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.~~1934.

For the quarterly period ended ~~May~~August 31, 2011.


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

For the transition period from [__________ ] to [ __________].

Commission File No. 001-09195

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.

Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yesþ Noo

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



Large accelerated filerþ	Accelerated filero	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

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

Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of ~~May~~August 31, 2011.

There were ~~77,005,075~~77,132,675 shares of the registrant’s common stock, par value $1.00 per share, outstanding on ~~May~~August 31, 2011. The registrant’s grantor stock ownership trust held an additional ~~11,048,044~~10,920,444 shares of the registrant’s common stock on that date.

PART I. FINANCIAL INFORMATION


Item 1.		Financial Statements

KB HOME

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts — Unaudited)


	Six Months Ended May 31,						Three Months Ended May 31,						Nine Months Ended August 31,						Three Months Ended August 31,
	2011			2010			2011			2010			2011			2010			2011			2010
Total revenues	$	468,678		$	638,030		$	271,738		$	374,052		$	835,994		$	1,139,033		$	367,316		$	501,003

																						��
Homebuilding:
Revenues	$	465,284		$	635,025		$	269,983		$	372,514		$	829,816		$	1,133,846		$	364,532		$	498,821
Construction and land costs		(421,177	)		(533,383	)		(250,381	)		(306,843	)		(724,085	)		(945,196	)		(302,908	)		(411,813	)
Selling, general and administrative expenses		(112,125	)		(155,193	)		(62,520	)		(82,990	)		(172,310	)		(233,795	)		(60,185	)		(78,602	)
Loss on loan guaranty		(37,330	)		—			(14,572	)		—			(37,330	)		—			—			—


Operating loss		(105,348	)		(53,551	)		(57,490	)		(17,319	)
Operating income (loss)														(103,909	)		(45,145	)		1,439			8,406

Interest income		653			1,025			270			601			776			1,628			123			603
Interest expense		(24,560	)		(35,925	)		(13,121	)		(16,518	)		(36,902	)		(52,108	)		(12,342	)		(16,183	)
Equity in loss of unconsolidated joint ventures		(55,929	)		(2,732	)		(92	)		(1,548	)
Equity in income (loss) of unconsolidated joint ventures														(55,865	)		(4,679	)		64			(1,947	)


Homebuilding pretax loss		(185,184	)		(91,183	)		(70,433	)		(34,784	)		(195,900	)		(100,304	)		(10,716	)		(9,121	)


Financial services:
Revenues		3,394			3,005			1,755			1,538			6,178			5,187			2,784			2,182
Expenses		(1,652	)		(1,885	)		(787	)		(992	)		(2,481	)		(2,639	)		(829	)		(754	)
Equity in income of unconsolidated joint venture		512			4,950			661			3,629
Equity in income (loss) of unconsolidated joint venture														(376	)		5,946			(888	)		996


Financial services pretax income		2,254			6,070			1,629			4,175			3,321			8,494			1,067			2,424


Total pretax loss		(182,930	)		(85,113	)		(68,804	)		(30,609	)		(192,579	)		(91,810	)		(9,649	)		(6,697	)
Income tax benefit (expense)		(100	)		(300	)		300			(100	)		(100	)		5,000			—			5,300


Net loss	$	(183,030	)	$	(85,413	)	$	(68,504	)	$	(30,709	)	$	(192,679	)	$	(86,810	)	$	(9,649	)	$	(1,397	)


Basic and diluted loss per share	$	(2.38	)	$	(1.11	)	$	(.89	)	$	(.40	)	$	(2.50	)	$	(1.13	)	$	(.13	)	$	(.02	)


Basic and diluted average shares outstanding		76,983			76,844			76,991			76,854			77,004			76,866			77,047			76,909


Cash dividends declared per common share	$	.1250		$	.1250		$	.0625		$	.0625		$	.1875		$	.1875		$	.0625		$	.0625

KB HOME

CONSOLIDATED BALANCE SHEETS

(In Thousands — Unaudited)


	May 31,			November 30,			August 31,			November 30,
	2011			2010			2011			2010
Assets

Homebuilding:
Cash and cash equivalents	$	621,304		$	904,401		$	477,406		$	904,401
Restricted cash		113,963			115,477			113,186			115,477
Receivables		70,353			108,048			79,180			108,048
Inventories		1,894,981			1,696,721			1,900,580			1,696,721
Investments in unconsolidated joint ventures		51,136			105,583			51,255			105,583
Other assets		83,551			150,076			78,382			150,076


		2,835,288			3,080,306			2,699,989			3,080,306

Financial services		25,060			29,443			21,828			29,443


Total assets	$	2,860,348		$	3,109,749		$	2,721,817		$	3,109,749


Liabilities and stockholders’ equity

Homebuilding:
Accounts payable	$	127,576		$	233,217		$	117,593		$	233,217
Accrued expenses and other liabilities		594,385			466,505			582,233			466,505
Mortgages and notes payable		1,691,659			1,775,529			1,586,703			1,775,529


		2,413,620			2,475,251			2,286,529			2,475,251


Financial services		3,276			2,620			3,321			2,620

Common stock		115,149			115,149			115,149			115,149
Paid-in capital		877,376			873,519			878,962			873,519
Retained earnings		525,209			717,852			510,750			717,852
Accumulated other comprehensive loss		(22,657	)		(22,657	)		(22,657	)		(22,657	)
Grantor stock ownership trust, at cost		(120,082	)		(120,442	)		(118,694	)		(120,442	)
Treasury stock, at cost		(931,543	)		(931,543	)		(931,543	)		(931,543	)


Total stockholders’ equity		443,452			631,878			431,967			631,878


Total liabilities and stockholders’ equity	$	2,860,348		$	3,109,749		$	2,721,817		$	3,109,749

KB HOME

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands — Unaudited)


	Six Months Ended May 31,						Nine Months Ended August 31,
	2011			2010			2011			2010
Cash flows from operating activities:
Net loss	$	(183,030	)	$	(85,413	)	$	(192,679	)	$	(86,810	)
Adjustments to reconcile net loss to net cash used by operating activities:
Equity in (income) loss of unconsolidated joint ventures		55,417			(2,218	)		56,241			(1,267	)
Distributions of earnings from unconsolidated joint ventures		6,313			7,500			6,312			10,000
Loss on loan guaranty		37,330			—			37,330			—
Gain on sale of operating property		(8,825	)		—			(8,825	)		—
Amortization of discounts and issuance costs		1,108			1,065			1,660			1,605
Depreciation and amortization		1,160			1,780			1,636			2,628
(Gain) on early extinguishment of debt/loss on voluntary termination of revolving credit facility		(3,612	)		1,802			(3,612	)		1,802
Tax benefits from stock-based compensation		—			1,599			—			1,599
Stock-based compensation expense		3,775			4,029			5,765			5,975
Inventory impairments and land option contract abandonments		22,345			13,362			23,507			16,739
Change in assets and liabilities:
Receivables		(1,443	)		183,417			(10,940	)		182,762
Inventories		(167,792	)		(155,214	)		(177,770	)		(149,021	)
Accounts payable, accrued expenses and other liabilities		(28,080	)		(81,609	)		(46,953	)		(147,323	)
Other, net		(5,990	)		(2,704	)		(1,611	)		(2,832	)


Net cash used by operating activities		(271,324	)		(112,604	)		(309,939	)		(164,143	)


Cash flows from investing activities:
Investments in unconsolidated joint ventures		(1,919	)		(1,756	)		(1,974	)		(1,533	)
Proceeds from sale of operating property		80,600			—			80,600			—
Purchases of property and equipment, net		(108	)		(454	)		(74	)		(642	)


Net cash provided (used) by investing activities		78,573			(2,210	)		78,552			(2,175	)


Cash flows from financing activities:
Change in restricted cash		1,514			6,535			2,291			(2,092	)
Repayment of senior notes								(100,000	)		—
Payments on mortgages and land contracts due to land sellers and other loans		(80,826	)		(71,828	)		(86,064	)		(73,371	)
Issuance of common stock under employee stock plans		442			897			1,426			1,609
Excess tax benefit associated with exercise of stock options		—			583			—			583
Payments of cash dividends		(9,613	)		(9,607	)		(14,423	)		(14,415	)
Repurchases of common stock		—			(350	)		—			(350	)


Net cash used by financing activities		(88,483	)		(73,770	)		(196,770	)		(88,036	)


Net decrease in cash and cash equivalents		(281,234	)		(188,584	)		(428,157	)		(254,354	)
Cash and cash equivalents at beginning of period		908,430			1,177,961			908,430			1,177,961


Cash and cash equivalents at end of period	$	627,196		$	989,377		$	480,273		$	923,607

KB HOME

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted.

In the opinion of KB Home (the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s consolidated financial position as of ~~May~~August 31, 2011, the results of its consolidated operations for the ~~six~~nine months and three months ended ~~May~~August 31, 2011 and 2010, and its consolidated cash flows for the ~~six~~nine months ended ~~May~~August 31, 2011 and 2010. The results of consolidated operations for the ~~six~~nine months and three months ended ~~May~~August 31, 2011 are not necessarily indicative of the results to be expected for the full year, due to seasonal variations in operating results and other factors. The consolidated balance sheet at November 30, 2010 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, 2010, which are contained in the Company’s Annual Report on Form 10-K for that period.

Use of Estimates

The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP and, therefore, include amounts based on informed estimates and judgments of management. Actual results could differ from these estimates.

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid short-term debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company’s cash equivalents totaled ~~$502.3~~$377.8 million at ~~May~~August 31, 2011 and $797.2 million at November 30, 2010. The majority of the Company’s cash and cash equivalents were invested in money market accounts and U.S. government securities.

Restricted cash of ~~$114.0~~$113.2 million at ~~May~~August 31, 2011 consisted of ~~$87.2~~$65.0 million of cash deposited with various financial institutions that is required as collateral for the Company’s cash-collateralized letter of credit facilities (the “LOC Facilities”), ~~and~~ $26.8 million ~~of cash in an escrow account~~ required as collateral for a surety ~~bond.~~bond and $21.4 million of cash deposited in an escrow account pursuant to a consensual plan of reorganization for one of the Company’s unconsolidated joint ventures. Restricted cash of $115.5 million at November 30, 2010 consisted of $88.7 million of cash collateral for the LOC Facilities and $26.8 million of cash collateral for ~~the~~a surety bond.

Loss per share

Basic and diluted loss per share were calculated as follows (in thousands, except per share amounts):


	Six Months Ended May 31,						Three Months Ended May 31,						Nine Months Ended August 31,						Three Months Ended August 31,
	2011			2010			2011			2010			2011			2010			2011			2010
Numerator:
Net loss	$	(183,030	)	$	(85,413	)	$	(68,504	)	$	(30,709	)	$	(192,679	)	$	(86,810	)	$	(9,649	)	$	(1,397	)


Denominator:
Basic and diluted average shares outstanding		76,983			76,844			76,991			76,854			77,004			76,866			77,047			76,909


Basic and diluted loss per share	$	(2.38	)	$	(1.11	)	$	(.89	)	$	(.40	)	$	(2.50	)	$	(1.13	)	$	(.13	)	$	(.02	)

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Basis of Presentation and Significant Accounting Policies (continued)

All outstanding stock options were excluded from the diluted loss per share calculations for the ~~six~~nine months and three months ended ~~May~~August 31, 2011 and 2010 because the effect of their inclusion would be antidilutive, or would decrease the reported loss per share.

Comprehensive loss

The Company’s comprehensive loss was ~~$68.5~~$9.6 million for the three months ended ~~May~~August 31, 2011 and ~~$30.7~~$1.4 million for the three months ended ~~May~~August 31, 2010. The Company’s comprehensive loss was ~~$183.0~~$192.7 million for the ~~six~~nine months ended ~~May~~August 31, 2011 and ~~$85.4~~$86.8 million for the ~~six~~nine months ended ~~May~~August 31, 2010. The accumulated balances of other comprehensive loss in the consolidated balance sheets as of ~~May~~August 31, 2011 and November 30, 2010 were comprised solely of adjustments recorded directly to accumulated other comprehensive loss in accordance with Accounting Standards Codification Topic No. 715, “Compensation — Retirement Benefits” (“ASC 715”). ASC 715 requires an employer to recognize the funded status of defined postretirement benefit plans as an asset or liability on the balance sheet and requires any unrecognized prior service costs and actuarial gains/losses to be recognized in accumulated other comprehensive income (loss).

Stock-Based Compensation

The Company measures and recognizes compensation expense associated with its grants of equity-based awards in accordance with Accounting Standards Codification Topic No. 718, “Compensation — Stock Compensation” (“ASC 718”). ASC 718 requires that public companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements over the vesting period.

Stock Options

In accordance with ASC 718, 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 an expected dividend yield, a risk-free interest rate, an expected volatility factor for the market price of the Company’s common stock and an expected term of the stock options. The following table summarizes the stock options outstanding and stock options exercisable as of ~~May~~August 31, 2011, as well as stock options activity during the ~~six~~nine months then ended:


				Weighted					Weighted
				Average Exercise					Average Exercise
	Options			Price		Options			Price
Options outstanding at beginning of period		8,798,613		$	24.19		8,798,613		$	24.19
Granted		—			—		20,000			9.54
Exercised		—			—		—			—
Cancelled		(205,979	)		22.09		(275,363	)		21.44

Options outstanding at end of period		8,592,634			24.24		8,543,250			24.24

Options exercisable at end of period		6,110,686			28.58		6,123,062			28.46

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Stock-Based Compensation (continued)

~~May 31, 2011. (The intrinsic~~ value of a stock option is the amount by which the market value of a share of the underlying common stock exceeds the exercise price of the stock option.)

Other Stock-Based Awards

From time to time, the Company grants restricted stock, phantom shares and stock appreciation rights (“SARs”) to various employees. In some cases, the Company has granted phantom shares and SARs that can be settled only in cash and are therefore accounted for as liability awards. The Company recognized ~~total compensation expense~~income of ~~$.4~~$.5 million in the three months ended ~~May~~August 31, 2011 and ~~total compensation income of $1.4~~$5.3 million in the three months ended ~~May~~August 31, 2010 related to restricted stock, phantom shares and SARs awards. The Company recognized total compensation expense of ~~$1.4~~$.9 million in the ~~six~~nine months ended ~~May~~August 31, 2011 and ~~$4.3~~total compensation income of $1.0 million in the ~~six~~nine months ended ~~May~~August 31, 2010 related to these stock-based awards. Some of the stock-based awards outstanding at ~~May~~August 31, 2010 were SARs that could be settled only in cash. In the third and fourth quarters of 2010, the Company offered to eligible officers and employees the opportunity to replace cash-settled SARs previously granted to them with options to purchase shares of the Company’s common stock. Each stock option issued to replace a SAR had an exercise price equal to the replaced SAR’s exercise price, and the same number of underlying shares, vesting schedule and expiration date as each such SAR. The offers did not include a re-pricing or any other changes impacting the value of the awards to the participating officers and employees, and no additional grants or awards were made to the participants as part of the offers. All of the SARs the Company received through the offers were canceled, and with forfeitures due to employee departures, the Company has canceled virtually all of its previously granted cash-settled SARs.

Approval of an Amendment to the KB Home 2010 Equity Incentive Plan

At the Company’s Annual Meeting of Stockholders held on April 7, 2011, the Company’s stockholders approved an amendment to the KB Home 2010 Equity Incentive Plan (the “Plan Amendment”) to increase the number of shares of the Company’s common stock that may be issued under the KB Home 2010 Equity Incentive Plan by an additional 4,000,000 shares. The Plan Amendment was filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2011.

