscal Year Ended November 30, 2002

or

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

For the transition period from __________ to __________.

Commission File No. 1-9195

KB HOME

10990 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90024

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

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

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

None

     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 ü    NO   

     INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT’S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K.  o

     THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT ON FEBRUARY 14, 2003 WAS $2,203,992,432, INCLUDING 7,647,315 SHARES HELD BY THE REGISTRANT’S GRANTOR STOCK OWNERSHIP TRUST AND EXCLUDING 5,448,100 SHARES HELD IN TREASURY.

     THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT’S CLASSES OF COMMON STOCK ON FEBRUARY 14, 2003 WAS AS FOLLOWS:

	Common Stock (par value $1.00 per share) 48,038,196 shares, including 7,647,315 shares held by the Registrant’s Grantor Stock Ownership Trust and excluding 5,448,100 shares held in treasury.

Documents Incorporated by Reference

  2002 Annual Report to Stockholders (incorporated into Part II).

  Notice of 2003 Annual Meeting of Stockholders and Proxy Statement (incorporated into Part III).

Table of Contents

PART I

Item 1. BUSINESS

General

      KB Home is one of the largest homebuilders in the United States based on the number of homes delivered. We have domestic operations in Arizona, California, Colorado, Florida, Nevada, New Mexico and Texas, and, through a majority-owned subsidiary, international operations in France. In January 2001, we changed our name from Kaufman and Broad Home Corporation to KB Home, a name which is intended to convey our strong customer focus and commitment to helping homebuyers realize their dream of homeownership. Founded in 1957, KB Home builds innovatively designed homes which cater primarily to first-time and first move-up homebuyers, generally in medium-sized developments close to major metropolitan areas. Kaufman & Broad S.A. (“KBSA”), KB Home’s majority-owned French subsidiary, builds single-family homes, high density residential properties such as condominium complexes and commercial projects in France. KBSA is among the largest builders in France based on the number of homes delivered. KB Home provides mortgage banking services to a majority of its domestic homebuyers through its wholly owned subsidiary, KB Home Mortgage Company (“KBHMC”).

      KB Home is a Delaware corporation with principal executive offices at the following address: 10990 Wilshire Boulevard, Los Angeles, California 90024. The telephone number of our corporate headquarters is (310) 231-4000 and our Web site address is kbhome.com.

Markets

      We delivered 25,452 units in 2002 (excluding 113 deliveries from unconsolidated joint ventures), the highest number of units delivered during any year in our history. Our unit deliveries for the year ended November 30, 2002 increased 4% from the previous year’s 24,538 units (excluding 330 deliveries from unconsolidated joint ventures). During 2002, we operated an average of 330 active communities compared with 329 communities in 2001. The average selling price of our homes was $190,800 in 2002, up 7% from $178,000 in 2001.

      Since 1997, our unit deliveries have grown at a compound annual rate of 17%. We believe that our strategy of operating in high growth markets according to the principles of our KBnxt operational business model (formerly known as KB2000) has been a key driver in our expansion. We hope to continue to increase our unit deliveries in future years following our current primary growth strategies, which are to expand existing operations to optimal market volume levels while exploring entry into new markets through acquisitions or de novo entry. Our growth could be materially affected, however, by the following factors: the continued impact of terrorist activities and U.S. military response (including the much-discussed potential U.S. conflict with Iraq); changes in general economic conditions either nationally, in the U.S. or France, or in the localized regions in which we operate or may commence operations; changes in job growth and employment levels; increases in home mortgage interest rates or declines in consumer confidence; or disruptions to national security in the U.S. or France, among other things. Nevertheless, we hope to continue to grow our business in 2003. In recent years, in addition to growing our existing businesses, we have been active in completing acquisitions.

      On July 19, 2001, we acquired Trademark Home Builders, Inc. (“Trademark”), a builder of single-family homes in Jacksonville, Florida. The acquisition marked our entry into Florida. Trademark was acquired for approximately $30.1 million, including the assumption of approximately $16.3 million in debt. On September 26, 2001, KBSA, our majority-owned French subsidiary, completed the acquisition of Résidences Bernard Teillaud (“RBT”), a France-based builder of condominiums. As a result of the acquisition, KBSA believes it has a leading market position in the Rhône-Alpes region of France. RBT was acquired for approximately $28.7 million.

      On September 30, 2002, we acquired Orlando, Florida-based American Heritage Homes (“AHH”) for approximately $74.0 million, including the assumption of approximately $46.5 million in debt. AHH, which in 2001 delivered more than 800 single-family homes in Orlando and Tampa and generated revenues of approximately $140.0 million, controlled more than 4,000 lots at the time of the acquisition. The AHH acquisition strengthens our market position in Florida, marking our entry into the Orlando market and supplementing our Tampa start-up business.

      During the late 1990’s, as a result of both organic growth and acquisitions, our homebuilding operations became more geographically diverse. Prior to that, for approximately a decade, we built virtually all of our homes in the California

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      To enhance our operating capabilities in regional submarkets, we conducted our domestic homebuilding business in 2002 through five divisional offices in California, five divisional offices in Texas, three divisional offices in Florida, two divisional offices in Arizona, and one divisional office in each of Colorado, Nevada and New Mexico. In addition, we operated 18 KB Home Studios in 2002, which are large showrooms where our customers may select from thousands of options for their home. Internationally, KBSA operates our construction business through two divisional offices in France.

      West Coast. Our West Coast region, comprised of operations in Northern and Southern California, accounted for 21% of our total deliveries in 2002 compared to 23% in 2001 and 25% in 2000. During the first half of the 1990’s, weak conditions for new housing and general recessionary trends in the West Coast region along with our desire for continued growth prompted us to diversify our business through aggressive expansion into other western states in 1993. Since 1995, the West Coast region housing market has improved with the number of new housing permits issued in the region having increased each year. In 2002, our unit deliveries in the West Coast region decreased 4% from the previous year with the average number of active communities we operated decreasing 22% to 62. Nonetheless, with deliveries of 5,344 units and a market share of 5%, we believe that we held the largest market share of any homebuilder within the region in 2002.

      In Southern California, we conduct our homebuilding activities in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties. In Northern California, our homebuilding activities are conducted in the Central Valley, Monterey Bay, Sacramento and San Francisco Bay-Oakland-San Jose regions.

      The communities we develop in our West Coast region generally consist of single-family detached homes primarily designed for the entry-level housing market. These homes ranged in size from approximately 1,300 to 3,500 square feet in 2002 and sold at an average price of $318,300, well below the region’s new home average of $350,500, as a result of our emphasis on the entry-level market. Our average selling price in the West Coast region increased 12% in 2002 from the previous year average of $283,100 primarily due to strategic increases in sales prices implemented throughout the region and increases in lot premiums and options sold through the KB Home Studios.

      Southwest.  In the early 1990’s, the greatly improved business conditions in other western states coupled with a prolonged economic downturn in California prompted us to expand our domestic operations outside the state. Our Southwest region, which includes operations in Arizona, Nevada and New Mexico, accounted for 24% of our home deliveries in 2002 compared to 25% in 2001 and 26% in 2000. Deliveries from our Southwest region totaled 6,037 units in 2002, down 3% from the prior year with the average number of active communities in the region decreasing 9% to 67 in 2002.