Segment Information

As of ~~May~~August 31, 2011, the Company had identified five reporting segments, comprised of four homebuilding reporting segments and one financial services reporting segment, within its consolidated operations in accordance with Accounting Standards Codification Topic No. 280, “Segment Reporting.” As of ~~May~~August 31, 2011, the Company’s homebuilding reporting segments conducted ongoing operations in the following states:

West Coast: California
Southwest: Arizona and Nevada
Central: Colorado and Texas
Southeast: Florida, Maryland, North Carolina and Virginia

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

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

The Company’s financial services reporting segment provides title and insurance services to the Company’s homebuyers. This segment also provided mortgage banking services to the Company’s homebuyers indirectly

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Segment Information (continued)

through KBA Mortgage, LLC (“KBA Mortgage”), a joint venture of a subsidiary of the Company and a subsidiary of Bank of America, N.A., with each partner having a 50% ownership interest in the venture. The Bank of America, N.A. subsidiary partner operated KBA Mortgage. The Company ~~has~~ accounted for KBA Mortgage as an unconsolidated joint venture in the financial services reporting segment of the Company’s consolidated financial statements. The Company’s financial services reporting segment conducts operations in the same markets as the Company’s homebuilding reporting segments. From its formation in 2005 until June 30, 2011, KBA Mortgage provided mortgage banking services to a significant proportion of the Company’s homebuyers. During the first quarter of 2011, the Bank of America, N.A. subsidiary partner in KBA Mortgage approached the Company about exiting the joint venture due to the desire of Bank of America, N.A. to cease participating in joint venture structures in its business. As a result, effective June 27, 2011, KBA Mortgage ~~ceased~~stopped accepting loan applications, and it ceased offering mortgage banking services to the Company’s homebuyers after June 30, 2011. After June 30, 2011, Bank of America, N.A. is processing and closing only the residential consumer mortgage loans that KBA Mortgage originated for the Company’s homebuyers on or before June 26, 2011. The Company entered into a marketing services agreement with MetLife Home Loans, a division of MetLife Bank, N.A., effective June 27, 2011. Under the agreement, MetLife Home Loans’ personnel, located onsite at ~~each~~several of the Company’s new home communities, can offer (i) financing options and mortgage loan products to the Company’s homebuyers, (ii) to prequalify homebuyers for residential consumer mortgage loans, and (iii) to commence the loan origination process for homebuyers who elect to use MetLife Home Loans. The Company ~~will make~~makes marketing materials and other information regarding MetLife Home Loans’ financing options and mortgage loan products available to its homebuyers and ~~will be~~is compensated solely for the fair market value of these services. MetLife Home Loans and MetLife Bank, N.A. are not affiliates of the Company or any of its subsidiaries. The Company’s homebuyers are under no obligation to use MetLife Home Loans and may select any lender of their choice to obtain mortgage financing for the purchase of a home. The Company does not have any ownership, joint venture or other interests in or with MetLife Home Loans or MetLife Bank, N.A. or with respect to the revenues or income that may be generated from MetLife Home ~~Loans’~~Loans providing mortgage banking services to, or originating residential consumer mortgage loans for, the Company’s homebuyers. The Company expects that its agreement with MetLife Home Loans will help its homebuyers to obtain reliable mortgage banking services to purchase a home.

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, nor are they indicative of the results to be expected in future periods.

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


	Six Months Ended May 31,				Three Months Ended May 31,				Nine Months Ended August 31,				Three Months Ended August 31,
	2011		2010		2011		2010		2011		2010		2011		2010

Revenues:
West Coast	$	178,914	$	272,089	$	107,143	$	163,655	$	354,348	$	483,383	$	175,434	$	211,294
Southwest		51,932		93,450		28,632		59,602		91,411		149,364		39,479		55,914
Central		144,790		174,751		84,201		91,826		247,492		314,786		102,702		140,035
Southeast		89,648		94,735		50,007		57,431		136,565		186,313		46,917		91,578

Total homebuilding revenues		465,284		635,025		269,983		372,514		829,816		1,133,846		364,532		498,821
Financial services		3,394		3,005		1,755		1,538		6,178		5,187		2,784		2,182


Total	$	468,678	$	638,030	$	271,738	$	374,052	$	835,994	$	1,139,033	$	367,316	$	501,003

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Segment Information (continued)


	Six Months Ended May 31,						Three Months Ended May 31,						Nine Months Ended August 31,						Three Months Ended August 31,
	2011			2010			2011			2010			2011			2010			2011			2010

Pretax income (loss):
West Coast	$	6,591		$	16,056		$	(2,274	)	$	12,699		$	9,927		$	31,080		$	3,336		$	15,024
Southwest		(116,821	)		(9,997	)		(36,492	)		(5,534	)		(113,620	)		(11,799	)		3,201			(1,802	)
Central		(10,202	)		(9,107	)		(3,493	)		(1,803	)		(12,389	)		(3,666	)		(2,187	)		5,441
Southeast		(23,021	)		(31,261	)		(8,993	)		(11,075	)		(30,177	)		(42,114	)		(7,156	)		(10,853	)
Corporate and other (a)		(41,731	)		(56,874	)		(19,181	)		(29,071	)		(49,641	)		(73,805	)		(7,910	)		(16,931	)

Total homebuilding pretax loss		(185,184	)		(91,183	)		(70,433	)		(34,784	)		(195,900	)		(100,304	)		(10,716	)		(9,121	)
Financial services		2,254			6,070			1,629			4,175			3,321			8,494			1,067			2,424


Total	$	(182,930	)	$	(85,113	)	$	(68,804	)	$	(30,609	)	$	(192,579	)	$	(91,810	)	$	(9,649	)	$	(6,697	)


Equity in income (loss) of unconsolidated joint ventures:
West Coast													$	50		$	877		$	67		$	230
Southwest														(55,902	)		(6,457	)		—			(2,177	)
Central														—			—			—			—
Southeast														(13	)		901			(3	)		—


Total													$	(55,865	)	$	(4,679	)	$	64		$	(1,947	)


Inventory impairments:
West Coast													$	1,679		$	2,630		$	328		$	1,434
Southwest														18,715			962			—			—
Central														51			—			—			—
Southeast														969			4,677			—			—


Total													$	21,414		$	8,269		$	328		$	1,434


Land option contract abandonments:
West Coast													$	112		$	722		$	—		$	722
Southwest														296			—			—			—
Central														1,074			6,340			834			—
Southeast														611			1,408			—			1,221


Total													$	2,093		$	8,470		$	834		$	1,943


Joint venture impairments:
West Coast													$	—		$	—		$	—		$	—
Southwest														53,727			—			—			—
Central														—			—			—			—
Southeast														—			—			—			—


Total													$	53,727		$	—		$	—		$	—

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Inventories (continued)

(a)

Amounts for the ~~six~~nine months ended ~~May~~August 31, 2011 include a $3.6 million gain on the early extinguishment of secured debt. Amounts for the ~~three~~nine months ended May 31, 2010 include $.4 million of debt issuance costs written off in connection with the Company’s voluntary termination of an unsecured revolving credit facility (the “Credit Facility”) effective March 31, 2010. Amounts for the six months ended MayAugust 31, 2010 include $1.8 million of debt issuance costs written off in connection with the Company’s voluntary reduction of the aggregate commitment under ~~the Credit Facility~~an unsecured revolving credit facility (the “Credit Facility”) from $650.0 million to $200.0 million during the first quarter of 2010 and the voluntary termination of the Credit Facility ~~in the second quarter of~~effective March 31, 2010.


	(b)		Inventory impairment charges are recognized against all inventory costs of a community, such as land, land improvements, costs of home construction and capitalized interest. Capitalized interest amounts presented in the table reflect the gross amount of capitalized interest as impairment charges recognized are not generally allocated to specific components of inventory.

Inventory Impairments and Land Option Contract Abandonments

Each land parcel or community in the Company’s owned inventory is assessed to determine if indicators of potential impairment exist. Impairment indicators are assessed separately for each land parcel or community on a quarterly basis and include, but are not limited ~~to:~~to the following: significant decreases in sales rates, average selling prices, volume of homes delivered, gross margins on homes delivered or projected margins on homes in backlog or future housing sales; significant increases in budgeted land development and construction costs or cancellation rates; or projected losses on expected future land sales. If indicators of potential impairment exist for a land parcel or community, the identified asset is evaluated for recoverability in accordance with Accounting Standards Codification Topic No. 360, “Property, Plant, and Equipment” (“ASC 360”). The Company evaluated 33 land parcels or communities for recoverability during each of the three-month periods ended August 31, 2011 and 282010. The Company evaluated 97 land parcels or communities and 88 land parcels or communities for recoverability during the ~~three~~nine months ended ~~May~~August 31, 2011 and 2010, respectively. ~~The Company evaluated 64~~Some of these land parcels or communities ~~and 55 land parcels or communities for recoverability~~evaluated during the ~~six~~nine months ended ~~May~~August 31, 2011 and 2010 ~~respectively.~~were evaluated in more than one quarterly period.

When an indicator of potential impairment is identified for a land parcel or community, the Company tests the asset for recoverability by comparing the carrying value of the asset to the undiscounted future net cash flows expected to be generated by the asset. The undiscounted future net cash flows are impacted by then-current conditions and trends in the market in which an asset is located as well as factors known to the Company at the time the cash flows are calculated. The undiscounted future net cash flows consider recent trends in the Company’s sales, backlog and cancellation rates. Among the trends considered with respect to the three-month and ~~six-month~~nine-month periods ended ~~May~~August 31, 2011 and 2010 were the after effects of a temporary surge in demand in the first two quarters of 2010 that was ~~the impact on demand of~~motivated by the April 30, 2010 expiration of the federal homebuyer tax credit, as discussed further below under “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Also taken into account ~~are~~were the Company’s future expectations related to the following: market supply and demand, including estimates concerning average selling prices; sales and cancellation rates; and anticipated land development, construction and overhead costs to be incurred. With respect to the three-month and ~~six-month~~nine-month periods ended ~~May~~August 31, 2011, these expectations ~~have~~ reflected the Company’s experience that market conditions for its assets in inventory where impairment indicators ~~are~~were identified have been generally stable in 2010 and into 2011, with no significant deterioration or improvement identified as to revenue and cost drivers, excluding the temporary, though significant impact of the expiration of the federal homebuyer tax credit. ~~The~~Based on this experience, and taking into account the year-over-year increase in net orders in the third quarter of 2011 and the year-over-year increase in the number of new home communities, the Company’s inventory assessments ~~therefore~~ considered an expected improved sales pace ~~as the Company moves through the remainder of 2011. The Company’s considerations in this regard took into account that, on a sequential basis, net orders~~ for the ~~second quarter of 2011 increased 53% from the first quarter~~remainder of 2011.

Given the inherent challenges and uncertainties in forecasting future results, the Company’s inventory assessments at the time they are made generally assume the continuation of then-current market conditions, subject to identifying information suggesting a sustained deterioration or improvement in such conditions or other significant changes. Therefore, for most of its assets in inventory where impairment indicators are

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Inventory Impairments and Land Option Contract Abandonments (continued)

~~other significant changes. Therefore, for most of its assets in inventory where impairment indicators are~~ identified, the Company’s quarterly inventory assessments infor the remainder of 2011, ~~will,~~ at the time ~~they are~~ made, will anticipate sales rates, average selling prices and costs to generally continue at or near then-current levels through an affected asset’s estimated remaining life. These estimates, trends and expectations are specific to each land parcel or community and may vary among land parcels or communities.

In its inventory assessments during the ~~second~~third quarter of 2011, the Company determined that the declines in its sales and backlog levels that it experienced in the third and fourth quarters of 2010 did not reflect a sustained change in market conditions preventing recoverability. Rather, the Company considered that they reflected the after effects of ~~the~~a temporary surge in demand in the first two quarters of 2010 that was motivated by the April 30, 2010 expiration of the federal homebuyer tax credit. Also contributing to these declines in the Company’s sales and backlog levels were strategic community count reductions the Company made in ~~selected communities~~select markets in ~~previous quarters.~~prior periods to align its operations with market activity levels.

A real estate asset is considered impaired when its carrying value is greater than the undiscounted future net cash flows the asset is expected to generate. Impaired real estate assets are written down to fair value, which is primarily based on the estimated future cash flows discounted for inherent risk associated with each asset. The discount rates used in the Company’s estimated discounted cash flows were 17% and 18% during the three months ended August 31, 2011 and 2010, respectively, and ranged from 17% to 20% during the ~~three-month and six-month~~nine-month periods ended ~~May~~August 31, 2011 and ~~the six-month period ended May 31,~~ 2010. These discounted cash flows are impacted ~~by:~~by the following: the risk-free rate of return; expected risk premium based on estimated land development, construction and delivery timelines; market risk from potential future price erosion; cost uncertainty due to development or construction cost increases; and other risks specific to the asset or conditions in the market in which the asset is located at the time the assessment is made. These factors are specific to each land parcel or community and may vary among land parcels or communities.

Based on the results of its evaluations, the Company recognized pretax, noncash inventory impairment charges of ~~$20.1~~$.3 million in the three months ended ~~May~~August 31, 2011 associated with ~~five~~one community with a post-impairment fair value of $1.1 million. In the three months ended August 31, 2010, the Company recognized $1.4 million of pretax, noncash inventory impairment charges associated with one community with a post-impairment fair value of $2.7 million. In the nine months ended August 31, 2011, the Company recognized pretax, noncash inventory impairment charges of $21.4 million associated with nine land parcels or communities with a post-impairment fair value of ~~$27.6~~$29.9 million. These charges ~~reflect~~included an $18.1 million adjustment to the fair value of real estate collateral in the Company’s Southwest homebuilding reporting segment that the Company took back on a note ~~receivable. There were no such charges~~receivable in the ~~three~~second quarter of 2011. In the nine months ended ~~May~~August 31, ~~2010. In the six months ended May 31, 2011,~~2010, the Company recognized $8.2 million of pretax, noncash inventory impairment charges ~~of $21.1 million~~ associated with ~~eight~~five land parcels or communities with a post-impairment fair value of ~~$28.8~~$6.6 million. ~~In the six months ended May 31, 2010, the Company recognized $6.8 million of such charges associated with four land parcels or communities.~~ The inventory impairments the Company recorded during the three-month and ~~six-month~~nine-month periods ended ~~May~~August 31, 2011 and ~~the six-month period ended May 31,~~ 2010 reflected declining asset values in certain markets due to unfavorable economic and competitive conditions.

As of ~~May~~August 31, 2011, the aggregate carrying value of the Company’s inventory that had been impacted by pretax, noncash inventory impairment charges was ~~$391.6~~$366.8 million, representing ~~59 communities and various other~~56 land ~~parcels.~~parcels or communities. As of November 30, 2010, the aggregate carrying value of the Company’s inventory that had been impacted by pretax, noncash inventory impairment charges was $418.5 million, representing 72 ~~communities and various other~~ land ~~parcels.~~parcels or communities.

The Company’s ~~optioned~~ inventory held under land option and other similar contracts is assessed to determine whether it continues to meet the Company’s internal investment and marketing standards. Assessments are made separately for each ~~optioned~~such land parcel on a quarterly basis and are affected by the following, among other factors: current and/or anticipated sales rates, average selling prices and home delivery volume; estimated land development and construction costs; and projected profitability on expected future housing or land sales. When a decision is made to not to exercise certain land option and other similar contracts due to market conditions and/or changes in marketing strategy, the Company writes off the costs, including non-refundable deposits and pre-acquisition costs, related to the abandoned projects. Based on the results of its assessments, the Company recognized pretax, noncash land option contract abandonment charges of ~~$.5~~$.8 million corresponding to ~~117~~209 lots in the three months ended ~~May~~August 31, ~~2011. There were no~~2011 and $1.9 million of such charges corresponding to 284 lots in the three months ended May 31, 2010. In the six months ended May 31, 2011 and 2010, the Company recognized pretax, noncash land option contract abandonment charges of $1.3 million corresponding to 258 lots and $6.5 million corresponding to 401 lots, respectively.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Inventory Impairments and Land Option Contract Abandonments (continued)

August 31, 2010. In the nine months ended August 31, 2011 and 2010, the Company recognized pretax, noncash land option contract abandonment charges of $2.1 million corresponding to 467 lots and $8.5 million corresponding to 685 lots, respectively. The charges for land option contract abandonments reflected the Company’s termination of land option contracts on projects that no longer met its investment standards or marketing strategy.

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

The estimated remaining life of each land parcel or community in the Company’s inventory depends on various factors, such as the total number of lots remaining; the expected timeline to acquire and entitle land and develop lots to build homes; the anticipated future sales and cancellation rates; and the expected timeline to build and deliver homes sold. While it is difficult to determine a precise timeframe for any particular inventory asset, the Company estimates its inventory assets’ remaining operating lives under current and expected future market conditions to range generally from one year to in excess of 10 years. Based on current market conditions and expected delivery timelines, the Company expects to realize, on an overall basis, the majority of its current inventory balance within three to five years.

Due to the judgment and assumptions applied in the estimation process with respect to inventory impairments, land option contract abandonments and the remaining operating lives of the Company’s inventory assets, it is possible that actual results could differ substantially from those estimated.

Fair Value Disclosures

Accounting Standards Codification Topic No. 820, “Fair Value Measurements and Disclosures,” provides a framework for measuring the fair value of assets and liabilities under GAAP and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows:

	Level 1		Fair value determined based on quoted prices in active markets for identical assets or liabilities.

	Level 2		Fair value determined using significant observable inputs, such as quoted prices for similar assets or liabilities or quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data, by correlation or other means.

	Level 3		Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques.

Fair value measurements are used for inventories on a nonrecurring basis when events and circumstances indicate the carrying value may not be recoverable. The following table presents the Company’s assets measured at fair value on a nonrecurring basis during the ~~six~~nine months ended ~~May~~August 31, 2011 and the year ended November 30, 2010 (in thousands):


	Fair Value					Fair Value
		May 31,		November 30,			August 31,		November 30,
Description	Hierarchy	2011 (a)		2010 (a)		Hierarchy	2011 (a)		2010 (a)

Long-lived assets held and used	Level 2	$	75	$	1,877	Level 2	$	75	$	1,877
Long-lived assets held and used	Level 3		28,709		9,693	Level 3		29,788		9,693


Total		$	28,784	$	11,570		$	29,863	$	11,570

~~KB HOME~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

~~Fair Value Disclosures (continued)~~

In accordance with the provisions of ASC 360, long-lived assets held and used with a carrying value of ~~$49.9~~$51.3 million were written down to their fair value of ~~$28.8~~$29.9 million during the ~~six~~nine months ended ~~May~~August 31, 2011, resulting in pretax, noncash inventory impairment charges of ~~$21.1~~$21.4 million. Long-lived assets held and used with a carrying value of $21.4 million were written down to their fair value of $11.6 million during the year ended November 30, 2010, resulting in pretax, noncash inventory impairment charges of $9.8 million.

The fair values for long-lived assets held and used that were determined using Level 2 inputs were based on an executed contract. The fair values for long-lived assets held and used that were determined using Level 3 inputs were primarily based on the estimated future cash flows discounted for inherent risk associated with each asset. These discounted cash flows are impacted ~~by:~~by the following: the risk-free rate of return; expected risk premium based on estimated land development, construction and delivery timelines; market risk from potential future price erosion; cost uncertainty due to development or construction cost increases; and other risks specific to the asset or conditions in the market in which the asset is located at the time the assessment is made. These factors are specific to each land parcel or community and may vary among land parcels or communities.

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, mortgages and notes receivable, senior notes, and mortgages and land contracts due to land sellers and other loans. Fair value measurements of financial instruments are determined by various market data and other valuation techniques as appropriate. When available, the Company uses quoted market prices in active markets to determine fair value.

The following table presents the carrying values and estimated fair values of the Company’s financial instruments, except those for which the carrying values approximate fair values (in thousands):


	May 31, 2011				November 30, 2010				August 31, 2011				November 30, 2010
	Carrying		Estimated		Carrying		Estimated		Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value		Value		Fair Value		Value		Fair Value

Financial Liabilities:
Senior notes due 2011 at 6 3/8%	$	99,977	$	100,514	$	99,916	$	101,500	$	—	$	—	$	99,916	$	101,500
Senior notes due 2014 at 5 3/4%		249,571		251,253		249,498		246,250		249,609		236,875		249,498		246,250
Senior notes due 2015 at 5 7/8%		299,169		291,034		299,068		289,500		299,221		261,000		299,068		289,500
Senior notes due 2015 at 6 1/4%		449,770		436,484		449,745		435,375		449,782		389,250		449,745		435,375
Senior notes due 2017 at 9.1%		260,603		273,588		260,352		279,575		260,732		237,175		260,352		279,575
Senior notes due 2018 at 7 1/4%		298,949		282,073		298,893		286,500		298,978		254,250		298,893		286,500

~~KB HOME~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

~~Variable Interest Entities (continued)~~

generally allows the Company to reduce the market risks associated with direct land ownership and development, to reduce the Company’s capital and financial commitments, including interest and other carrying costs, and to minimize the amount of the Company’s land inventories in its consolidated balance sheets. Under such contracts, the Company typically pays 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 ASC 810, certain of these contracts may create a variable interest for the Company, with the land seller being identified as a VIE.

In compliance with ASC 810, the Company analyzes its land option and other similar contracts to determine whether the corresponding land sellers are VIEs and, if so, whether the Company is the primary beneficiary. Although the Company does not have legal title to the ~~optioned~~underlying land, ASC 810 requires the Company to consolidate a VIE if the Company is determined to be the primary beneficiary. As a result of its analyses, the Company determined that, as of ~~May~~August 31, 2011 and November 30, 2010, it was not the primary beneficiary of any VIEs from which it is purchasing land under land option and other similar contracts. In determining whether it is the primary beneficiary, the Company considers, among other things, whether it has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Such activities would include, among other things, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. The Company also considers whether it has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE.

As of ~~May~~August 31, 2011, the Company had cash deposits totaling ~~$2.9~~$2.6 million associated with land option and other similar contracts that it determined to be unconsolidated VIEs, having an aggregate purchase price of ~~$119.1~~$110.6 million, and had cash deposits totaling ~~$10.9~~$13.0 million associated with land option and other similar contracts that the Company determined were not VIEs, having an aggregate purchase price of ~~$250.7~~$219.3 million. As of November 30, 2010, the Company had cash deposits totaling $2.6 million associated with land option and other similar contracts that the Company determined to be unconsolidated VIEs, having an aggregate purchase price of $86.1 million, and had cash deposits totaling $12.2 million associated with land option and other similar contracts that the Company determined were not VIEs, having an aggregate purchase price of $274.3 million.

The Company’s exposure to loss related to its land option and other similar contracts with third parties and unconsolidated entities consisted of its non-refundable deposits, which totaled ~~$13.8~~$15.6 million at ~~May~~August 31, 2011 and $14.8 million at November 30, 2010 and are included in inventories in the Company’s consolidated balance sheets. In addition, the Company had outstanding letters of credit of ~~$2.1~~$2.0 million at ~~May~~August 31, 2011 and $4.2 million at November 30, 2010 in lieu of cash deposits under certain land option or other similar contracts.

The Company also evaluates its land option and other similar contracts involving financing arrangements in accordance with Accounting Standards Codification Topic No. 470, “Debt” (“ASC 470”), and, as a result of its evaluations, increased inventories, with a corresponding increase to accrued expenses and other liabilities, in its consolidated balance sheets by ~~$28.4~~$25.1 million at ~~May~~August 31, 2011 and $15.5 million at November 30, 2010.

10.

Investments in Unconsolidated Joint Ventures

The Company has investments in unconsolidated joint ventures that conduct land acquisition, development

~~KB HOME~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

~~10.~~

~~Investments in Unconsolidated Joint Ventures (continued)~~

The Company typically has obtained rights to purchase portions of the land held by the unconsolidated joint ventures in which it currently participates. When an unconsolidated joint venture sells land to the Company’s homebuilding operations, the Company defers recognition of its share of such unconsolidated joint venture earnings until a home sale is closed and title passes to a homebuyer, at which time the Company accounts for those earnings as a reduction of the cost of purchasing the land from the unconsolidated joint venture.

The Company and its unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata ~~basis.~~basis equal to their respective equity interests. The obligations to make capital contributions are governed by each such unconsolidated joint venture’s respective operating agreement and related governing documents.

Each unconsolidated joint venture is obligated to maintain financial statements in accordance with GAAP. The Company shares in the profits and losses of its unconsolidated joint ventures generally in accordance with its respective equity interests. In some instances, the Company recognizes profits and losses related to its investment in an unconsolidated joint venture that differ from its respective equity ~~share~~interest in the unconsolidated joint venture. This may arise from impairments recognized by the Company related to its investment that differ from the recognition of impairments by the unconsolidated joint venture with respect to the unconsolidated joint venture’s assets; differences between the Company’s basis in assets it has transferred to the unconsolidated joint venture and the unconsolidated joint venture’s basis in those assets; the deferral of the unconsolidated joint venture’s profits from land sales to the Company; or other items.

With respect to the Company’s investment in unconsolidated joint ventures, its equity in loss of unconsolidated joint ventures included pretax, noncash impairment charges of $53.7 million for the ~~six~~nine months ended ~~May~~August 31, 2011 to write off the Company’s remaining investment in South Edge, LLC (“South Edge”), an unconsolidated joint venture in the Company’s Southwest homebuilding reporting segment. KB HOME Nevada Inc., a wholly-owned subsidiary of the Company, is a member of South Edge. The Company ~~determined that~~wrote off its remaining investment in South Edge based on the Company’s determination that South Edge was no longer ~~recoverable~~able to perform its activities as originally intended due to a court decision in the first quarter of 2011, which is discussed further below. There were no such impairment charges for the three months ended ~~May~~August 31, 2011 or the three months and ~~six~~nine months ended ~~May~~August 31, 2010. Due to the Company’s write-off of its investment in South Edge, the information from the combined condensed statements of operations of the Company’s unconsolidated joint ventures for the three months ended ~~May~~August 31, 2011 and the combined condensed balance sheet information for the Company’s unconsolidated joint ventures as of ~~May~~August 31, 2011, in each case as presented in the tables below, dodoes not include South Edge.

The following table presents information from the combined condensed statements of operations of ~~the Company’s unconsolidated joint ventures (in thousands):~~

Six Months Ended May 31, Three Months Ended May 31,
2011 2010 2011 2010

Revenues $ 230 $ 100,079 $ — $ 14,277
Construction and land costs (201 ) (100,735 ) 21 (12,215 )
Other expenses, net (4,605 ) (8,837 ) (238 ) (8,515 )

Loss $ (4,576 ) $ (9,493 ) $ (217 ) $ (6,453 )

~~The following table presents combined condensed balance sheet information for~~ the Company’s unconsolidated joint ventures (in thousands):

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

10.

Investments in Unconsolidated Joint Ventures (continued)

May 31, November 30,
2011 2010

Assets
Cash $ 11,333 $ 14,947
Receivables 28 147,025
Inventories 181,124 575,632
Other assets 475 51,755

Total assets $ 192,960 $ 789,359

Liabilities and equity
Accounts payable and other liabilities $ 3,802 $ 113,478
Mortgages and notes payable — 327,856
Equity 189,158 348,025

Total liabilities and equity $ 192,960 $ 789,359


	Nine Months Ended August 31,						Three Months Ended August 31,
	2011			2010			2011		2010

Revenues	$	230		$	110,455		$	—	$	10,376
Construction and land costs		(201	)		(109,929	)		—		(9,194	)
Other income (expense), net		(4,505	)		(14,173	)		101		(5,336	)

Income (loss)	$	(4,476	)	$	(13,647	)	$	101	$	(4,154	)

The following table presents combined condensed balance sheet information for the Company’s unconsolidated joint ventures (in thousands):


	August 31,		November 30,
	2011		2010

Assets
Cash	$	9,672	$	14,947
Receivables		33		147,025
Inventories		182,983		575,632
Other assets		261		51,755


Total assets	$	192,949	$	789,359


Liabilities and equity
Accounts payable and other liabilities	$	3,707	$	113,478
Mortgages and notes payable		—		327,856
Equity		189,242		348,025


Total liabilities and equity	$	192,949	$	789,359

The following table presents information relating to the Company’s investments in unconsolidated joint ventures and the outstanding debt of unconsolidated joint ventures as of the dates specified (dollars in thousands):


	May 31,		November 30,		August 31,		November 30,
	2011		2010		2011		2010

Number of investments in unconsolidated joint ventures:
South Edge (a)		—		1		—		1
Other		7		9		7		9


Total		7		10		7		10


Investments in unconsolidated joint ventures:
South Edge (a)	$	—	$	55,269	$	—	$	55,269
Other		51,136		50,314		51,255		50,314


Total	$	51,136	$	105,583	$	51,255	$	105,583


Outstanding debt of unconsolidated joint ventures:
South Edge (a)	$	—	$	327,856	$	—	$	327,856

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

10.

Investments in Unconsolidated Joint Ventures (continued)


	(a)		During the first quarter of 2011, the Company wrote off its remaining investment in South Edge. The Company also recorded an estimate of the probable net payment obligation it would pay to the administrative agent (the “Administrative Agent”) for lenders to South Edge related to a limited several repayment guaranty (the “Springing Guaranty”). The Company updated its estimate in the second ~~quarter~~and third quarters of 2011. Therefore, data related to South Edge is not reflected in the table as of ~~May~~August 31, 2011.

The Company’s unconsolidated joint ventures finance land and inventory investments for a project through a variety of arrangements. To finance their respective land acquisition and development activities, certain of the Company’s unconsolidated joint ventures have obtained loans from third-party lenders that are secured by the underlying property and related project assets. Of the Company’s unconsolidated joint ventures at November 30, 2010, only South Edge had outstanding debt, which was secured by a lien on South Edge’s assets, with a principal balance of $327.9 million. As of ~~May~~August 31, 2011, the principal balance of South Edge’s outstanding debt remained at $327.9 million.

~~KB HOME~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

~~10.~~

~~Investments in Unconsolidated Joint Ventures (continued)~~

In certain instances, the Company and/or its partner(s) in an unconsolidated joint venture have provided completion and/or carve-out guarantees to the unconsolidated joint venture’s lenders. A completion guaranty refers to the physical completion of improvements for a project and/or the obligation to contribute equity to an unconsolidated joint venture to enable it to fund its completion obligations. The Company’s potential responsibility under its completion guarantees, if triggered, is highly dependent on the facts of a particular case. A carve-out guaranty refers to the payment of losses a lender suffers due to certain bad acts or omissions by an unconsolidated joint venture or its partners, such as fraud or misappropriation, or due to environmental liabilities arising with respect to the relevant project.