      We conduct our Southwest region homebuilding activities in Phoenix and Tucson, Arizona; Las Vegas, Nevada; and Albuquerque, New Mexico.

      The communities we develop in our Southwest region primarily consist of single-family detached entry-level homes. These homes ranged in size from approximately 1,200 to 3,700 square feet in 2002 and sold at an average price of $169,400. The average selling price of our homes in the Southwest region increased 8% in 2002 from $157,600 in 2001 as a result of selected increases in sales prices in certain markets and communities, as well as increases in lot premiums and options sold through the KB Home Studios.

      Central.  Our Central region, which includes operations in Colorado, Florida and Texas, accounted for 40% of our deliveries in 2002 compared to 38% in 2001 and 36% in 2000. Since delivering our first homes in the Central region in 1994, we have substantially grown these operations, both organically and through acquisitions. Our operations in the Central region delivered 10,284 units in 2002, up 10% from 9,368 units in 2001 partly due to our expansion into Florida through a start-up business established in 2002 and acquisitions completed in 2002 and 2001. In the Central region, the average number of active communities we operated in 2002 rose 13% from the prior year to 123.

      We conduct our Central region homebuilding activities in Denver, Colorado; Jacksonville, Orlando and Tampa Florida; and Austin, Dallas, Houston, Laredo, Rio Grande Valley and San Antonio, Texas.

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      The communities we develop in our Central region consist primarily of single-family detached homes targeted at the entry-level housing market. These homes ranged in size from approximately 1,100 to 3,800 square feet in 2002 and sold at an average price of $148,100, up 5% from $140,700 in 2001.

      France.  We conduct our operations in France through our majority-owned subsidiary KBSA, which is one of the leading builders of homes (single-family homes and condominium units) in France. In France, we build homes principally for “move-up” buyers who already own a home. Our principal market in France is the Ile-de-France region, where we built 77% of our individual homes and 46% of our condominium units in 2002. We also have activities in the regions of Lyon, Marseille, Toulouse, Lille, Rouen and Grenoble. In 2002, housing deliveries from our French homebuilding operations increased 12% from the prior year to 3,787 units. Deliveries from our French operations accounted for 15% of our home deliveries in 2002 compared to 14% in 2001 and 13% in 2000. The single-family homes built by our French business ranged in size from approximately 700 to 2,600 square feet in 2002. The average selling price of our homes in France increased 10% to $161,000 in 2002 from $146,300 in 2001.

      In the late 1980’s and early 1990’s, our French operations conducted a large commercial development business with revenues from these activities peaking at $362.3 million in 1990. These commercial operations, which included the development of commercial office buildings in Paris for sale to institutional investors, became a significantly smaller segment of our French operations as the French economy declined in the first half of the 1990’s and we de-emphasized our commercial development operations in light of less favorable commercial market conditions. Since then, the French economy has improved and we have again expanded our commercial activity. As a result, revenues from the development of commercial buildings, all located in metropolitan Paris, totaled $43.8 million in 2002, $69.9 million in 2001 and $.8 million in 2000. The decrease in our commercial revenues in 2002 versus 2001 reflected the completion of certain projects during the year and a lack of new commercial construction contracts initiated in 2002. In 2001, our French commercial revenues increased substantially from 2000 due to the decision to expand our commercial activity as market conditions for this type of development improved.

      Prior to February 7, 2000, KBSA was wholly owned by KB Home. On February 7, 2000, KBSA issued 5,314,327 common shares (including an over-allotment option) in an initial public offering. The offering was made in France and elsewhere in Europe and was priced at 23 euros per share. Since the initial public offering, the French business has been listed on the Premier Marché of the Paris Bourse. The offering generated total net proceeds of $113.1 million, of which $82.9 million was used to reduce our domestic debt and repurchase shares of KB Home common stock. The remainder of the proceeds was used to fund internal and external growth of our French operations. Since the initial public offering, we have maintained a 57% majority ownership interest and continue to consolidate these operations in our financial statements.

      Unconsolidated Joint Ventures. From time to time, we participate in the development, construction and sale of residential properties and commercial projects through unconsolidated joint ventures. These included joint ventures in California, Florida, Nevada, New Mexico and France in 2002; Nevada, New Mexico, and France in 2001; and California, Nevada, New Mexico and France in 2000. Only a relatively small portion of our business is conducted through unconsolidated joint ventures and, in 2002, unit deliveries from joint ventures comprised less than 1% of our total unit deliveries for the year.

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      Selected Market Data. The following table sets forth, for each of our regions, unit deliveries, average selling prices and total construction revenues for the years ended November 30, 2002, 2001 and 2000 (excluding the effects of unconsolidated joint ventures).

(1)	Total construction revenues include revenues from residential development, commercial activities and land sales.
(2)	Average selling prices and total construction revenues for foreign operations have been translated into U.S. dollars using weighted average exchange rates for each period.

Strategy

      Since 1997, we have operated under the principles of our KBnxt operational business model, and have continued to introduce complementary strategies to enhance the benefits of this model. KBnxt emphasizes efficiencies generated from a more process-driven, systematic approach to homebuilding and also focuses on gaining a deeper understanding of customer interests and needs. Key elements of KBnxt include: gaining a detailed understanding of customer desires and preferences through frequent and localized surveys; emphasizing pre-sales instead of speculative inventory; maintaining lower average levels of in-process and standing inventory; establishing even flow production; providing a wide spectrum of choice to customers in terms of location, design and options; offering low base prices; and reducing the use of sales incentives. Since introducing the KBnxt operational business model in 1997, we have made significant progress in implementing it by, among other things, focusing on the pre-sale and backlog building strategy, developing and implementing a rigorous and detailed customer survey program, and opening new KBnxt communities and KB Home Studios.

      In order to leverage the benefits of our KBnxt operational business model, we have concentrated on a strategy designed to achieve a leading position in our major markets. By operating in fewer, larger markets at sufficiently large volume levels, we believe we can better execute our KBnxt operational business model and use economies of scale to increase profits. The general benefits of this strategy include lower land acquisition costs, improved terms with financially

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      We hope to continue to increase our overall unit deliveries in future years. Our growth strategies include expanding existing operations to optimal market volume levels, as well as exploring entry into new markets at high volume levels through acquisitions or de novo entry. Growth in existing markets will be partly driven by our ability to increase the average number of active communities in our major markets through the continued successful implementation of our KBnxt operational business model. We believe these growth strategies can be supplemented by de novo entry into new markets as we did in Phoenix, Arizona; Denver, Colorado; Las Vegas, Nevada; and Austin and Houston, Texas in the 1990’s, and Tampa, Florida in early 2002. In addition, we continue to employ an acquisition strategy which has enabled us to supplement growth in existing markets and facilitate expansion into new markets. We believe that expanding our operations through the acquisition of existing homebuilding companies affords several benefits such as established land positions and existing relationships with land owners, subcontractors and suppliers not found in start-up operations. During the last seven fiscal years, we have made the following acquisitions:

*	In August 1998, we acquired a majority interest in General Homes; we acquired the remaining minority interest in January 1999, bringing our total ownership interest in General Homes to 100% at that time.