In addition to completion and carve-out guarantees, the Company provided the Springing Guaranty to the Administrative Agent in connection with ~~the~~secured loans made to South Edge that comprise its outstanding debt. By its terms, the Springing Guaranty’s obligations arise after the occurrence of an involuntary bankruptcy proceeding or an involuntary bankruptcy petition filed against South Edge that is not dismissed within 60 days or for which an order or decree approving or ordering any such proceeding or petition is entered. On February 3, 2011, a bankruptcy court entered an order for relief on a Chapter 11 involuntary bankruptcy petition (the “Petition”) filed against South Edge and appointed a Chapter 11 trustee for South Edge. Although the Company believes that there are potential offsets or defenses to prevent or minimize the enforcement of the Springing Guaranty, as a result of the February 3, 2011 order for relief on the Petition, the Company considers it probable that it became responsible to pay certain amounts to the Administrative Agent related to the Springing Guaranty. Therefore, the Company’s consolidated financial statements at ~~May~~August 31, 2011 reflect a net payment obligation of $226.4 million, representing the Company’s estimate of the probable amount that it would pay to the Administrative Agent (on behalf of the South Edge lenders) related to the Springing Guaranty and to pay for certain fees, expenses and charges and for certain allowed general unsecured claims in the South Edge bankruptcy case. This estimate ~~which updates the Company’s estimate of its probable net payment obligation at February 28, 2011,~~ is based on the terms of a consensual agreement, effective June 10, 2011, among the Company, KB HOME Nevada Inc., the Administrative Agent, several of the lenders to South Edge, and certain of the other South Edge members and their respective parent companies (together with the Company and KB HOME Nevada Inc., the “Participating Members”) regarding a proposed consensual plan of reorganization for South Edge (the “Plan”). As a result of recording its probable net payment obligation at February 28, 2011, and taking into account accruals the Company had previously established with respect to South Edge and factoring in an offset for the estimated fair value of the South Edge land the Company expects to acquire as a result of satisfying the payment obligation, the Company recognized a charge of $22.8 million in the first quarter of 2011 that was reflected as a loss on loan guaranty in its consolidated statements of operations. This charge was in addition to the joint venture impairment charge of $53.7 million that the Company recognized in the first quarter of 2011 to write off its investment in South Edge. In the second quarter of 2011, in updating its estimate of its probable net payment obligation to reflect the terms of the consensual agreement effective June 10, 2011 regarding the Plan, the Company recorded an additional loss on loan guaranty of $14.6 million. The consensual agreement effective June 10, 2011 and the Plan are discussed further below in Note 15. Legal Matters. The Company’s probable net obligation related to South Edge may change if new information subsequently becomes available.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

10.

Investments in Unconsolidated Joint Ventures (continued)

Based on the terms of the Plan, the Company anticipates acquiring approximately 600 developable acres of the land owned by South Edge. Therefore, the Company considers its probable net payment obligation to be partially offset by $75.2 million, the estimated fair value of its share of the South Edge land at ~~May~~August 31, 2011. The Company calculated this estimated fair value using a present value methodology and assuming that it would develop the land, build and sell homes on most of the land, and sell the remainder of the developed land. This fair value estimate at ~~May~~August 31, 2011 reflected the Company’s expectations of the price it would receive for its share of the South Edge land in the land’s then-current state in an orderly (not a forced) transaction under then-prevailing market conditions. This fair value estimate also reflected judgments and key assumptions concerning (a) housing market supply and demand conditions, including estimates of average selling prices; (b) estimates of potential future home sales and cancellation rates; (c) anticipated entitlements and development plans for the land; (d) anticipated land development, construction and overhead costs to be incurred; and (e) a risk-free rate of return and an expected risk premium, in each case in relation to an expected ~~15 year~~15-year life for the South Edge project.

~~KB HOME~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

~~10.~~

~~Investments in Unconsolidated Joint Ventures (continued)~~

Among the key assumptions used in the present value methodology was the anticipated appreciation in revenues and costs over the expected life of the South Edge project. For revenues, the Company applied an annual appreciation factor of 5% to the average selling prices for its homes to be delivered at the South Edge project in the current quarter to estimate the average selling prices of homes expected to be sold during the relevant 15-year period. This appreciation factor reflected the following considerations: that average selling prices in the southern Nevada market will increase over the period within a range of long-term historical trends; that average selling prices will rebound from the current depressed levels; that recent negative media coverage of the bankruptcy process and other legal and development matters involving South Edge have depressed selling prices at the South Edge project relative to the Company’s experience at communities located near South Edge; that the South Edge project is a premium master planned community in the land-constrained southern Nevada market, factors that are anticipated to increase the average selling prices of homes at the project at a rate greater than other homes in the area over the life of the project; and that the uniqueness of the South Edge project in the southern Nevada market and the size of the Company’s share of the South Edge land can be leveraged to effectively manage home sales and pricing strategies to maximize revenues and profits. The following appreciation considerations were applied to costs: a factor of 10% was applied to the cost estimates in the current quarter for the development work expected to be completed over the life of the project, representing the potential cost increases and other uncertainties inherent in estimating development costs; and a factor of 1% was applied to home construction costs for anticipated inflation of such costs, taking into account historical trends and current market conditions. In addition, incremental increases in overhead costs that would be incurred in connection with the sale of each home were assessed as a function of the 5% appreciation factor applied to the average selling prices. These revenue and cost appreciation factors were determined using judgment and assumptions believed to be appropriate based on the information known to the Company at the time. Due to the judgment and assumptions applied in the estimation process with respect to the fair value of the Company’s share of the South Edge land at ~~May~~August 31, 2011, including as to the anticipated appreciation in revenues and costs over the life of the South Edge project, it is possible that actual results could differ substantially from those estimated. The Company will continue to review and update as appropriate its fair value estimates of its share of the South Edge land to reflect changes in relevant market conditions and other applicable factors.

The ultimate outcome of the South Edge bankruptcy, including whether the Plan becomes effective, is uncertain. The Company believes, however, that it will realize the value of its share of the South Edge land in the bankruptcy proceeding in accordance with the Plan. If the Plan becomes effective, the Company anticipates that it would (a) acquire its share of the South Edge land as a result of a bankruptcy court-approved disposition of the land to a newly created entity in which the Company would expect to be a part owner, and (b) without further payment, satisfy or assume the respective liens of the Administrative Agent and the South Edge lenders on the land. If, on the other hand, the Plan does not become effective and instead the Company assumes the lenders’ lien position through payment on its Springing Guaranty obligation to the Administrative Agent, the Company would become a secured lender with respect to its share of the South Edge land and would expect to have first claim on the value generated from the land.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

10.

Investments in Unconsolidated Joint Ventures (continued)

If the Company is not able to realize some or all of the value of its share of the South Edge land, it may be required to recognize an additional expense. Based on the Company’s current estimates, this additional expense could range from near zero to potentially as much as $75 million.

11.

Other Assets

Other assets consisted of the following (in thousands):


	August 31,		November 30,
	2011		2010

Operating properties (a)	$	—	$	71,938
Cash surrender value of insurance contracts		59,920		59,103
Property and equipment, net		8,028		9,596
Debt issuance costs		4,444		5,254
Prepaid expenses		4,838		3,033
Deferred tax assets		1,152		1,152


Total	$	78,382	$	150,076

~~KB HOME~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

~~11.~~		~~Other Assets (continued)~~
(a)		On December 16, 2010, the Company sold a multi-level residential building the Company operated as a rental property for net proceeds of $80.6 million and recognized a gain of $8.8 million on the sale, which is recorded as a component of selling, general and administrative expenses in the consolidated statements of operations.

May 31, November 30,
2011 2010

Operating properties $ — $ 71,938
Cash surrender value of insurance contracts 64,070 59,103
Property and equipment, net 8,541 9,596
Debt issuance costs 4,714 5,254
Prepaid expenses 5,074 3,033
Deferred tax assets 1,152 1,152

Total $ 83,551 $ 150,076

On December 16, 2010, the Company sold a multi-level residential building the Company operated as a rental property for net proceeds of $80.6 million and recognized a gain of $8.8 million on the sale.

12.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following (in thousands):


	May 31,		November 30,		August 31,		November 30,
	2011		2010		2011		2010

South Edge debt guaranty obligation	$	151,205	$	—	$	151,205	$	—
Construction defect and other litigation liabilities		129,931		124,853		136,354		124,853
Warranty liability		82,630		93,988		70,499		93,988
Employee compensation and related benefits		71,177		76,477		70,027		76,477
Accrued interest payable		44,978		42,963		27,615		42,963
Liabilities related to inventory not owned		28,362		15,549		25,145		15,549
Real estate and business taxes		4,417		8,220		7,635		8,220
Other		81,685		104,455		93,753		104,455


Total	$	594,385	$	466,505	$	582,233	$	466,505

13.

Mortgages and Notes Payable

Mortgages and notes payable consisted of the following (in thousands):

May 31, November 30,
2011 2010

Mortgages and land contracts due to land sellers and other loans $ 33,620 $ 118,057
Senior notes due 2011 at 6 3/8% 99,977 99,916
Senior notes due 2014 at 5 3/4% 249,571 249,498
Senior notes due 2015 at 5 7/8% 299,169 299,068
Senior notes due 2015 at 6 1/4% 449,770 449,745
Senior notes due 2017 at 9.1% 260,603 260,352
Senior notes due 2018 at 7 1/4% 298,949 298,893

Total $ 1,691,659 $ 1,775,529

During the six months ended May 31, 2011, the Company repaid debt that was secured by a multi-level residential building, which the Company sold during the period. As the secured debt was repaid at a discount

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

13.

Mortgages and Notes Payable (continued)


	August 31,		November 30,
	2011		2010

Mortgages and land contracts due to land sellers and other loans	$	28,381	$	118,057
Senior notes due 2011 at 6 3/8%		—		99,916
Senior notes due 2014 at 5 3/4%		249,609		249,498
Senior notes due 2015 at 5 7/8%		299,221		299,068
Senior notes due 2015 at 6 1/4%		449,782		449,745
Senior notes due 2017 at 9.1%		260,732		260,352
Senior notes due 2018 at 7 1/4%		298,978		298,893


Total	$	1,586,703	$	1,775,529

During the nine months ended August 31, 2011, the Company repaid debt that was secured by a multi-level residential building, which the Company sold during the period. As the secured debt was repaid at a discount prior to its scheduled maturity, the Company recognized a gain of $3.6 million on the early extinguishment of secured debt during the ~~six~~nine months ended ~~May~~August 31, 2011.

The Company repaid $100.0 million in aggregate principal amount of the $100 Million Senior Notes upon their August 15, 2011 maturity.

Following its voluntary termination of the Credit Facility effective March 31, 2010, the Company entered into the LOC Facilities with various financial institutions to obtain letters of credit in the ordinary course of operating its business. As of ~~May~~August 31, 2011, ~~$86.2~~$64.3 million of letters of credit were outstanding under the LOC Facilities. The LOC Facilities require the Company to deposit and maintain cash with the issuing financial institutions as collateral for its letters of credit outstanding. As of ~~May~~August 31, 2011, the amount of cash maintained for the LOC Facilities totaled ~~$87.2~~$65.0 million and was included in restricted cash on the Company’s consolidated balance sheet as of that date. ~~During 2011, the~~The Company may maintain, revise or, if necessary or desirable, enter into additional or expanded letter of credit facilities with the same or other financial institutions.

The termination of the Credit Facility also released and discharged six of the Company’s subsidiaries from guaranteeing obligations with respect to the Company’s senior notes (the “Released Subsidiaries”). Each of the Released Subsidiaries does not guaranty any other indebtedness of the Company. Each Released Subsidiary may be required to again provide a guaranty with respect to the Company’s senior notes if it becomes a “significant subsidiary,” as defined under Rule 1-02(w) of Regulation S-X, or if it is determined to be in the best interests of the Company and the relevant subsidiary. Three of the Company’s subsidiaries (the “Guarantor Subsidiaries”) continue to provide a guaranty ofwith respect to the Company’s senior notes.

The indenture governing the Company’s senior notes does not contain any financial maintenance covenants. Subject to specified exceptions, the indenture contains certain restrictive covenants that, among other things, limit the Company’s ability to incur secured indebtedness, or engage in sale-leaseback transactions involving property or assets above a certain specified value. Unlike the Company’s other senior notes, the terms governing the Company’s $265.0 million of 9.1% senior notes due 2017 (the “$265 Million Senior Notes”) contain certain limitations related to mergers, consolidations, and sales of assets.

As of ~~May~~August 31, 2011, the Company was in compliance with the applicable terms of its covenants under the Company’s senior notes, the indenture, and mortgages and land contracts due to land sellers and other loans. The Company’s ability to secure future debt financing may depend in part on its ability to remain in such compliance.

14.

Commitments and Contingencies

Commitments and contingencies include typical obligations of homebuilders for the completion of contracts and

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

14.

Commitments and Contingencies (continued)

those incurred in the ordinary course of business.

Warranty. The Company provides a limited warranty on all of its homes. The specific terms and conditions of these limited 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. 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’s primary assumption in estimating the amounts it accrues for warranty costs is that historical claims experience is a strong indicator of future claims experience. The Company periodically assesses the adequacy of its recorded warranty liabilities, which are included in accrued expenses and other liabilities in the consolidated balance sheets, and adjusts the amounts as necessary based on its assessment. The Company’s assessment includes the review of its actual warranty costs incurred to identify trends and changes in its warranty claims experience, and considers the Company’s construction quality and customer service initiatives and outside events. While the Company believes the warranty liability reflected in its consolidated balance sheets to be adequate, unanticipated changes in the legal environment, local weather, land or environmental conditions, quality of materials or methods used in the construction of homes, or customer service practices could have a significant impact on its actual warranty costs in the future and such amounts could differ from the Company’s current estimates.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

14.

Commitments and Contingencies (continued)

The drywall used in the construction of the Company’s homes is purchased and installed by subcontractors. The Company’s subcontractors obtained drywall material from multiple domestic and foreign sources through late 2008. In late 2008, the Company directed its subcontractors to obtain only domestically sourced drywall. The Company has identified homes that contain or may contain allegedly defective drywall manufactured in China primarily by responding to homeowner-initiated warranty claims or customer service questions regarding such material or regarding conditions or items in a home that may be affected by such material. Additionally, in certain communities where there ~~has~~had been a high number of affected homes identified through the warranty/customer service process, the Company ~~has~~ proactively ~~undertaken~~undertook community-wide reviews ~~and~~that identified more affected homes. The Company completed all such ~~identified~~ community-wide reviews at the end of May 2011. The Company’s customer service personnel or, in some instances, third-party consultants handle these matters. Because of the testing process required to determine the origin of drywall material obtained before December 2008, the source of drywall for homes that have not been the subject of a customer service/warranty request or community-wide review is unknown. As a result, the Company is unable to readily identify the total number of homes that may contain the allegedly defective drywall material manufactured in China.

While the Company continues to respond to individual warranty/customer service requests as they are made, the number of additional affected homes newly identified each quarter has fallen significantly since the third quarter of 2009 to a nominal amount. Based on the significantly reduced individual warranty/customer service request rate, the completion of its community-wide reviews and the domestic sourcing of drywall material since late 2008, the Company anticipates that it has identified substantially all potentially affected homes and will receive at most only nominal additional claims in future periods.

During the ~~six~~nine months ended ~~May~~August 31, 2011 and 2010, the Company paid ~~$9.0~~$11.8 million and ~~$11.0~~$19.4 million, respectively, to repair identified affected homes, and estimated its additional repair costs with respect to the newly identified affected homes to be ~~$4.7~~$6.3 million and ~~$14.3~~$19.5 million, respectively. Since first identifying affected homes in 2009, the Company has identified a total of ~~456~~464 affected homes and has resolved repairs on ~~303~~352 of

~~KB HOME~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

~~14.~~

~~Commitments and Contingencies (continued)~~

those homes through ~~May~~August 31, 2011. As of ~~May~~August 31, 2011, the Company has paid ~~$35.8~~$38.6 million of the total estimated repair costs of ~~$42.8~~$44.5 million associated with the identified affected homes.