      In identifying acquisition targets, we seek homebuilders that possess the following characteristics: a business model similar to or readily convertible to our KBnxt operational business model; access to or control of a significant land position to support growth; a strong management team; and a financial condition positioned to be accretive to earnings in the first full year following acquisition. We believe that the combination of de novo market entries, organic growth in existing markets and continued acquisitions fitting these criteria will enable us to expand our operations in a focused and disciplined manner. However, our ability to acquire other homebuilders in the future could be affected by several factors, including, among other things, general conditions in the U.S. securities markets, our stock price, the general availability of appropriate acquisition candidates, pricing for such transactions, competition among other national or regional builders for such target companies, changes in general economic conditions nationally and in target markets, and capital or credit market conditions.

      We regularly review our land assets and businesses for the purpose of monetizing non-strategic or marginal positions. We also employ stringent criteria for prospective land acquisitions.

Local Expertise

      We believe that our business requires in-depth knowledge of local markets in order to acquire land in desirable locations and on favorable terms, to engage subcontractors, to plan communities keyed to local demand, to anticipate

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Design and Marketing Strategies  

      We believe that we have been and continue to be an innovator in the design of entry-level homes for the first-time and first move-up buyer. Our in-house Builder Services group, whose plans are typically protected by registered copyright, has been successful in creating distinctive design features that meet the core demands and needs of our customers. In 2002, we continued to employ our KBnxt operational business model, seeking to design homes that keep construction costs and base prices as low as possible while achieving high quality levels and promoting customer choice.

      Certain elements of the KBnxt operational business model include achieving an in-depth understanding of customer desires and preferences through detailed market surveys and providing a wide spectrum of choice to customers in terms of location, design and options. Our communities offer entry-level homebuyers an abundance of choices and options which allows customers to customize their home to an extent not typically available with other entry-level builders. After selecting a floorplan and homesite that meet their needs, our buyers visit our KB Home Studios to select options for their home, the cost of which may be rolled into their new home mortgages. Our KB Home Studios, which are now typically “retail”-type locations of approximately 10,000 square feet but can be as large as our 21,000 square foot facility in Las Vegas, Nevada, are located separately from our divisional business offices. These studios offer customers more than 5,000 options — from floor plans to fireplaces to garage doors — in a retail environment convenient to multiple communities. Our personnel are available at the studios to assist homebuyers in selecting options and upgrades.

      We believe that our marketing is one of our key competitive advantages, in relation to both other new home builders and the resale market. Our print advertising is innovative and positions us as the market leader in each of our operating divisions. In 2002, we responded to market conditions by refocusing our advertising on the core message of value, with bold monthly payment messages for all our communities to communicate how affordable a new home is. We reached beyond traditional real estate section advertising as well, by advertising in main news and calendar sections of newspapers, to target an audience that may not yet know they can afford a home. We also partnered with high-profile brands that reflect positively on our own brand and draw a diverse homebuying audience. In 2002, in addition to a number of local and national partnerships, we joined forces with Scholastic^TM Books for a national promotion featuring Clifford the Big Red Dog^TM, the well-known children’s character and star of one of the most highly rated children’s shows on television. The partnership between Scholastic^TM Books and KB Home made sense since the majority of KB Homebuyers have young children.

      Our marketing extends well beyond traditional real estate advertising and promotional activities, and also includes our directional signage, billboards, direct mail, doorhangers, and TV and radio spots. We are always looking for new ways to reach potential homebuyers in order to make KB Home the first name consumers think of when they go to buy a home. In 2001, we launched an industry-first 30-minute infomercial, which has since been expanded to a Spanish-language version as well and has become a key source of new leads for us in all our markets. We also launched an aggressive email marketing effort in 2001, which targets almost 100,000 homebuyers a month. This email effort has generated significant new leads and has become one of the most cost-effective ways of maximizing our investment in our existing leads.

      The KB Homebuyers Clubs in our operating divisions have become an essential strategy in driving traffic and developing leads from all these sources into sales. Designed to provide one-on-one personalized counseling on financing, down-payment savings plans and credit repair for people who are not yet ready to buy and match them up with the perfect home once they are, the KB Homebuyers Club provides a way to incubate leads and create long-term brand loyalty. To reach even more consumers and further position ourselves as the first stop for first-time homebuyers, we have begun offering free homebuying seminars in both English and Spanish to the general public at KB Home Studios and local communities in which we operate. These seminars educate consumers about the homebuying and financing process

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      In addition to using nontraditional mediums, we have extended our marketing efforts to target emerging markets, particularly focusing on the growing Spanish-speaking population in many of our key regions. We not only advertise in Spanish-language publications and on Spanish-language radio stations, but also have created innovative, dedicated campaigns that reflect our commitment to providing the highest quality homebuying information wherever and however our consumers want it. We want to be the builder of choice not only for the families of today, but the next generations as well.

      We maintain market and specific community information on our Web site which can be reached at kbhome.com and which received nearly 22 million page views in 2002 and just under 13 million page views in 2001. We also utilize a houseCall™ Center, a phone service center designed to bring potential buyers to our communities while also simplifying the home buying process for the consumer. The houseCall™ Center also conducts some telephone surveys for us. The houseCall™ Center can be reached at 1-888-KB-HOMES. In recent years, we have been enhancing the richness of up-to-date information available at kbhome.com and fully integrating our Web site with the houseCall™ Center, the KB Home Studios and all sales offices; developing strategic alliances that will enable us to provide new products and services to homebuyers; utilizing business-to-business resources such as the KBbid program to create cost and time savings for us; and increasing our ability to cross-sell communities through data collection and retrieval, while protecting the privacy of our Web site visitors.

      In France, we created a village concept through the elimination of front-yard walls and the extensive use of landscaping. We also introduced to the French market the American concept of a master bedroom suite, as well as walk-in closets, built-in kitchen cabinetry and two-car garages. We believe that in each of our residential markets, our value engineering enables us to offer appealing and well-designed homes without increasing construction costs. Our French operations offer a broad choice of options to new home and condominium buyers through a 6,500 square foot new home showroom in Paris, and two additional new home showrooms that opened in 2002 in Lyon and Marseille. The French business also maintains a Web site (ketb.com) featuring information on available homes.

      In all of our domestic and international residential markets, the sale of homes is largely carried out by our in-house sales force. We maintain on-site sales offices, which are usually open seven days a week, and market our homes principally through the use of fully furnished and landscaped model homes which are decorated to emphasize the distinctive design features and the choices available to customers. Our sales representatives are available to assist prospective buyers by providing them with floor plans, price information and tours of model homes. These sales representatives are experienced, trained individuals who can provide buyers with specific information regarding other products in the area, the variety of financing programs available, construction schedules and marketing and advertising plans. In all of our domestic communities, we encourage participation of outside real estate brokers in bringing prospective buyers to our communities. Also in many of our domestic markets, our KB Homebuyers Club serves as a resource for prospective homebuyers, providing them with helpful information, credit counseling and the opportunity to participate in a variety of activities.

Community Development

      The community development process generally consists of three phases: land acquisition; land development; and home construction and sale. The normal development cycle for a community has historically ranged from six to 24 months in the West Coast region and is typically a somewhat shorter duration in our Southwest and Central markets. In France, the development cycle has historically ranged from 12 to 30 months. Development cycles vary depending on the extent of the government approvals required, the size of the development, necessary site preparation, weather conditions and marketing results.