In assessing its overall warranty liability, the Company evaluates the costs related to identified homes affected by the allegedly defective drywall material and other home warranty-related items on a combined basis. While the Company has considered the repair costs related to the identified affected homes in conjunction with its quarterly assessments of its overall warranty liability since the third quarter of 2009, the Company has experienced favorable trends in its actual warranty costs incurred with respect to other home warranty-related items. These favorable trends reflect the Company’s ongoing focus on construction quality and customer service, among other things. Based on its ~~analyses,~~assessments, the Company determined that its overall warranty liability at each reporting date was sufficient with respect to the Company’s then-estimated remaining repair costs associated with identified affected homes and its overall warranty obligations on homes delivered. ~~As a result,~~In light of these assessments, the Company did not incur charges in the ~~six~~nine months ended ~~May~~August 31, 2011 or in its 2010 fiscal year with respect to repair costs associated with the identified affected homes. Additionally, based on the trends in the Company’s actual warranty costs incurred, the Company’s assessment for the quarter ended August 31, 2011 resulted in the recording of warranty adjustments of approximately $7.4 million as reductions to construction and land costs. The overall warranty liability has decreased since the third quarter of 2009 in part because of the payments the Company has made to resolve repairs on identified affected homes and in part due to the decrease in the number of homes the Company has delivered over the past several years.

Depending on the number of additional affected homes identified, if any, and the actual costs the Company incurs to repair identified affected homes in future periods, including costs to provide affected homeowners with temporary housing, the Company may revise the estimated amount of its liability with respect to this issue, which could result in an increase or decrease in the Company’s overall warranty liability.

As of ~~May~~August 31, 2011, the Company has been named as a defendant in 10 lawsuits relating to the allegedly defective drywall material, and it may in the future be subject to other similar litigation or claims that could cause the Company to incur significant costs. Given the preliminary stages of the proceedings, the Company has

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

14.

Commitments and Contingencies (continued)

not concluded whether the outcome of any of these lawsuits will be material to its consolidated financial statements.

The Company intends to seek and is undertaking efforts, including legal proceedings, to obtain reimbursement from various sources for the costs it has incurred or expects to incur to investigate and complete repairs and to defend itself in litigation associated with this drywall material. At this stage of its efforts, however, the Company has not recorded any amounts for potential recoveries as of ~~May~~August 31, 2011.

Guarantees.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 Accounting Standards Codification Topic No. 460, “Guarantees.” Based on historical evidence, the Company does not believe any potential liability with respect to these representations, warranties or guarantees would be material to its consolidated financial statements.

Insurance.The Company has, and requires the majority of its subcontractors to have, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect the Company against a portion of its risk of loss from claims related to its homebuilding activities, subject to certain self-insured retentions, deductibles and other coverage limits. In Arizona, California, Colorado and Nevada, the Company’s general liability insurance takes the form of a wrap-up policy, where eligible subcontractors are enrolled as insureds on each project. The Company self-insures a portion of its overall risk through the use of a captive insurance subsidiary. The Company records expenses and liabilities based on the estimated costs required to cover its self-insured retention and deductible amounts under its insurance policies, and on the estimated costs of potential claims and claim adjustment expenses that are above its coverage limits or that are not covered by its policies. These estimated costs are based on an analysis of the Company’s historical claims and include an estimate of construction defect claims incurred but not yet reported. The Company’s estimated liabilities for such items were ~~$97.0~~$95.7 million at ~~May~~both August 31, 2011 and ~~$95.7 million at~~ November 30, 2010. These amounts are included in accrued expenses and other liabilities in the Company’s consolidated balance sheets. The Company’s expenses associated with self-insurance totaled ~~$2.3~~$2.1 million for the three months ended ~~May~~August 31, 2011 and ~~$1.8~~$1.6 million for the three months ended ~~May~~August 31,

~~KB HOME~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

~~14.~~

~~Commitments and Contingencies (continued)~~

2010. For the ~~six~~nine months ended ~~May~~August 31, 2011 and 2010, the Company’s expenses associated with self-insurance totaled ~~$4.6~~$6.7 million and ~~$3.6~~$5.2 million, respectively.

Performance Bonds and Letters of Credit. The Company is often required to obtain performance bonds and letters of credit in support of its obligations to various municipalities and other government agencies in connection with community improvements such as roads, sewers and water, and to support similar development activities by certain of its unconsolidated joint ventures. At ~~May~~August 31, 2011, the Company had ~~$400.2~~$392.4 million of performance bonds and ~~$86.2~~$64.3 million of letters of credit outstanding. At November 30, 2010, the Company had $414.3 million of performance bonds and $87.5 million of letters of credit outstanding. If any such performance bonds or letters of credit are called, the Company would be obligated to reimburse the issuer of the performance bond or letter of credit. The Company does not believe that a material amount of any currently outstanding performance bonds or letters of credit will be called. Performance bonds do not have stated expiration dates. Rather, the Company is released from the performance bonds as the underlying performance is completed. The expiration dates of some letters of credit ~~issued in connection with community improvements~~ coincide with the expected completion dates of the related projects or obligations. Most letters of credit, however, are issued with an initial term of one year and are typically extended on a year-to-year basis until the related performance obligation is completed.

Land Option Contracts. In the ordinary course of its business, the Company enters into land option and other similar contracts to procure rights to land parcels for the construction of homes. At ~~May~~August 31, 2011, the Company had total deposits of ~~$15.9~~$17.6 million, comprised of ~~$13.8~~$15.6 million of cash deposits and ~~$2.1~~$2.0 million of letters of credit, to purchase land having an aggregate purchase price of ~~$369.8~~$329.8 million. The Company’s land option and other similar contracts generally do not contain provisions requiring the Company’s specific performance.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

15.

Legal Matters

South Edge, LLC Litigation

On December 9, 2010, certain lenders to South Edge filed the Petition against South Edge in the United States Bankruptcy Court, District of Nevada, titledJPMorgan Chase Bank, N.A. v. South Edge, LLC (Case No. 10-32968-bam). The petitioning lenders were JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A., and Crédit Agricole Corporate and Investment Bank. KB HOME Nevada Inc., the Company’s wholly-owned subsidiary, is a member of South Edge together with unrelated homebuilders and a third-party property development firm.

The Petition alleged that South Edge failed to undertake certain development-related activities and to repay amounts due on secured loans that the petitioning lenders (as part of a lending syndicate) made to South Edge in 2004 and 2007, totaling $585.0 million in initial aggregate principal amount (the “Loans”), that the petitioning lenders were undersecured, and that South Edge was generally not paying its debts as they became due. The Loans were used by South Edge to partially finance both the purchase of certain real property located near Las Vegas, Nevada and the development of a residential community on that property. The Loans are secured by the underlying property and related South Edge assets. As of ~~May~~August 31, 2011, the outstanding principal balance of the Loans was $327.9 million.

The petitioning lenders also filed a motion to appoint a Chapter 11 trustee for South Edge, and asserted that, among other actions, the trustee can enforce alleged obligations of the South Edge members to purchase land parcels from South Edge, which would likely result in repayment of the Loans, or enforce alleged obligations of the South Edge members to make capital contributions to the South Edge bankruptcy estate. On February 3, 2011, the bankruptcy court entered an order for relief on the Petition and appointed a Chapter 11 trustee for South Edge. The Chapter 11 trustee may or may not pursue remedies proposed by the petitioning lenders, including attempted enforcement of alleged obligations of the South Edge members as described above.

As a result of the February 3, 2011 order for relief on the Petition, the Company considers it probable that it became responsible to pay certain amounts to the Administrative Agent related to the Springing Guaranty that

~~KB HOME~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

~~15.~~

~~Legal Matters (continued)~~

the Company provided in connection with the Loans, as discussed further above in Note 10. Investments in Unconsolidated Joint Ventures. Each of KB HOME Nevada Inc., the other members of South Edge and their parent companies provided a similar repayment guaranty to the Administrative Agent.

Effective June 10, 2011, the Company and the other Participating Members of South Edge became parties to a consensual agreement together with the Administrative Agent and several of the lenders to South Edge, as discussed above in Note 10. Investments in Unconsolidated Joint Ventures. The Chapter 11 trustee for South Edge has expressed its consent to the agreement. Each of the parties has agreed to use commercially reasonable efforts to support the Plan, to obtain bankruptcy court approval of a disclosure statement that will accompany the Plan, to obtain bankruptcy court confirmation of the Plan following, and subject to, the bankruptcy court’s approval of a disclosure statement, to obtain the requisite support of the South Edge lenders to the Plan, and to consummate the Plan promptly after confirmation, in each case by certain specified dates. Under the agreement, the effective date of the Plan following its confirmation is to occur on or before November 30, 2011, though it may be extended by the Participating Members and the Administrative Agent jointly by up to 30 days, depending on the date of Plan confirmation.

Pursuant to the terms of the Plan, the Company would pay to the South Edge lenders an amount between approximately $214 million and $225 million on the effective date of the Plan. The Company has deposited ~~approximately $21~~$21.4 million of this amount in an escrow ~~account.~~account, which is reflected as restricted cash in its consolidated balance sheet as of August 31, 2011. The other Participating Members also would pay certain amounts to the South Edge lenders on the effective date of the Plan and have similarly deposited amounts into ~~the~~an escrow account. The exact sum that the Company and the other Participating Members would pay to the South Edge lenders depends on the outcome of proceedings the Chapter 11 trustee for South Edge has commenced against, among others, a South Edge member that is not a Participating Member in order to determine the amount of pledged infrastructure development funds that can be applied to the South Edge debt. In addition to their payments to the South Edge lenders, each of the Company and the other Participating Members would each be responsible for certain fees, expenses and charges and for certain allowed general unsecured claims, and would

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

15.

Legal Matters (continued)

receive the benefit of potential contributions and recoveries that would, in the aggregate, affect their respective costs related to the Plan. Taking all of this into account, the Company estimates that its probable net payment obligation under the terms of the consensual agreement effective June 10, 2011 regarding the Plan is $226.4 million, though it could possibly be as high as $240 million.

If the Plan becomes effective, the Company anticipates that it would (a) acquire its share of the land owned by South Edge (amounting to at least approximately 65% of the land and as much as approximately 68%) as a result of a bankruptcy court-approved disposition of the land to a newly created entity in which the Company would expect to be a part owner, and (b) without further payment, satisfy or assume the respective liens of the Administrative Agent and the South Edge lenders on the land. In addition, if the Plan becomes effective, the Company anticipates that all South Edge-related claims, potential guaranty obligations (including the Company’s potential Springing Guaranty obligation), and litigation between the Administrative Agent (on behalf of itself and the South Edge lenders) and the Participating Members would be resolved, although lenders holding less than 8% ownership in the ~~loans~~Loans made to South Edge that are not currently expected to consent to the Plan and members of South Edge that are not Participating Members may assert certain claims against the Company, which claims the Company would vigorously dispute.

The agreement ~~is subject to bankruptcy court approval and~~ may be terminated by the Administrative Agent or the Participating Members upon the occurrence of certain specified events, including a failure to meet the specified dates on which the above-described activities in support of the Plan are to occur. ~~The Participating Members and~~On September 8, 2011, the ~~Administrative Agent currently expect~~bankruptcy court approved a disclosure statement designed to ~~file~~implement the Plan, and ~~accompanying disclosure statement with~~a hearing to confirm the ~~bankruptcy court in or around late July~~Plan is scheduled for October 17, 2011. As of the date of this report, the Company believes that the other Participating Members, the Administrative Agent and the South Edge lenders that are party to the agreement are able to and will fulfill their respective obligations as contemplated under the Plan if it becomes effective.

The Administrative Agent had previously filed lawsuits in December 2008 against the South Edge members and their respective parent companies (including the Company and KB HOME Nevada Inc.) (JP Morgan Chase Bank, N.A. v. KB HOME Nevada, et al., U.S. District Court, District of Nevada (Case No. 08-CV-01711 PMP) and consolidated and related actions) (the “Lender Litigation”). The Lender Litigation seeks to enforce

~~KB HOME~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

~~15.~~

~~Legal Matters (continued)~~

completion guarantees provided to the Administrative Agent in connection with the Loans, seeks to compel the South Edge members (including KB HOME Nevada Inc.) to purchase land parcels from South Edge, seeks to compel the South Edge members to provide certain financial support to South Edge, and also seeks various damages based on other guarantees and claims. The Lender Litigation has been stayed in light of the South Edge bankruptcy and, as stated above, would be resolved between the Administrative Agent (on behalf of itself and the South Edge lenders consenting to the Plan) and the Participating Members if the Plan becomes effective.

A separate arbitration proceeding was also commenced in May 2009 to address one South Edge member’s claims for specific performance by the other members to purchase land parcels from and to make certain capital contributions to South Edge or, in the alternative, damages. On July 6, 2010, the arbitration panel issued a decision denying the specific performance and damages claim asserted on behalf of South Edge, but the panel awarded the claimant damages of $36.8 million against all of the respondents. Motions to partially vacate the award were denied and judgment was entered on the award, which the respondents have appealed to the United States Courts of Appeal for the Ninth Circuit, titledFocus South Group, LLC, et al. v. KB HOME Nevada Inc, et al., (Case No. 10-17562).The appeal is pending. If the appeals of the arbitration panel’s July 6, 2010 decision ultimately are not successful, the Company has estimated that its probable maximum share of the $36.8 million awarded as damages to the claimant in the arbitration is approximately $25.5 million. This estimate is based on KB HOME Nevada Inc.’s interest in South Edge in relation to that of the other four respondents in the arbitration and the Company’s assumption that liability for the awarded amount would be joint and several among the five respondents. Although the appeal remains pending, the Company has since the third quarter of 2010 segregated an accrual for $25.5 million for this matter from its previously established reserve balances relating to South Edge. The ultimate amount of the Company’s share, however, could be subject to negotiations and/or potential arbitration among all of the respondents in the arbitration. The accrual for this matter is separate from the accrual the Company established with respect to its probable net payment obligation related to South Edge.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

15.

Legal Matters (continued)

The ultimate resolution of the South Edge bankruptcy, the Lender Litigation and the appeal of the arbitration panel decision, and the time at which any resolution is reached with respect to each matter, are uncertain and involve multiple factors, including whether the Plan becomes effective, as described above, the actions of the Chapter 11 trustee for South Edge, and court decisions. Further, the ultimate resolution of the South Edge bankruptcy (including with respect to the Company’s ~~potential~~anticipated net payment obligation related to South Edge), the Lender Litigation and the appeal of the arbitration panel decision could have a material effect on the Company’s liquidity, as further discussed below under “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

In addition to the specific proceedings described above, the Company is involved in other litigation and regulatory proceedings incidental to its business that are in various procedural stages. The Company believes that the accruals it has recorded for probable and reasonably estimable losses with respect to these proceedings are adequate and that, as of ~~May~~August 31, 2011, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the estimated amounts already recognized on the Company’s consolidated financial statements. The Company evaluates its accruals for litigation and regulatory proceedings at least quarterly and, as appropriate, adjusts them to reflect (i) the facts and circumstances known to the Company at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments; (ii) the advice and analyses of counsel; and (iii) the assumptions and judgment of management. Similar factors and considerations are used in establishing new accruals for proceedings as to which losses have become probable and reasonably estimable at the time an evaluation is made. Based on its experience, the Company believes that the amounts that may be claimed or alleged against it in these proceedings are not a meaningful indicator of its potential liability. The outcome of any of these proceedings, including the defense and other litigation-related costs and expenses the Company may incur, however, is inherently uncertain and could differ significantly from the estimate reflected in a related accrual, if made. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a related accrual or if no accrual had been made, could be material to the Company’s consolidated financial statements.

~~KB HOME~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

16.

Stockholders’ Equity

At ~~May~~August 31, 2011, the Company was authorized to repurchase 4,000,000 shares of its common stock under a board-approved share repurchase program. The Company did not repurchase any of its common stock under this program in the ~~six~~nine months ended ~~May~~August 31, 2011. The Company has not repurchased common shares pursuant to a common stock repurchase plan for the past several years and any resumption of such stock repurchases will be at the discretion of the Company’s board of directors.

During the three months ended February 28, 2011, the Company’s board of directors declared a cash dividend of $.0625 per share of common stock, which was paid on February 17, 2011 to stockholders of record on February 3, 2011. During the three months ended May 31, 2011, the Company’s board of directors declared a cash dividend of $.0625 per share of common stock, which was paid on May 19, 2011 to stockholders of record on May 5, 2011. During the three months ended August 31, 2011, the Company’s board of directors declared a cash dividend of $.0625 per share of common stock, which was paid on August 18, 2011 to stockholders of record on August 4, 2011. A cash dividend of $.0625 per share of common stock was also declared and paid during each of the ~~three months~~three-month periods ended February 28, 2010, May 31, 2010 and ~~the three months ended May~~August 31, 2010. The declaration and payment of future cash dividends on the Company’s common stock are at the discretion of the Company’s board of directors, and depend upon, among other things, the Company’s expected future earnings, cash flows, capital requirements, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions.

17.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06, “Improving Disclosures About Fair Value Measurements” (“ASU 2010-06”), which provides

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

17.

Recent Accounting Pronouncements (continued)

amendments to Accounting Standards Codification Subtopic No. 820-10, “Fair Value Measurements and ~~Disclosures~~Disclosures” — ~~Overall.”~~Overall (“ASC 820-10”). ASU 2010-06 requires additional disclosures and clarifications of existing disclosures for recurring and nonrecurring fair value measurements. The revised guidance was effective for the Company in the second quarter of 2010, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010. ASU 2010-06 concerns disclosure only and will not have a material impact on the Company’s consolidated financial position or results of operations.

In December 2010, the FASB issued Accounting Standards Update No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”), which addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in ASU 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in ASU 2010-29 also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in ASU 2010-29 are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company believes the adoption of this guidance concerns disclosure only and will not have a material impact on its consolidated financial position or results of operations.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and ~~IFRSs”~~IFRS” (“ASU 2011-04”), which changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements in order to improve consistency in the application and description of fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 clarifies how the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or of liabilities. In addition, the guidance expanded the disclosures for the unobservable inputs for Level 3 fair value measurements, requiring quantitative information to be disclosed related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs

~~KB HOME~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

~~17.~~

~~Recent Accounting Pronouncements (continued)~~

from the asset’s highest and best use. The revised guidance is effective for interim and annual periods beginning after December 15, 2011 and early application by public entities is prohibited. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial position and results of operations.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). The amendments in ASU 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments in ASU 2011-05 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company believes the adoption of this guidance concerns disclosure only and will not have a material impact on its consolidated financial position or results of operations.

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

18.

Income Taxes

The ~~Company’s~~Company had no income tax benefit ~~totaled $.3~~or expense for the three months ended August 31, 2011 and an income tax benefit of $5.3 million for the three months ended ~~May 31, 2011, compared to income tax expense of $.1 million for the three months ended May~~August 31, 2010. For the ~~six~~nine months ended ~~May~~August 31, 2011, ~~and 2010,~~ the Company’s income tax expense totaled $.1 million, ~~and $.3~~compared to an income tax benefit of $5.0 million ~~respectively.~~for the nine months ended August 31, 2010. Due to the effects of its deferred tax asset valuation allowances, carrybacks of its net operating losses (“NOLs”), and changes in its unrecognized tax benefits, the Company’s effective tax rates for the three-month and ~~six-month~~nine-month periods ended ~~May~~August 31, 2011 and 2010 are not meaningful items as the Company’s income tax amounts are not directly correlated to the amount of its pretax losses for those periods.

In accordance with Accounting Standards Codification Topic No. 740, “Income Taxes” (“ASC 740”), the Company evaluates its deferred tax assets quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a “more likely than not” standard. During the three months ended ~~May~~August 31, 2011, the Company recorded a valuation allowance of ~~$25.7~~$2.5 million against net deferred tax assets generated from the loss for the period. During the three months ended ~~May~~August 31, 2010, the Company recorded a net reduction of $2.4 million to the valuation allowance ~~of $12.8 million~~ against net deferred tax assets. The net reduction was comprised of a $5.4 million federal income tax benefit from the increased carryback of the Company’s 2009 net operating loss to offset earnings it generated in 2004 and 2005, partially offset by a $3.0 million valuation allowance recorded against the net deferred tax assets generated from the loss for the period. For the ~~six~~nine months ended ~~May~~August 31, 2011, ~~and 2010,~~ the Company recorded valuation allowances of ~~$70.8~~$73.3 million ~~and $34.0 million, respectively,~~ against the net deferred ~~taxes~~tax assets generated from losses for ~~those periods.~~ the period. For the nine months ended August 31, 2010, the Company recorded a net increase of $31.6 million to the valuation allowance against net deferred tax assets. The net increase was comprised of a $37.0 million valuation allowance recorded against the net deferred tax assets generated from the loss for the period, partially offset by the $5.4 million federal income tax benefit from the increased carryback of the Company’s 2009 net operating loss to offset earnings it generated in 2004 and 2005.

The Company’s net deferred tax assets totaled $1.1 million at both ~~May~~August 31, 2011 and November 30, 2010. The deferred tax asset valuation allowance increased to ~~$841.9~~$844.4 million at ~~May~~August 31, 2011 from $771.1 million at November 30, 2010. This increase reflected the impact of the ~~$70.8~~$73.3 million valuation allowance recorded during the ~~six~~nine months ended ~~May~~August 31, 2011.

During the three months ended ~~May~~August 31, 2011, the Company ~~had~~did not have a ~~$.3 million net reduction~~change to its total gross unrecognized tax ~~benefits as a result of the current status of federal and state audits.~~benefits. During the ~~six~~nine months ended ~~May~~August 31, 2011, net reductions to the Company’s total gross unrecognized tax benefits were $.3 million. The total amount of unrecognized tax benefits, including interest and penalties, was $6.6 million as of ~~May~~August 31, 2011. The Company anticipates that total unrecognized tax benefits will decrease by approximately $2.0 million during the 12 months from this reporting date due to various state filings associated with the resolution of the federal audit.

The benefits of the Company’s NOLs, built-in losses and tax credits would be reduced or potentially eliminated if the Company experienced an “ownership change” under Internal Revenue Code Section 382 (“Section 382”). Based on the Company’s analysis performed as of ~~May~~August 31, 2011, the Company does not believe that it has experienced an ownership change as defined by Section 382, and, therefore, the NOLs, built-in losses and tax credits the Company has generated should not be subject to a Section 382 limitation as of this reporting date.

Six Months Ended May 31,
2011 2010

Summary of cash and cash equivalents at end of period:
Homebuilding $ 621,304 $ 985,756
Financial services 5,892 3,621

Total $ 627,196 $ 989,377

Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized $ 22,544 $ 40,493
Income taxes paid 226 292
Income taxes refunded 182 191,342

Supplemental disclosures of noncash activities:
Increase in inventories in connection with consolidation of joint ventures $ — $ 72,300
Increase in accounts payable, accrued expenses and other liabilities in connection with consolidation of joint ventures — 38,861
Cost of inventories acquired through seller financing — 6,299
Increase (decrease) in consolidated inventories not owned 12,813 (35,556 )
Acquired property securing note receivable 40,000 —

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

19.

Supplemental Disclosure to Consolidated Statements of Cash Flows (continued)


	Nine Months Ended August 31,
	2011		2010

Summary of cash and cash equivalents at end of period:
Homebuilding	$	477,406	$	919,851
Financial services		2,867		3,756


Total	$	480,273	$	923,607


Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized	$	23,159	$	72,113
Income taxes paid		278		523
Income taxes refunded		182		191,345


Supplemental disclosures of noncash activities:
Increase in inventories in connection with consolidation of joint ventures	$	—	$	72,300
Increase in accounts payable, accrued expenses and other liabilities in connection with consolidation of joint ventures		—		38,861
Stock appreciation rights exchanged for stock options		—		1,816
Cost of inventories acquired through seller financing		—		53,125
Increase (decrease) in consolidated inventories not owned		9,596		(37,633	)
Acquired property securing note receivable		40,000		—

20.

Supplemental Guarantor Information

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

In connection with the Company’s voluntary termination of the Credit Facility effective March 31, 2010, the Released Subsidiaries were released and discharged from guaranteeing any obligations with respect to the Company’s senior notes. Accordingly, the supplemental financial information presented below reflects the relevant subsidiaries that were Guarantor Subsidiaries as of the respective periods then ended.

3132

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

20.

Supplemental Guarantor Information (continued)

Condensed Consolidated Statements of Operations
~~Six~~Nine Months Ended ~~May~~August 31, 2011 (in thousands)


																					Non-
	KB Home			Guarantor			Non-Guarantor			Consolidating					KB Home			Guarantor			Guarantor			Consolidating
	Corporate			Subsidiaries			Subsidiaries			Adjustments		Total			Corporate			Subsidiaries			Subsidiaries			Adjustments		Total

Revenues	$	—		$	131,894		$	336,784		$	—	$	468,678		$	—		$	241,702		$	594,292		$	—	$	835,994


Homebuilding:
Revenues	$	—		$	131,894		$	333,390		$	—	$	465,284		$	—		$	241,702		$	588,114		$	—	$	829,816
Construction and land costs		—			(114,128	)		(307,049	)		—		(421,177	)		—			(206,373	)		(517,712	)		—		(724,085	)
Selling, general and administrative expenses		(33,839	)		(9,935	)		(68,351	)		—		(112,125	)		(39,361	)		(23,735	)		(109,214	)		—		(172,310	)
Loss on loan guaranty		—			—			(37,330	)		—		(37,330	)		—			—			(37,330	)		—		(37,330	)


Operating income (loss)		(33,839	)		7,831			(79,340	)		—		(105,348	)		(39,361	)		11,594			(76,142	)		—		(103,909	)
Interest income		534			4			115			—		653			631			4			141			—		776
Interest expense		23,779			(21,392	)		(26,947	)		—		(24,560	)		37,025			(35,582	)		(38,345	)		—		(36,902	)
Equity in loss of unconsolidated joint ventures		—			(72	)		(55,857	)		—		(55,929	)		—			(5	)		(55,860	)		—		(55,865	)


Homebuilding pretax loss		(9,526	)		(13,629	)		(162,029	)		—		(185,184	)		(1,705	)		(23,989	)		(170,206	)		—		(195,900	)

Financial services pretax income		—			—			2,254			—		2,254			—			—			3,321			—		3,321


Total pretax loss		(9,526	)		(13,629	)		(159,775	)		—		(182,930	)		(1,705	)		(23,989	)		(166,885	)		—		(192,579	)
Income tax expense		—			—			(100	)		—		(100	)		—			—			(100	)		—		(100	)
Equity in net loss of subsidiaries		(173,504	)		—			—			173,504		—			(190,974	)		—			—			190,974		—


Net loss	$	(183,030	)	$	(13,629	)	$	(159,875	)	$	173,504	$	(183,030	)	$	(192,679	)	$	(23,989	)	$	(166,985	)	$	190,974	$	(192,679	)

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

20.

Supplemental Guarantor Information (continued)

Condensed Consolidated Statements of Operations
Three Months Ended ~~May~~August 31, 2011 (in thousands)


																					Non-
	KB Home			Guarantor			Non-Guarantor			Consolidating					KB Home			Guarantor			Guarantor			Consolidating
	Corporate			Subsidiaries			Subsidiaries			Adjustments		Total			Corporate			Subsidiaries			Subsidiaries			Adjustments		Total

Revenues	$	—		$	82,687		$	189,051		$	—	$	271,738		$	—		$	109,808		$	257,508		$	—	$	367,316


Homebuilding:
Revenues	$	—		$	82,687		$	187,296		$	—	$	269,983		$	—		$	109,808		$	254,724		$	—	$	364,532
Construction and land costs		—			(67,551	)		(182,830	)		—		(250,381	)		—			(92,245	)		(210,663	)		—		(302,908	)
Selling, general and administrative expenses		(15,169	)		(11,060	)		(36,291	)		—		(62,520	)		(5,522	)		(13,800	)		(40,863	)		—		(60,185	)
Loss on loan guaranty		—			—			(14,572	)		—		(14,572	)		—			—			—			—		—


Operating income (loss)		(15,169	)		4,076			(46,397	)		—		(57,490	)		(5,522	)		3,763			3,198			—		1,439
Interest income		221			—			49			—		270			97			—			26			—		123
Interest expense		13,929			(13,085	)		(13,965	)		—		(13,121	)		13,246			(14,190	)		(11,398	)		—		(12,342	)
Equity in loss of unconsolidated joint ventures		—			(29	)		(63	)		—		(92	)
Equity in income (loss) of unconsolidated joint ventures																—			67			(3	)		—		64


Homebuilding pretax loss		(1,019	)		(9,038	)		(60,376	)		—		(70,433	)
Homebuilding pretax income (loss)																7,821			(10,360	)		(8,177	)		—		(10,716	)

Financial services pretax income		—			—			1,629			—		1,629			—			—			1,067			—		1,067


Total pretax loss		(1,019	)		(9,038	)		(58,747	)		—		(68,804	)
Income tax benefit		—			100			200			—		300
Total pretax income (loss)																7,821			(10,360	)		(7,110	)		—		(9,649	)
Income tax expense																—			—			—			—		—
Equity in net loss of subsidiaries		(67,485	)		—			—			67,485		—			(17,470	)		—			—			17,470		—


Net loss	$	(68,504	)	$	(8,938	)	$	(58,547	)	$	67,485	$	(68,504	)	$	(9,649	)	$	(10,360	)	$	(7,110	)	$	17,470	$	(9,649	)

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

20.

Supplemental Guarantor Information (continued)

Condensed Consolidated Balance Sheets
~~May~~August 31, 2011 (in thousands)


																			Non-
	KB Home			Guarantor		Non-Guarantor		Consolidating					KB Home			Guarantor			Guarantor		Consolidating
	Corporate			Subsidiaries		Subsidiaries		Adjustments			Total		Corporate			Subsidiaries			Subsidiaries		Adjustments			Total

Assets
Homebuilding:
Cash and cash equivalents	$	491,384		$	7,524	$	122,396	$	—		$	621,304	$	422,406		$	13,466		$	41,534	$	—		$	477,406
Restricted cash		87,200			—		26,763		—			113,963		65,021			—			48,165		—			113,186
Receivables		3,865			10,011		56,477		—			70,353		(72,889	)		10,518			141,551		—			79,180
Inventories		—			846,864		1,048,117		—			1,894,981		—			832,252			1,068,328		—			1,900,580
Investments in unconsolidated joint ventures		—			38,203		12,933		—			51,136		—			38,216			13,039		—			51,255
Other assets		74,580			560		8,411		—			83,551		69,662			607			8,113		—			78,382

		657,029			903,162		1,275,097		—			2,835,288		484,200			895,059			1,320,730		—			2,699,989

Financial services		—			—		25,060		—			25,060		—			—			21,828		—			21,828
Investments in subsidiaries		31,260			—		—		(31,260	)		—		10,641			—			—		(10,641	)		—


Total assets	$	688,289		$	903,162	$	1,300,157	$	(31,260	)	$	2,860,348	$	494,841		$	895,059		$	1,342,558	$	(10,641	)	$	2,721,817


Liabilities and stockholders’ equity
Homebuilding:
Accounts payable, accrued expenses and other liabilities	$	128,981		$	149,642	$	443,338	$	—		$	721,961	$	121,480		$	140,274		$	438,072	$	—		$	699,826
Mortgages and notes payable		1,632,929			29,286		29,444		—			1,691,659		1,533,212			24,118			29,373		—			1,586,703

		1,761,910			178,928		472,782		—			2,413,620		1,654,692			164,392			467,445		—			2,286,529

Financial services		—			—		3,276		—			3,276		—			—			3,321		—			3,321
Intercompany		(1,517,073	)		724,234		792,839		—			—		(1,591,818	)		741,030			850,788		—			—
Stockholders’ equity		443,452			—		31,260		(31,260	)		443,452		431,967			(10,363	)		21,004		(10,641	)		431,967


Total liabilities and stockholders’ equity	$	688,289		$	903,162	$	1,300,157	$	(31,260	)	$	2,860,348	$	494,841		$	895,059		$	1,342,558	$	(10,641	)	$	2,721,817

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

20.