      When feasible, we acquire control of lot positions through the use of options. In addition, we frequently acquire finished lots, enabling us to deliver completed homes shortly after acquisition. The total number of lots in our domestic new home communities vary significantly but typically range from 50 to 250 lots. These domestic developments usually

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      Through the mid-1990s, we typically acquired undeveloped and/or unentitled properties, often with total lots significantly in excess of 250 lots. With the introduction of the KBnxt operational business model in 1997, we substantially reduced our practice of investing in such long-term development projects in order to lower the operating risk associated with such projects. Since introducing the KBnxt operational business model, we have focused on acquiring finished or partially improved lots and purchasing raw land under options which require little or no initial payments, or pursuant to purchase agreements in which our obligations are contingent upon our being satisfied with the feasibility of developing and selling homes. In France, typical single-family developments consist of approximately 50 to 150 lots, with average lot sizes of 5,500 square feet.

      Land Acquisition and Development.  In accordance with the KBnxt operational business model, a deep cross section of homebuyers of both new and resale homes in each market are carefully surveyed. Based upon these surveys, a marketing strategy is developed which targets specific price points and geographic sectors which we will pursue. We utilize an in-house staff of land acquisition specialists at each division who carry out extensive site selection research and analysis in order to identify properties in desirable locations consistent with our market strategy. In acquiring land, we consider such factors as: current market conditions, with an emphasis on the prices of comparable new and resale homes in the particular market; expected sales rates; proximity to metropolitan areas; population, industrial and commercial growth patterns; estimated costs of completed lot development; customer preferences; and environmental matters. Several of our highest ranking executives, including the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Senior Vice President of Asset Management, comprise our “Land Committee” which controls the commitment of our resources for all land acquisitions and utilizes a series of specific financial and budgetary controls in approving acquisition opportunities identified by division land acquisition personnel. The Land Committee employs strict standards for assessing all proposed land purchases based, in part, upon specific discounted after tax cash flow internal rate of return requirements and also evaluates each division’s overall return on investment. Extensive due diligence is also performed for each land acquisition with the results reported as part of the Land Committee presentation prior to acquisition decisions. Our geographic expansion to areas which generally offer lower risk for less investment in land has resulted in more stringent criteria guiding our land investment decisions. Consistent with our standards, we seek to minimize, or defer the timing of, cash expenditures for new land purchases and development by acquiring lots under option, phasing the land purchase and lot development, relying upon non-recourse seller financing or working with third-party land developers. In addition, we focus on acquiring finished or partially improved lots, which allow us to begin delivery of finished homes within six months of the purchase of such lots and reduces the risks of unforeseen improvement costs and volatile market conditions. These techniques are intended to enhance returns associated with new land investments by minimizing the incremental capital required.

      The following table shows the number of lots we owned in various stages of development and under option contracts in our principal markets as of November 30, 2002 and 2001. The table does not include acreage which has not yet been approved for subdivision into lots. This excluded acreage consisted of 750 acres optioned in the United States in 2002 and 440 acres optioned in the United States in 2001.

      Since implementing the KBnxt operational business model, we have reduced the proportion of unentitled and unimproved land in our portfolio. In addition, we have continued to focus on purchasing raw land under options which require little or no initial payments, or pursuant to purchase agreements in which our obligations are contingent upon our being satisfied with the feasibility of developing and selling homes. During the option period of our acquisition

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      In France, we also employ conservative strategies, including an emphasis on the move-up market segment and generally restrictive policies regarding land acquisition.

      Home Construction and Sale.  Following the purchase of land and, if necessary, the completion of the entitlement process, we typically begin marketing homes and constructing model homes. The time required for construction of our homes depends on the weather, time of year, local labor situations, availability of materials and supplies and other factors. The construction of production homes is generally contingent upon customer orders to minimize the costs and risks of standing inventory. Our KBnxt operational business model emphasizes pre-selling, maintaining stringent control of production inventory and reducing unsold inventory. The pre-selling of homes benefits homebuyers by allowing them to personalize their homes by selecting from a wider range of customizing options. As a result of our KBnxt operational business model pre-sale and backlog building strategies, the percentage of sold inventory in production in our domestic operations has increased dramatically and was approximately 83% at year-end 2002.

      We act as the general contractor for virtually all of our communities and hire subcontractors for all production activities. The use of subcontractors enables us to reduce our investment in direct labor costs, equipment and facilities. Where practical, we use mass production techniques, and prepackaged, standardized components and materials to streamline the on-site production phase. During the early 1990’s, we developed systems for national and regional purchasing of certain building materials, appliances and other items to take advantage of economies of scale and to reduce costs through improved pricing and participation in national manufacturers’ rebate programs. At all stages of production, our own administrative and on-site supervisory personnel coordinate the activities of subcontractors and subject their work to quality and cost controls. As part of our KBnxt strategies, we have also emphasized even flow production methods to enhance the quality of our homes, minimize production costs and improve the predictability of our revenues and earnings.

      We generally price our homes in a given community only after we have entered into contracts for the construction of such homes with subcontractors for that community, an approach that improves our ability to estimate gross profits accurately. Wherever possible, we seek to acquire land and construct homes at costs that allow selling prices to be set at levels at or below immediate competitors on a per square foot basis, while maintaining appropriate gross margins.

      Our division personnel provide assistance to homebuyers during all phases of the homebuying process and after the home is sold. The coordinated efforts of sales representatives, KB Home Studio consultants, on-site construction superintendents and post-closing customer service personnel in the customer’s homebuying experience is intended to provide high levels of customer satisfaction and lead to enhanced customer retention and referrals. In our domestic homebuilding operations, we provide customers with a limited home warranty program administered by personnel in each of our divisions. This arrangement is designed to give our customers prompt and efficient post-delivery service directly from KB Home. In all of our domestic markets, our limited warranty program covers certain repairs, which may be necessary following new home construction, for one or two year periods and covers structural integrity for a period of ten years.

Backlog

      Sales of our homes are made pursuant to standard sales contracts which generally require a customer deposit at the time of execution and an additional payment upon mortgage approval. We generally permit customers to cancel their obligations and obtain refunds of all or a portion of their deposits in the event mortgage financing is unobtainable within a period of time, as specified in the contract.

      “Backlog” consists of homes for which we have entered into a sales contract but have not yet delivered. “Ending Backlog” represents the number of units in backlog from the previous period plus the number of net orders (sales made

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      Our backlog at November 30, 2002, excluding the effects of unconsolidated joint ventures, reached a new year-end record of 12,023 units, up 8% from the 11,127 backlog units at year-end 2001. Our backlog ratio was 171% at year-end 2002 and 174% at year-end 2001. (Backlog ratio is defined as the ratio of beginning unit backlog to actual deliveries in the succeeding quarter.) Domestically, unit backlog at November 30, 2002 was higher by 8% compared to November 30, 2001. The success of communities designed under our KBnxt operational business model and our continued emphasis on pre-sales contributed to the increase in domestic backlog levels. Internationally, net orders in France increased 3% to 1,194 in the fourth quarter of 2002 from 1,156 in the year-earlier quarter. As a result, unit backlog in France was 8% higher at November 30, 2002 compared to November 30, 2001.