Supplemental Guarantor Information (continued)

Condensed Consolidated Statements of Cash Flows
~~Six~~Nine Months Ended ~~May~~August 31, 2011 (in thousands)


																						Non-
	KB Home			Guarantor			Non-Guarantor			Consolidating						KB Home			Guarantor			Guarantor			Consolidating
	Corporate			Subsidiaries			Subsidiaries			Adjustments			Total			Corporate			Subsidiaries			Subsidiaries			Adjustments			Total

Cash flows from operating activities:
Net loss	$	(183,030	)	$	(13,629	)	$	(159,875	)	$	173,504		$	(183,030	)	$	(192,679	)	$	(23,989	)	$	(166,985	)	$	190,974		$	(192,679	)
Adjustments to reconcile net loss to net cash used by operating activities:
Equity in loss of unconsolidated joint ventures		—			72			55,345			—			55,417			—			5			56,236			—			56,241
Loss on loan guaranty		—			—			37,330			—			37,330			—			—			37,330			—			37,330
Gain on sale of operating property		—			(8,825	)		—			—			(8,825	)		—			(8,825	)		—			—			(8,825	)
Inventory impairments and land option contract abandonments		—			663			21,682			—			22,345			—			991			22,516			—			23,507
Changes in assets and liabilities:
Receivables		340			(3,740	)		1,957			—			(1,443	)		77,094			(4,247	)		(83,787	)		—			(10,940	)
Inventories		—			(60,612	)		(107,180	)		—			(167,792	)		—			(49,142	)		(128,628	)		—			(177,770	)
Accounts payable, accrued expenses and other liabilities		4,374			(13,431	)		(19,023	)		—			(28,080	)		(3,127	)		(19,985	)		(23,841	)		—			(46,953	)
Other, net		(512	)		(3,007	)		6,273			—			2,754			6,566			(2,989	)		6,573			—			10,150


Net cash used by operating activities		(178,828	)		(102,509	)		(163,491	)		173,504			(271,324	)		(112,146	)		(108,181	)		(280,586	)		190,974			(309,939	)


Cash flows from investing activities:
Investments in unconsolidated joint ventures		—			(1,388	)		(531	)		—			(1,919	)		—			(1,334	)		(640	)		—			(1,974	)
Proceeds from sale of operating property		—			80,600			—			—			80,600			—			80,600			—			—			80,600
Sales (purchases) of property and equipment, net		(289	)		(14	)		195			—			(108	)		(178	)		(81	)		185			—			(74	)


Net cash provided (used) by investing activities		(289	)		79,198			(336	)		—			78,573			(178	)		79,185			(455	)		—			78,552


Cash flows from financing activities:
Change in restricted cash		1,514			—			—			—			1,514			23,692			—			(21,401	)		—			2,291
Repayment of senior notes																	(100,000	)		—			—			—			(100,000	)
Payments on mortgages and land contracts due to land sellers and other loans		—			(79,471	)		(1,355	)		—			(80,826	)		—			(84,638	)		(1,426	)		—			(86,064	)
Issuance of common stock under employee stock plans		442			—			—			—			442			1,426			—			—			—			1,426
Payments of cash dividends		(9,613	)		—			—			—			(9,613	)		(14,423	)		—			—			—			(14,423	)
Intercompany		(92,445	)		106,687			159,262			(173,504	)		—			(146,568	)		123,481			214,061			(190,974	)		—


Net cash provided (used) by financing activities		(100,102	)		27,216			157,907			(173,504	)		(88,483	)		(235,873	)		38,843			191,234			(190,974	)		(196,770	)


Net increase (decrease) in cash and cash equivalents		(279,219	)		3,905			(5,920	)		—			(281,234	)		(348,197	)		9,847			(89,807	)		—			(428,157	)
Cash and cash equivalents at beginning of period		770,603			3,619			134,208			—			908,430			770,603			3,619			134,208			—			908,430


Cash and cash equivalents at end of period	$	491,384		$	7,524		$	128,288		$	—		$	627,196		$	422,406		$	13,466		$	44,401		$	—		$	480,273

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

20.

Supplemental Guarantor Information (continued)

~~Six~~Nine Months Ended ~~May~~August 31, 2010 (in thousands)


																						Non-
	KB Home			Guarantor			Non-Guarantor			Consolidating						KB Home			Guarantor			Guarantor			Consolidating
	Corporate			Subsidiaries			Subsidiaries			Adjustments			Total			Corporate			Subsidiaries			Subsidiaries			Adjustments			Total

Cash flows from operating activities:
Net loss	$	(85,413	)	$	(20,098	)	$	(23,234	)	$	43,332		$	(85,413	)	$	(86,610	)	$	(25,443	)	$	(16,978	)	$	42,221		$	(86,810	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Equity in (income) loss of unconsolidated joint ventures																	—			148			(1,415	)		—			(1,267	)
Inventory impairments and land option contract abandonments		—			1,196			12,166			—			13,362			—			1,671			15,068			—			16,739
Changes in assets and liabilities:
Receivables		187,918			(6,535	)		2,034			—			183,417			182,187			(3,027	)		3,602			—			182,762
Inventories		—			(17,601	)		(137,613	)		—			(155,214	)		—			(60,018	)		(89,003	)		—			(149,021	)
Accounts payable, accrued expenses and other liabilities		(787	)		(16,996	)		(63,826	)		—			(81,609	)		(27,757	)		(29,692	)		(89,874	)		—			(147,323	)
Other, net		478			23			12,352			—			12,853			(7,304	)		867			27,214			—			20,777


Net cash provided (used) by operating activities		102,196			(60,011	)		(198,121	)		43,332			(112,604	)		60,516			(115,494	)		(151,386	)		42,221			(164,143	)


Cash flows from investing activities:
Investments in unconsolidated joint ventures		—			(56	)		(1,700	)		—			(1,756	)		—			(212	)		(1,321	)		—			(1,533	)
Purchases of property and equipment, net		(21	)		(58	)		(375	)		—			(454	)		(213	)		(63	)		(366	)		—			(642	)


Net cash used by investing activities		(21	)		(114	)		(2,075	)		—			(2,210	)		(213	)		(275	)		(1,687	)		—			(2,175	)


Cash flows from financing activities:
Change in restricted cash		31,614			(25,079	)		—			—			6,535			22,689			(24,781	)		—			—			(2,092	)
Payments on mortgages and land contracts due to land sellers and other loans		—			(53,354	)		(18,474	)		—			(71,828	)		—			(53,354	)		(20,017	)		—			(73,371	)
Issuance of common stock under employee stock plans		897			—			—			—			897			1,609			—			—			—			1,609
Excess tax benefit associated with exercise of stock options		583			—			—			—			583			583			—			—			—			583
Payments of cash dividends		(9,607	)		—			—			—			(9,607	)		(14,415	)		—			—			—			(14,415	)
Repurchases of common stock		(350	)		—			—			—			(350	)		(350	)		—			—			—			(350	)
Intercompany		(284,899	)		105,104			223,127			(43,332	)		—			(288,924	)		154,796			176,349			(42,221	)		—


Net cash provided (used) by financing activities		(261,762	)		26,671			204,653			(43,332	)		(73,770	)		(278,808	)		76,661			156,332			(42,221	)		(88,036	)


Net increase (decrease) in cash and cash equivalents		(159,587	)		(33,454	)		4,457			—			(188,584	)		(218,505	)		(39,108	)		3,259			—			(254,354	)
Cash and cash equivalents at beginning of period		995,122			44,478			138,361			—			1,177,961			995,122			44,478			138,361			—			1,177,961


Cash and cash equivalents at end of period	$	835,535		$	11,024		$	142,818		$	—		$	989,377		$	776,617		$	5,370		$	141,620		$	—		$	923,607

~~KB HOME~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

~~21.~~

~~Subsequent Events (continued)~~

~~South Edge land the Company expects~~amounts to acquire as a result of satisfying the payment obligation, the Company recorded a loss on loan guaranty of $14.6 million in the quarter ended May 31, 2011. This loss on loan guaranty was in addition to the $22.8 million loss on loan guaranty the Company recorded in the first quarter of 2011 based on its estimate of its probable net payment obligation at February 28, 2011. The Company also recognized a pretax, noncash joint venture impairment charge of $53.7 million in the first quarter of 2011 to write off its investment in South Edge.

As discussed above in Note 3. Segment Information, effective June 27, 2011, KBA Mortgage ceased accepting loan applications, and it ceased offering mortgage banking services to the Company’s homebuyers after June 30, 2011. As a result, the Company anticipates that income generated in its financial services segment from its equity in income of the unconsolidated mortgage banking joint venture (i.e., KBA Mortgage), which the Company reported in the three-month and six-month periods ended May 31, 2011 and 2010, will decline substantially in the quarter ending August 31, 2011 and that no such income will be generated in subsequent periods. The Company’s marketing services agreement with MetLife Home Loans, effective June 27, 2011, does not provide the Company with any ownership, joint venture or other interests in or with MetLife Home Loans or MetLife Bank, N.A. or with respect to the revenues or income that may be generated from MetLife Home Loans’ providing mortgage banking services to, or originating residential consumer mortgage loans for, the Company’s homebuyers. MetLife Home Loans and MetLife Bank, N.A. are not affiliates of the Company or any of its subsidiaries. Therefore, unlike the Company’s prior participation in KBA Mortgage, the Company’s marketing services agreement with MetLife Home Loans will not result in any income for the Company based on an equity interest. The Company will be compensated solely for the fair market value of the services it provides. The Company’s homebuyers are under no obligation to use MetLife Home Loans and may select any lender of their choice to obtain mortgage financing for the purchase of a home.determined.

InDespite historically high levels of housing affordability and low interest rates for residential consumer mortgage loans, housing market conditions were difficult in the ~~second~~third quarter of 2011, ~~housing market conditions remained difficult,~~ reflecting ~~the housing market downturn that has persisted since 2006. These conditions stem from~~ an ~~ongoing~~ oversupply of homes available for sale that has persisted throughout the year and significantly restrained consumer demand for ~~housing, particularly following the expiration~~housing. The oversupply of ~~the federal homebuyer tax credit in the second quarter of 2010. Key factors negatively impacting housing markets in the second quarter of 2011 include the large~~homes available for sale has stemmed largely from a sizeable and generally rising inventory of lender-owned homes that were acquired through foreclosures and short ~~sales;~~sales, a factor that is expected to continue in the fourth quarter of 2011 and into 2012. Consumer demand was affected by, among other things, turbulent macroeconomic conditions and the inability of policymakers to effectively respond to such conditions, a generally weak and ~~uneven economic and~~uncertain employment ~~environment; tighter~~environment, low confidence levels, tight residential consumer mortgage lending standards and reduced credit availability for residential consumer mortgage ~~loans; low levels of consumer confidence;~~loans. Compounding the negative supply and demand environment in the third quarter was intense competition for home sales among homebuilders and sellers of resale and foreclosed homes. Despite historically high housing affordability, uncertainty and caution about the economy are leading many qualified homebuyers to delay purchasing a home, which, among other things, is moderating the pace of net orders at our new home communities. ThoughWhile select markets for new homes are showing signs of stability, ~~it is difficult~~we do not anticipate a full housing recovery without broad, sustainable employment growth and increased consumer confidence.

decreased on a year-over-year basis, reflecting prevailing market conditions and strategic actions we have taken in earlier periods to align our operations with those conditions. ~~In particular, our 2011 second quarter results reflect the effect of the April 30, 2010 expiration of the federal homebuyer tax credit, which motivated a surge~~However, we succeeded in demand and a significant increase in net order volume in the second quarter of our 2010 fiscal year, followed by sharp declines in the second half of 2010 and into 2011 as demand returned towards its trend pattern levels of the past few years. At the same time, we substantially ~~reduced~~reducing our selling, general and administrative expenses and increasing our net orders and backlog in the 2011 ~~second~~third quarter compared to the year-earlier ~~quarter and~~quarter. In addition, we made investments in land and land development to support future growth in our ~~community count,~~new home communities, deliveries and revenues. As in previous quarters in 2011, the majority of our investments in land and land development were made in California and Texas, and we expect to continue to target most of our inventory-related investments in those states in the fourth quarter and into 2012. While ~~it remains uncertain when~~the scope and timing of a sustained housing market recovery ~~will occur,~~remains uncertain, we believe that our focus on growing our ~~community count~~new home communities in relatively healthy housing markets and on ~~continuing to execute~~executing on ~~the~~ initiatives that support our three primary goals will help position us operationally and financially to support our current business operations and to take advantage of ~~any~~ future ~~improvements~~opportunities in housing markets as they ~~occur.~~arise.

Our total revenues of ~~$271.7~~$367.3 million for the three months ended ~~May~~August 31, 2011 decreased 27% from ~~$374.1~~$501.0 million for the three months ended ~~May~~August 31, 2010, ~~primarily~~mainly due to lower housing revenues. Housing revenues declined 27% to ~~$270.0~~$364.4 million in the ~~second~~third quarter of 2011 from ~~$370.4~~$496.9 million in the year-earlier quarter, ~~due to~~reflecting a ~~29%~~31% decrease in the number of homes delivered, which was partly offset by a 3%6% increase in the average selling price. We use the term “home” in this discussion and analysis to refer to a single-family residence, whether it is a single-family home or other type of residential property. We delivered ~~1,265~~1,603 homes in the ~~second~~third quarter of 2011 at an average selling price of ~~$213,400,~~$227,400, compared with ~~1,782~~2,320 homes delivered at an average selling price of ~~$207,900~~$214,200 in the year-earlier quarter.

~~The year-over-year decrease~~We delivered fewer homes in the ~~number of homes delivered in the second~~third quarter of 2011 ~~was largely~~as compared to the year-earlier quarter, primarily due to our relatively low backlog level at the beginning of the quarter. At the start of our 2011 ~~second~~third quarter, the number of homes in our backlog was down ~~38% on a year-over-year basis,~~24% from the previous year, reflecting the year-over-year decline in net orders we experienced in the ~~fourth quarter of 2010 and the~~ first ~~quarter~~two quarters of 2011 due to generally weak housing market conditions and to the ~~sharp reduction~~after effects of a temporary surge in demand ~~following~~in the first two quarters of 2010 that was motivated by the April 30, 2010 expiration of the federal homebuyer tax credit. To a lesser extent, the number of homes in our backlog at the beginning of the 2011 ~~second~~third quarter was also negatively affected by the strategic community count reductions we made in ~~selected underperforming~~select markets ~~where we have curtailed land acquisition and development activities,~~in prior periods to align our operations with ~~reduced~~prevailing housing market ~~activity and to support our profitability and balance sheet goals.~~activity. In light of our more recent investments in land and land development to support future growth, ~~though,~~ we anticipate continuing to gradually ~~increasing~~increase the number of new home communities ~~we operate during 2011,~~in the fourth quarter and into 2012, as further discussed below under “Outlook.”