      The following table sets forth net orders, unit deliveries and ending backlog relating to sales of homes and homes under contract for each quarter during the three-year period ended November 30, 2002. The information in the table excludes activity related to unconsolidated joint ventures. Activity associated with unconsolidated joint ventures included net orders, unit deliveries and ending backlog of 15, 113, and 0, respectively, for the year ended November 30, 2002; 220, 330 and 98, respectively, for the year ended November 30, 2001; and 444, 455 and 208, respectively, for the year ended November 30, 2000.

*

Ending backlog amounts for 2002 have been adjusted to reflect the acquisition of AHH. Therefore, the ending backlog at November 30, 2001 combined with net order and delivery activity for 2002 will not equal the ending backlog at November 30, 2002. Similarly, ending backlog amounts for 2001 were adjusted to reflect the acquisitions of Trademark and RBT and ending backlog amounts for 2000 were adjusted to reflect four acquisitions that year in France.

Land and Raw Materials

      We believe that our current supply of land is sufficient for our reasonably anticipated needs over the next several years, and that we will be able to acquire land on acceptable terms for future housing developments absent significant changes in current land acquisition market conditions. The principal raw materials used in the construction of our homes are concrete and forest products. (In France, the principal materials used in the construction of our commercial buildings are steel, concrete and glass). In addition, we use a variety of other construction materials, including sheetrock, plumbing and electrical items in the homebuilding process. We attempt to maintain efficient operations by utilizing standardized

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Land Sales

      In the normal course of business, we sell land which either can be sold at an advantageous price due to market conditions or does not meet our marketing needs. Such property may consist of land zoned for commercial use which is part of a larger parcel being developed for single-family homes or in areas where we may consider our inventory to be excessive. Generally, land sales fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, the strength and number of competing developers entering particular markets at given points in time, the availability of land in markets we serve and prevailing market conditions. Land sale revenues totaled $39.2 million in 2002, $64.8 million in 2001 and $100.5 million in 2000. The results for 2002 and 2001 were representative of our typical historical fluctuations in land sales activity.

Customer Financing — KB Home Mortgage Company

      On-site personnel at KB Home’s communities in the United States facilitate sales by offering to arrange financing for prospective customers through KBHMC. We believe that the ability to offer customers financing on firm, competitive terms as a part of the sales process is an important factor in completing sales.

      KBHMC’s business primarily consists of providing KB Home’s domestic customers with competitive financing and coordinating and expediting the loan origination transaction through the steps of loan application, loan approval and closing. KBHMC has its headquarters in Los Angeles and operates regional mortgage centers in Las Vegas, Nevada; and San Antonio, Texas. During 2001, KBHMC also operated a regional mortgage center in Fairfield, California but consolidated these operations into the Las Vegas regional mortgage center in January 2002.

      KBHMC’s principal sources of revenues are: (i) interest income earned on mortgage loans during the period they are held by KBHMC prior to their sale to investors; (ii) net gains from the sale of loans; (iii) loan servicing fees; and (iv) revenues from the sale of the rights to service loans.

      KBHMC is approved by the Government National Mortgage Association (“GNMA”) as a seller-servicer of Federal Housing Administration (“FHA”) and Veterans Administration (“VA”) loans. A portion of the conventional loans originated by KBHMC (i.e., loans other than those insured by FHA or guaranteed by VA) qualify for inclusion in loan guarantee programs sponsored by Fannie Mae or the Federal Home Loan Mortgage Corporation (“FHLMC”). KBHMC arranges for fixed and adjustable rate, conventional, privately insured mortgages, FHA-insured or VA-guaranteed mortgages, and mortgages funded by revenue bond programs of states and municipalities. In 2002, 55% of the mortgages originated for the Company’s customers were conventional (most of which conformed to Fannie Mae and FHLMC guidelines), 36% were FHA-insured or VA-guaranteed (a portion of which are adjustable rate loans), 4% were funded by mortgage revenue bond programs and 5% were adjustable rate mortgages (“ARMs”) provided through commitments from institutional investors. The percentages set forth above change from year to year reflecting then-current fixed interest rates, introductory rates for ARMs, housing prices and other economic conditions. In 2002, KBHMC originated loans for 89% of the Company’s domestic home deliveries to end users who obtained mortgage financing.

      KBHMC is a delegated underwriter under the FHA Direct Endorsement and VA Automatic programs in accordance with criteria established by such agencies. Additionally, KBHMC has delegated underwriting authority from Fannie Mae and FHLMC. As a delegated underwriter, KBHMC may underwrite and close mortgage loans under programs sponsored by these agencies without their prior approval, which expedites the loan origination process.

      KBHMC customarily sells nearly all of the loans that it originates. Loans are sold either individually or in pools to GNMA, Fannie Mae or FHLMC or against forward commitments to institutional investors, including banks and savings and loan associations.

      KBHMC typically sells servicing rights on a regular basis for substantially all of the loans it originates. However, for a small percentage of loans, and to the extent required for loans being held for sale to investors, KBHMC services the

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      One of KBHMC’s strategies is to fully support KB Home’s home sales while also expanding from this core business by offering other related products through its wholly owned subsidiary, rateOne Home Loans (“rateOne”). The rateOne organization, established in 1999, is a telemarketing and on-line lender with a mission to make the home loan process simple and convenient with highly competitive rates. Telemarketing and on-line lending has grown over the last several years with many lenders realizing that this form of business is not only more cost effective but may become the preferred method of originating loans. In 2002, originations for the rateOne telemarketing center were primarily sourced to customer responses to electronic billboards strategically located on various highways in urban centers in the U.S. The billboards offer the customer the option of applying for a loan through the rateOne telemarketing center or Web site.

      All loans originated by KBHMC, including rateOne, are intended to be of investment quality and adhere to the basic fundamentals of sound lending practices. While rateOne provides additional production to augment the already strong production from KBHMC, it is still in its start-up phase and, therefore, did not contribute materially to KBHMC’s financial results in 2002.

      In France, we assist our customers by arranging financing through third-party lenders, primarily major French banks with which our French business has established relationships. In some cases, French customers qualify for certain government-assisted home financing programs. A second mortgage is usually handled through a government agency. A homebuyer in France may also have a third mortgage provided through credit unions or other employee groups.

Employees

      All of our operating divisions operate independently with respect to day-to-day operations within the context of the KBnxt operational business model. All land purchases and other significant construction, mortgage banking and similar operating decisions must be approved by the operating division and senior corporate management.

      We employ a trained staff of land acquisition specialists, architects, planners, engineers, construction supervisors, marketing and sales personnel and finance and accounting personnel, supplemented as necessary by outside consultants, who guide the development of our communities from their conception through the marketing and sale of completed homes. Each operating division is given extensive autonomy regarding employment of personnel within policy guidelines established by our senior management.

      At January 31, 2003, the Company had approximately 4,500 full-time employees in its operations, including approximately 500 in KBHMC’s operations. No employees are represented by a collective bargaining agreement.

      Construction and mortgage banking personnel are typically paid performance bonuses based on individual performance and incentive compensation based on the performance of the applicable operating division or subsidiary. Our corporate personnel are typically paid performance bonuses based on individual performance and incentive compensation based on the overall performance of KB Home.

Competition and Other Factors

      We believe the use of the KBnxt operational business model, particularly the aspects that involve gaining a deeper understanding of customer interests and needs and offering a wide range of choice to homebuyers, provides us with long-term competitive advantages. The housing industry is highly competitive, and we compete with numerous housing producers ranging from regional and national firms to small local builders primarily on the basis of price, location, financing, design, reputation, quality and amenities. In addition, we compete with housing alternatives other than new production homes, including existing homes and rental housing. In certain markets and at times when housing demand is high, we also compete with other builders to hire subcontractors.

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Financing

      We do not generally finance the development of our domestic communities with project financing (by “project financing” we mean proceeds of loans specifically obtained for, or secured by, particular communities). Instead, financing of our domestic operations has been primarily generated from results of operations, public debt and equity financing, and borrowings under our domestic unsecured credit facility with various banks. Historically, financing for our French business has been primarily generated from results of operations and borrowings from its unsecured committed credit lines with a series of foreign banks. The initial public offering of KBSA, completed in February 2000, provided the French business with additional capital to support its growth. As a result of diverse external sources of financing, we were not adversely affected by the tight credit conditions that much of the homebuilding industry experienced during the recession of the early to mid-1990s, both domestically and in France.

      On July 29, 2002, our French operations issued 150.0 million euros principal amount of 8 3/4% French senior notes at 100% of the principal amount of the notes. The notes, which are KBSA’s first publicly traded debt issue, are due August 1, 2009 with interest payable semi-annually, represent unsecured obligations and rank pari passu in right of payment with all other senior unsecured indebtedness of KBSA. KB Home does not guarantee these notes. On or prior to August 1, 2005, our French business may redeem up to 35% of the aggregate principal amount of the notes with the net cash proceeds of qualified equity offerings at a redemption price of 108.75% of their principal amount together with accrued and unpaid interest, if any. The notes are not otherwise redeemable at the option of KBSA, except in the event of certain changes in tax laws. Proceeds from the issuance of the notes were used to pay down bank borrowings and other indebtedness.

      Our current universal shelf registration statement filed on October 15, 2001 with the Securities and Exchange Commission (“SEC”) (as subsequently amended, the “2001 Shelf Registration”) was declared effective on January 28, 2002. The remaining capacity under the 1997 Shelf Registration was rolled into the 2001 Shelf Registration, thereby providing KB Home with a total issuance capacity of $750.0 million under the 2001 Shelf Registration. The 2001 Shelf Registration provides that securities may be offered from time to time in one or more series and in the form of senior, senior subordinated or subordinated debt, preferred stock, common stock, stock purchase contracts, stock purchase units and/or warrants to purchase such securities.

      On January 27, 2003, pursuant to the 2001 Shelf Registration, we issued $250.0 million of 7 3/4% senior subordinated notes at 98.444% of the principal amount of the notes and on February 7, 2003, we issued an additional $50.0 million notes in the same series (collectively, the “$300.0 Million Senior Subordinated Notes”). The $300.0 Million Senior Subordinated Notes, which are due February 1, 2010, with interest payable semi-annually, represent unsecured obligations of KB Home and are subordinated to all existing and future senior indebtedness of KB Home. The $300.0 Million Senior Subordinated Notes are redeemable at the option of KB Home at 103.875% of their principal amount beginning February 1, 2007 and thereafter at prices declining annually to 100% on and after February 1, 2009. In addition, before February 1, 2006, we may redeem up to 35% of the aggregate principal amount of the $300.0 Million Senior Subordinated Notes with the net proceeds of one or more public or private equity offerings at a redemption price of 107.75% of their principal amount, together with accrued and unpaid interest. We used $129.0 million of the net proceeds from the issuance of the $300.0 Million Senior Subordinated Notes to redeem all of our outstanding $125.0 million 9 5/8% senior subordinated notes due 2006. The remaining net proceeds were used for general corporate purposes. At February 27, 2003, $450.0 million of capacity remained available under the 2001 Shelf Registration.

      KBHMC competes with other mortgage lenders, including national, regional and local mortgage bankers, savings and loan associations and other financial institutions, in the origination, sale and servicing of mortgage loans. Principal competitive factors include interest rates and other features of mortgage loan products available to the consumer. External sources of financing for KBHMC’s operations include a $200.0 million master loan and security agreement (the “$200.0 Million Master Loan and Security Agreement”) and a $400.0 million master loan and security agreement. The $200.0 Million Master Loan and Security Agreement, which was renewed on May 13, 2002 with an investment bank, expires on May 26, 2003. During the fourth quarter of 2002, KBHMC negotiated a temporary increase in the maximum credit amount available under the $400.0 million master loan and security agreement to $550.0 million (the “$550.0 Million Master Loan and Security Agreement”) through February 13, 2003. The temporary increase was obtained to meet the Company’s increased volume of loan originations. At November 30, 2002, KBHMC had

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Regulation and Environmental Matters

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

Risk Factors  

      We want you to be aware that the following important factors could adversely impact our homebuilding and mortgage lending operations. These factors could cause our actual results to differ materially from the forward-looking and other statements that we make in registration statements, periodic reports and other filings with the SEC, and that we make from time to time in our news releases, annual reports and other written communications, as well as oral forward-looking and other statements made from time to time by our representatives.

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

      Our business is substantially affected by changes in national and general economic factors outside of our control, such as:

	•	short and long term interest rates;
	•	the availability of financing for homebuyers;
	•	consumer confidence (which can be substantially affected by external conditions, including international hostilities involving the U.S. or France);
	•	federal mortgage financing programs; and
	•	federal income tax provisions.

      The cyclicality of our business is also highly sensitive to changes in economic conditions that can occur on a local or regional basis, such as changes in:

	•	housing demand;
	•	population growth;
	•	employment levels and job growth; and
	•	property taxes.

      Weather conditions and natural disasters such as earthquakes, hurricanes, tornadoes, floods, droughts, fires and other casualties can harm our homebuilding business on a local or regional basis.

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      Fluctuating lumber prices and shortages, as well as shortages or price fluctuations in other important building materials, can have an adverse effect on our homebuilding business.

      Similarly, labor shortages or unrest among key trades, such as carpenters, roofers, electricians and plumbers, can delay the delivery of our homes and increase our costs.

      The difficulties described above can cause demand and prices for our homes to diminish or cause us to take longer and incur more costs to build our homes. We may not be able to recover these increased costs by raising prices because the price of each home is usually set several months before the home is delivered, as our customers typically sign their home purchase contracts before construction has even begun on their homes. In addition, some of the difficulties described above could cause some homebuyers to cancel their home purchase contracts altogether.

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

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

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

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

Interest rate increases or changes in federal lending programs could lower demand for our homes and adversely impact our mortgage lending operations.

      Nearly all of our customers finance the purchase of their homes, and a significant majority of these customers arrange their financing through our mortgage lending subsidiary. Increases in interest rates or decreases in availability of mortgage financing would increase monthly mortgage costs for our potential homebuyers and could therefore reduce demand for our homes and mortgages. Increased interest rates can also hinder our ability to realize our backlog because our sales contracts provide our customers with a financing contingency. Financing contingencies allow customers to cancel their home purchase contracts in the event they cannot arrange for financing at interest rates that were prevailing when they signed their contracts.

      Because the availability of FNMA, FHLMC, FHA and VA mortgage financing is an important factor in marketing many of our homes, any limitations or restrictions on the availability of those types of financing could reduce our home sales and the lending volume at our mortgage subsidiary.

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

      Our homebuilding business is heavily regulated and subject to increasing local, state and federal statutes, ordinances, rules and regulations concerning zoning, resource protection, other environmental impacts, building design, construction and similar matters. These regulations often provide broad discretion to governmental authorities that regulate these matters, which can result in unanticipated delays or increases in the cost of a specified project or a number of projects in

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

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

      Because of our French business, we are also subject to regulations and restrictions imposed by the government of France concerning investments by non-French companies, such as us, in businesses in France, as well as to French laws and regulations similar to those discussed above.

      Our mortgage operations are heavily regulated and subject to the rules and regulations promulgated by a number of governmental and quasi-governmental agencies. We are also subject to federal and state statutes and regulations which, among other things, prohibit discrimination, establish underwriting guidelines which include obtaining inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts. A finding that we had materially violated any of the foregoing laws could have an adverse effect on our results of mortgage operations.

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

We build homes in highly competitive markets, which could hurt our future operating results.

      We compete in each of our markets with a number of homebuilding companies for homebuyers, land, financing, raw materials and skilled management and labor resources. Our competitors include other large national homebuilders, as well as smaller regional and local builders that can have an advantage in local markets because of long-standing relationships they may have with local labor or land sellers. We also compete with other housing alternatives, such as existing homes and rental housing.

      These competitive conditions can:

	•	make it difficult for us to acquire desirable land which meets our land buying criteria;
	•	cause us to offer or to increase our sales incentives or price discounts; and
	•	result in reduced sales.

      Any of these competitive conditions can adversely impact our revenues, increase our costs and/or impede the growth of our local or regional homebuilding businesses.

      Our mortgage lending operation competes with other mortgage lenders, including national, regional and local mortgage bankers, savings and loan associations and other financial institutions. Mortgage lenders with greater access to capital markets or those with less rigorous lending criteria can sometimes offer lower interest rates than we can, which can diminish our ability to compete and adversely impact the results of operations from our mortgage lending business.

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

      We have experienced seasonal fluctuations in quarterly operating results. We typically do not commence significant construction on a home before a sales contract has been signed with a homebuyer. A significant percentage of our sales

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

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

	•	limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service requirements or other requirements;
	•	require us to dedicate a substantial portion of our cash flow from operations to the payment of our debt and reduce our ability to use our cash flow for other purposes;
	•	impact our flexibility in planning for, or reacting to, changes in our business;
	•	place us at a competitive disadvantage because we have more debt than some of our competitors; and
	•	make us more vulnerable in the event of a downturn in our business or in general economic conditions.

      Our ability to meet our debt service and other obligations will depend upon our future performance. We are engaged in businesses that are substantially affected by changes in economic cycles. Our revenues and earnings vary with the level of general economic activity in the markets we serve. Our businesses could also be affected by financial, political, business and other factors, many of which are beyond our control. The factors that affect our ability to generate cash can also affect our ability to raise additional funds through the sale of debt and/or equity securities, the refinancing of debt or the sale of assets. Changes in prevailing interest rates may also affect our ability to meet our debt service obligations, because borrowings under our bank credit facilities bear interest at floating rates. A higher interest rate on our debt could adversely affect our operating results.

      Our business may not generate sufficient cash flow from operations and borrowings may not be available to us under our bank credit facilities in an amount sufficient to enable us to pay our debt service obligations or to fund our other liquidity needs. We may need to refinance all or a portion of our debt on or before maturity, which we may not be able to do on favorable terms or at all.

      Under the terms of our bank credit facilities, our debt service payment obligations are defined as consolidated interest expense. As defined, consolidated interest expense for the years ended November 30, 2002 and 2001 were $101.1 million and $113.8 million, respectively. On a pro forma basis, after giving effect to the issuance on January 27, 2003 and February 7, 2003 of our $300.0 Million Senior Subordinated Notes and the redemption on February 18, 2003 of our $125.0 million 9 5/8% Senior Subordinated Notes due 2006, our debt service payment obligations for the year ended November 30, 2002 would have been $112.3 million.

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

      Our homebuilding operations require significant amounts of cash and/or available credit. It is not possible to predict the future terms or availability of additional capital. Moreover, our outstanding domestic public debt, as well as our domestic bank credit facilities and the credit facilities of our French subsidiary, contain provisions that may restrict the amount and nature of debt we may incur in the future. Our bank credit facilities limit our ability to borrow additional funds by placing a maximum cap on our leverage ratio. Under the most restrictive of these provisions, as of November 30, 2002, we would have been permitted to incur up to $2,513.0 million of Total Consolidated Indebtedness, as defined in the bank credit facilities. This maximum amount exceeded our actual Total Consolidated Indebtedness at November 30, 2002 by $1,574.5 million. There can be no assurance that we can actually borrow up to this maximum amount at any time, as our ability to borrow additional funds, and to raise additional capital through other means, is also dependent on conditions in the capital markets and our credit-worthiness. If conditions in the capital markets change significantly, it could reduce our sales and may hinder our future growth and results of operations.

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Our future growth may be limited by contracting economies in the markets in which we currently operate, our inability to find appropriate acquisition candidates, or our consummation of acquisitions that may not be successfully integrated or may not achieve expected benefits.

      Our future growth and results of operations could be adversely affected if the markets in which we currently operate do not continue to support the expansion of our existing business or if we are unable to identify suitable acquisition opportunities in new markets. Over the last several years, there has been significant consolidation in the homebuilding industry, which has made it somewhat more difficult for us to identify appropriate acquisition candidates in new markets and has increased competition for acquisition candidates. If we do consummate acquisitions in the future, we may not be successful in integrating the operations of the acquired businesses, including their product lines, dispersed operations and distinct corporate cultures. Our inability to grow in existing markets or find appropriate acquisition opportunities in new markets, or our failure to successfully manage future acquisitions, would limit our ability to grow and would adversely impact our future operating results.

Because we build homes in France, some of our revenues and earnings are subject to foreign currency and economic risks.

      A portion of our construction operations are located in France. As a result, our financial results are affected by fluctuations in the value of the U.S. dollar as compared to the euro and changes in the French economy to the extent those changes affect the homebuilding market there. We do not currently use any currency hedging instruments or other strategies to manage currency risks related to fluctuations in the value of the U.S. dollar or the euro.

International instability, and future terrorist acts against or similar adverse developments involving the United States or France, could have a material adverse effect on our operations.

      The September 11, 2001 terrorist acts against the United States and the subsequent U.S. military response initially resulted in generalized economic uncertainty. In the weeks immediately following the September 11th attacks, net orders for our homes fell sharply and cancellations increased, although they have subsequently returned to levels that compare more favorably on a year-over-year basis. Despite this apparent rebound, considerable instability continues since September 11, 2001 and consumer confidence is at a low level. These generalized conditions or future adverse developments in the war against terrorism, future terrorist acts against the U.S. or France, possibility of war, or increased international instability in general, could result in a material long-term decrease in our net orders and an increase in cancellations, which could materially adversely affect our operating results or result in a decline in the market value of our securities.

Item 2. PROPERTIES  

      KB Home’s executive offices are in leased premises at 10990 Wilshire Boulevard, Los Angeles, California. Our housing operations are principally conducted from leased premises located in Phoenix and Tucson, Arizona; Fremont, Irvine, Los Angeles, Pleasanton, Pomona, San Diego and Vacaville, California; Denver, Colorado; Jacksonville, Orlando and Tampa, Florida; Las Vegas, Nevada; Albuquerque, New Mexico; Austin, Dallas, Houston, Laredo and Rio Grande Valley, Texas; and Paris, France.

      Our mortgage banking subsidiary leases executive offices at 10990 Wilshire Boulevard, Los Angeles, California and a regional office in Las Vegas, Nevada. rateOne also leases an office in Las Vegas, Nevada.

      Our homebuilding and mortgage banking operations in San Antonio, Texas are principally conducted from premises that we own.

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

Item 3.  LEGAL PROCEEDINGS  

      We are involved in litigation incidental to our business. These cases are in various procedural stages and, based on reports of counsel, it is management’s opinion that provisions or reserves made for potential losses are adequate and any

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

      No matters were submitted during the fourth quarter of 2002 to a vote of security holders, through the solicitation of proxies or otherwise.

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EXECUTIVE OFFICERS OF THE REGISTRANT

      The following sets forth certain information regarding the executive officers of KB Home as of January 31, 2003:  

(1)	All positions described were with KB Home, unless otherwise indicated.

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PART II

      As of January 31, 2003, there were 1,132 holders of record of KB Home’s common stock.

      Information as to KB Home’s quarterly stock prices is included on page 92 of KB Home’s 2002 Annual Report to Stockholders, which is included as part of Exhibit 13 hereto.

      Information as to the principal exchanges on which KB Home’s common stock is being traded and quarterly cash dividends is included on page 92 of KB Home’s 2002 Annual Report to Stockholders, which is included as part of Exhibit 13 hereto.

      The Five Year Summary of KB Home for the five-year period ended November 30, 2002 is included on page 49 of KB Home’s 2002 Annual Report to Stockholders, which is included as part of Exhibit 13 hereto. It should be read in conjunction with the consolidated financial statements included in KB Home’s 2002 Annual Report to Stockholders, which are also included as part of Exhibit 13 hereto.

      Management’s Discussion and Analysis of Financial Condition and Results of Operations of KB Home is included on pages 50 through 64 of KB Home’s 2002 Annual Report to Stockholders, which are included as part of Exhibit 13 hereto.

      We primarily enter into debt obligations to support general corporate purposes, including acquisitions, and the operations of our divisions. The primary market risk facing KB Home is the interest rate risk on our senior and senior subordinated notes. We have no cash flow exposure due to interest rate changes for these notes. In connection with our mortgage banking operations, mortgage loans held for sale and the master loan and security agreements are subject to interest rate risk; however, such obligations reprice frequently and are short-term in duration and accordingly the risk is not material. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes other than as disclosed in Notes 1 and 4 to the consolidated financial statements with regard to our mortgage banking operations. As disclosed, we use mortgage forward delivery contracts and non-mandatory commitments to mitigate our exposure to movements in interest rates on interest rate lock agreements and mortgage loans held for sale. The estimated fair value of mortgage forward delivery contracts and non-mandatory commitments exceeded the contract value by $1.3 million and $3.9 million at November 30, 2002 and 2001, respectively. The estimated fair value of interest rate lock agreements exceeded the contract value by $1.2 million and was less than the contract value by $.2 million at November 30, 2002 and 2001, respectively.

      The following table sets forth as of November 30, 2002, our long-term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value (in thousands):

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     A portion of our construction operations are located in France. As a result, our financial results could be affected by factors such as changes in the foreign currency exchange rate or weak economic conditions in our markets. Our earnings are affected by fluctuations in the value of the U.S. dollar relative to the euro in France, as a result of our sales in France. Therefore, for the year ending November 30, 2002, the result of a 10% uniform strengthening in the value of the dollar relative to the currency in which our sales were denominated in France would have resulted in a decrease in revenues of $67.6 million and a decrease in pretax income of $3.9 million. Comparatively, the 2001 results of a 10% uniform strengthening in the value of the dollar relative to the currencies in which our sales were denominated would have been a decrease in revenues of $57.8 million and a decrease in pretax income of $3.7 million. These calculations assume that each exchange rate would change in the same direction relative to the U.S. dollar. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.

      The consolidated financial statements of KB Home are included on pages 65 through 88 of KB Home’s 2002 Annual Report to Stockholders, which are included as part of Exhibit 13 hereto. Reference is made to the Index to Financial Statements on page F-1 herein.

      None.

PART III

      The Notice of 2003 Annual Meeting of Stockholders and Proxy Statement, filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, is incorporated by reference in this Annual Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K and provides the information required under Part III (Items 10, 11, 12 and 13) except for the information regarding the executive officers of KB Home, which is included in Part I on page 20 herein.

      Within the 90 days prior to the date of this report, KB Home carried out an evaluation, under the supervision and with the participation of its management, including the Chairman and Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chairman and Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to KB Home (including its consolidated subsidiaries) required to be included in our periodic SEC filings. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART IV

     Financial Statements

           Reference is made to the index set forth on page F-1 of this Annual Report on Form 10-K.

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    Exhibits

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     Financial Statement Schedules

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

     Reports on Form 8-K

	No reports on Form 8-K were filed during the fourth quarter of 2002.

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SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	KB HOME

	By:	/s/ DOMENICO CECERE

	Domenico Cecere
	Senior Vice President and Chief Financial Officer

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

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CERTIFICATIONS

      I, Bruce Karatz, certify that:

	1.	I have reviewed this annual report on Form 10-K of KB Home;
	2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
	3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
	4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	6.	The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated February 27, 2003

	/s/ BRUCE KARATZ
	Bruce Karatz
	Chairman and Chief Executive Officer
	(Principal Executive Officer)

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CERTIFICATIONS

      I, Domenico Cecere, certify that:

	1.	I have reviewed this annual report on Form 10-K of KB Home;
	2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
	3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
	4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	6.	The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated February 27, 2003

	/s/ DOMENICO CECERE
	Domenico Cecere
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)

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KB HOME AND CONSOLIDATED SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

      The consolidated financial statements, together with the report thereon of Ernst & Young LLP, dated December 19, 2002, all appearing on pages 49 through 88 of KB Home’s 2002 Annual Report to Stockholders, are incorporated in this Annual Report on Form 10-K between page F-1 and the List of Exhibits Filed. With the exception of the aforementioned information and the information incorporated in Items 5, 6 and 7, KB Home’s 2002 Annual Report to Stockholders is not to be deemed filed as part of this Annual Report on Form 10-K.

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

      The following pages represent pages 49 through 88 and page 92 of KB Home’s 2002 Annual Report to Stockholders, and include the Five Year Summary, Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and related notes thereto, the Report of Independent Auditors, Report on Financial Statements, Stockholder Information and Common Stock Prices. These pages were filed with the Securities and Exchange Commission as Exhibit 13 hereto.

F-1

SELECTED FINANCIAL INFORMATION