Our average selling price for the three months ended August 31, 2011 increased ~~on a year-over-year basis in~~relative to the ~~second quarter of 2011,~~year-earlier period, primarily due to a change in the proportion of homes delivered from higher-priced communities and a shift in product mix. The year-over-year increase in our average selling price in the three months ended ~~May~~August 31, 2011 ~~relative to the year-earlier quarter~~ reflected increases of 6%, 3% and ~~28%~~15% in our Southwest, Central and Southeast homebuilding reporting segments, respectively, partly offset by ~~decreases~~a decrease of ~~7% and 3%~~5% in our West Coast ~~and Southwest~~ homebuilding reporting ~~segments, respectively.~~segment.

Included in our total revenues were financial services revenues of ~~$1.8~~$2.8 million in the third quarter of 2011 and $2.2 million in the third quarter of 2010. The increase in financial services revenues in the three months ended ~~May~~August 31, ~~2011 and $1.5 million in the three months ended May 31, 2010. Financial services revenues increased in the second quarter of~~ 2011 compared to the year-earlier period reflected revenues associated with our marketing services agreement with MetLife Home Loans, which became effective in the third quarter ~~primarily due to~~of 2011, and higher title services revenues. The revenues associated with our marketing services agreement represent the fair market value of the services we provided in connection with the agreement.

We ~~generated~~posted a net loss of $9.6 million, or $.13 per diluted share, for the three months ended August 31, 2011, compared to a net loss of $1.4 million, or $.02 per diluted share, for the corresponding period of 2010. Our 2011 third quarter net loss included pretax, noncash charges of $1.2 million for inventory impairments and land option contract abandonments, compared to $3.4 million of similar charges in the year-earlier quarter. Our third quarter net loss improved substantially from the net loss of $68.5 million, or $.89 per diluted share, reported in the second quarter of 2011.

Our homebuilding operations posted operating income of $1.4 million for the three months ended ~~May~~August 31, 2011 ~~compared to a net loss of $30.7~~and $8.4 million ~~or $.40 per diluted share,~~ for the three months ended ~~May~~August 31, 2010. ~~Our 2011 second quarter net loss included pretax, noncash charges of $20.6 million for inventory impairments~~The year-over-year decrease in homebuilding operating income reflected lower gross profits, which were partly offset by lower selling, general and ~~land option contract abandonments, and a loss on loan guaranty of $14.6 million related to South Edge. Our net loss for the quarter ended May 31, 2010 included no such charges.~~ administrative expenses.

The ~~loss on loan guaranty recorded~~decrease in gross profits in the third quarter of 2011 ~~second~~from the year-earlier quarter resulted from our updated estimate of our probable net payment obligation to reflect the terms of the agreement effective June 10, 2011 regarding the Plan, as discussed below under “Off-Balance Sheet Arrangements, Contractual Obligationsfewer homes delivered and ~~Commercial Commitments” and “Part II — Item 1. Legal Proceedings.”~~

a lower housing gross margin. Our housing gross margin decreased to ~~7.3%~~16.9% in the ~~second~~third quarter of 2011 from ~~17.7%~~17.5% in the year-earlier quarter. Our 2011 third quarter housing gross margin included $7.4 million of favorable warranty adjustments that resulted from trends in our overall warranty claims experience on homes previously delivered, which were partly offset by $1.2 million of inventory impairment and land option contract abandonment charges. In the year-earlier quarter, the housing gross margin included $3.4 million of such charges. Our housing gross margin, excluding inventory impairment and land option contract abandonment charges, was ~~14.9%~~17.2% in the ~~second~~third quarter of 2011, compared to ~~17.7%~~18.2% in the year-earlier quarter. The year-over-year decrease in our housing gross margin, excluding inventory impairment and land option contract abandonment charges, was ~~due to~~largely the result of reduced ~~operating~~ leverage from ~~the~~a lower volume of homes delivered

~~competitive pricing pressure in certain markets, a higher proportion of homes delivered from communities with lower margin levels~~ and a shift in product ~~mix. On a sequential basis,~~mix, partly offset by the warranty adjustments. However, our 2011 third quarter housing gross margin, excluding inventory impairment and land option contract abandonment charges, ~~for~~continued to improve on a sequential basis, up from 13.4% and 14.9% in the first and second ~~quarter~~quarters of 2011, ~~improved by 1.5 percentage points as compared to the first quarter of 2011.~~ respectively.

Our selling, general and administrative expenses of ~~$62.5~~$60.2 million for the three months ended ~~May~~August 31, 2011 decreased ~~25%~~by $18.4 million, or 23%, from ~~$83.0~~$78.6 million for the year-earlier period, ~~due to~~reflecting our ongoing efforts to streamline our organizational structure and reduce overhead costs while maintaining a ~~drop in~~solid growth platform, the recovery of legal expenses from insurance carriers, and ~~the lower volume of~~fewer homes delivered. As a percentage of housing revenues, selling, general and administrative expenses ~~increased slightly to 23.2%~~of 16.5% for the three months ended ~~May~~August 31, 2011 ~~from 22.4% for the year-earlier period, reflecting the year-over-year decrease in housing revenues, though the percentage~~ improved ~~sequentially~~on a sequential basis from 25.4% ~~for~~in the first quarter and 23.2% in the second quarter of 2011. In the third quarter of 2010, this ratio was 15.8%.

Total revenues for the ~~six~~nine months ended ~~May~~August 31, 2011 were ~~$468.7~~$836.0 million, down 27% from ~~$638.0 million~~$1.14 billion for the year-earlier period. Included in our total revenues were financial services revenues of ~~$3.4~~$6.2 million for the first ~~six~~nine months of 2011 and ~~$3.0~~$5.2 million for the year-earlier period. Our net loss for the ~~six~~nine months ended ~~May~~August 31, 2011 totaled ~~$183.0~~$192.7 million, or ~~$2.38~~$2.50 per diluted share, including pretax, noncash charges of ~~$22.4~~$23.5 million for inventory impairments and land option contract abandonments. Our net loss for the ~~six~~nine months ended ~~May~~August 31, 2011 also included a pretax, noncash joint venture impairment charge of $53.7 million and a loss on loan guaranty of $37.3 million, both related to our investment in South Edge. For the ~~six~~nine months ended ~~May~~August 31, 2010, we incurred a net loss of ~~$85.4~~$86.8 million, or ~~$1.11~~$1.13 per diluted share, including pretax, noncash charges of ~~$13.4~~$16.7 million for inventory impairments and land option contract abandonments.

We ended the ~~second~~2011 third quarter with a total of ~~2011 with $735.3~~$590.6 million of cash and cash equivalents and restricted cash, of which ~~$621.3~~$113.2 million was ~~unrestricted.~~restricted. Our debt balance of ~~$1.69~~$1.59 billion at ~~May~~August 31, 2011 decreased from $1.78 billion at November 30, 2010 due to the repayment of $100.0 million in aggregate principal amount of our $100 Million Senior Notes upon their August 15, 2011 maturity, and the repayment of secured debt. Our ratio of debt to total capital was ~~79.2%~~78.6% at ~~May~~August 31, 2011 and 73.8% at November 30, 2010. Our ratio of net debt to total capital, which reflects our cash position, was ~~68.3%~~69.8% at ~~May~~August 31, 2011, compared to 54.5% at November 30, 2010.

Our total backlog at ~~May~~August 31, 2011 was comprised of ~~2,422~~2,657 homes, representing projected future housing revenues of approximately ~~$501.5~~$559.3 million, compared to a backlog at ~~May~~August 31, 2010 of ~~3,175~~2,169 homes, representing projected future housing revenues of approximately ~~$648.2~~$455.3 million. The number of homes in our backlog ~~decreased 24%~~increased 22% year over year, ~~mainly due to a decline~~reflecting an increase in our net orders in the ~~first and second quarters~~third quarter of ~~2011.~~2011 relative to the year-earlier quarter. Net orders from our homebuilding operations ~~decreased 11%~~increased 40% to ~~1,998~~1,838 in the ~~second~~third quarter of 2011 from ~~2,244~~1,314 in the ~~second~~third quarter of 2010. Net orders rose in each of our homebuilding reporting segments, with increases ranging from 22% in our Central homebuilding reporting segment to 73% in our West Coast homebuilding reporting segment. The ~~negative~~favorable year-over-year net order ~~comparison was primarily due to generally weak housing market conditions and to~~comparisons in the ~~sharp reduction~~third quarter of 2011 partly reflected activity from recently opened communities as well as depressed net orders in ~~demand following~~ the year-earlier period stemming from the impact of the April 30, 2010 expiration of the federal homebuyer tax credit. ~~Notwithstanding~~Reflecting the ~~impact of the expiration of the federal homebuyer tax credit, the year-over-year second quarter comparison improved from the 32% year-over-year decrease in net orders that~~land and land development investments we ~~reported~~have made since 2009 to maintain a solid growth platform, we opened over 60 new home communities in the first half of 2011 and an additional 33 communities in the third quarter of 2011. Given construction cycle times, we anticipate delivering homes and realizing revenues from the net orders generated in these newly opened communities in the coming quarters. Our cancellation rate as a percentage of gross orders was ~~25%~~29% in the ~~second~~third quarter of 2011 and ~~24%~~33% in the ~~year-earlier quarter.~~third quarter of 2010.

Revenues. Homebuilding revenues totaled ~~$270.0~~$364.5 million for the ~~three months ended May 31,~~third quarter of 2011, decreasing by ~~$102.5~~$134.3 million, or ~~28%~~27%, from ~~$372.5~~$498.8 million for the ~~three months ended May 31,~~third quarter of 2010 due to declines in housing and land sale revenues. Housing revenues of ~~$270.0~~$364.4 million for the three months ended ~~May~~August 31, 2011 ~~declined~~decreased by ~~$100.4~~$132.5 million, or 27%, from ~~$370.4~~$496.9 million for the year-earlier period, asreflecting a ~~result of a 29%~~31% decrease in the number of homes delivered, partially offset by a 3%6% increase in the average selling price. We delivered ~~1,265~~1,603 homes in the ~~second quarter of~~three months ended August 31, 2011, down from ~~1,782~~2,320 homes delivered in the year-earlier ~~quarter.~~period. The decrease in homes delivered was ~~largely~~partly due to our relatively low backlog level at the beginning of our 2011 ~~second~~third quarter, which was down ~~38%~~24% on a year-over-year basis. The lower beginning backlog reflected softness in net orders in the ~~fourth quarter of 2010~~first and ~~first quarter~~second quarters of 2011 as a result of generally weak housing market conditions, ~~reduced~~the after effects of a temporary surge in demand ~~following~~in the first two quarters of 2010 that was motivated by the April 30, 2010 expiration of the federal homebuyer tax credit, and ~~our~~the strategic community count reductions we made in ~~selected underperforming~~select markets in ~~previous quarters~~prior periods to align our operations with ~~reduced~~prevailing housing market activity.

changes in the proportion of homes delivered from higher-priced communities and a shift in product mix.

~~During~~For the three months ended ~~May~~August 31, 2011, ~~there were no~~ land sale revenues totaled $.1 million, compared to land sale revenues of ~~$2.1~~$1.9 million for the three months ended ~~May~~August 31, 2010. For the ~~six~~nine months ended ~~May~~August 31, 2011, revenues from land sales totaled ~~$.1~~$.2 million, compared to ~~$2.4~~$4.4 million for the corresponding period of 2010. Generally, land sale revenues fluctuate with our decisions to maintain or decrease our land ownership position in certain markets based upon the volume of our holdings, our marketing strategy, the strength and number of competing developers entering particular markets at given points in time, the availability of land in markets we serve and prevailing market conditions.

Operating ~~Loss~~Income (Loss). Our homebuilding business generated operating ~~losses~~income of ~~$57.5~~$1.4 million for the three months ended ~~May~~August 31, 2011 and ~~$17.3~~$8.4 million for the three months ended ~~May~~August 31, ~~2010 as a result of losses from our housing operations.~~2010. Within our homebuilding operations, ~~our~~the year-over-year decline in operating income for the three months ended August 31, 2011 ~~second quarter operating loss~~ reflected ~~$20.6 million of pretax, noncash inventory impairment and land option contract abandonment charges,~~ lower gross profits compared to the year-earlier quarter, partly offset by reduced selling, general and ~~a $14.6 million loss on loan guaranty.~~administrative expenses. The decrease in gross profits for the three months ended ~~May~~August 31, 2011 ~~reflected~~resulted from fewer homes delivered and a lower housing gross margin. The loss on loan guaranty resulted from our updated estimate of our probable net payment obligation to reflect the terms of the agreement effective June 10, 2011 regarding the Plan. Based on the agreement and the Plan, our consolidated financial statements at May 31, 2011 reflect a net payment obligation of $226.4 million, representing our estimate of the probable amount that we would pay to the Administrative Agent (on behalf of the South Edge lenders) related to the Springing Guaranty and to pay for certain fees, expenses and charges and for certain allowed general unsecured claims in the South Edge bankruptcy case, as discussed below under “Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments.” In satisfying this payment obligation, we would expect to assume the lenders’ lien position and/or become a part owner of an entity that would acquire the land owned by South Edge through a bankruptcy court-approved process. Therefore, we currently expect to be able to realize the value of our share of the South Edge land. Thus, in our consolidated financial statements, our probable net payment obligation is partially offset by $75.2 million, the estimated fair value of our share of the South Edge land at May 31, 2011.

Our housing gross margin decreased by ~~10.4~~.6 percentage points to ~~7.3%~~16.9% in the ~~second~~third quarter of 2011 from ~~17.7%~~17.5% in the year-earlier quarter. The housing gross margin for the third quarter of 2011 included $7.4 million of favorable warranty adjustments resulting from trends in our overall warranty claims experience on homes previously delivered, which were partly offset by $1.2 million of inventory impairment and land option contract abandonment charges. In the year-earlier quarter, we had $3.4 million of inventory impairment and land option contract abandonment charges. Our housing gross margin, excluding inventory impairment and land option contract abandonment charges, was ~~14.9%~~17.2% in the ~~second~~third quarter of 2011 and ~~17.7%~~18.2% in the ~~second~~third quarter of 2010. The year-over-year decrease in our housing gross margin, excluding inventory impairment and land option contract abandonment charges, was ~~driven by a combination~~largely the result of reduced ~~operating~~ leverage from the lower volume of homes delivered ~~competitive pricing pressure in certain markets, a higher proportion of homes delivered from communities with lower margin levels~~ and a shift in product ~~mix.~~mix, partly offset by the warranty adjustments. On a sequential basis, our 2011 ~~second~~third quarter housing gross margin, excluding inventory impairment and land option contract abandonment charges, ~~improved by 1.5 percentage points as compared~~continued to improve, up from 13.4% and 14.9% in the first and second quarters of 2011, ~~first quarter.~~respectively.

Our land sales generated break-even results in the ~~three months~~three-month periods ended ~~May~~August 31, 2011 and 2010.

Selling, general and administrative expenses totaled ~~$62.5~~$60.2 million in the three months ended ~~May~~August 31, 2011, decreasing by ~~$20.5~~$18.4 million, or ~~25%~~23%, from ~~$83.0~~$78.6 million in the year-earlier period. The year-over-year decrease was mainly due to our ongoing efforts to streamline our organizational structure and reduce overhead costs while maintaining a ~~drop in~~solid growth platform, the recovery of legal expenses from insurance carriers, and fewer homes delivered. As a percentage of housing revenues, selling, general and administrative expenses ~~increased slightly to~~were 16.5%, improving on a sequential basis from 25.4% in the first quarter and 23.2% in the second quarter of 2011. In the three months ended ~~May~~August 31, ~~2011 from 22.4% in the corresponding~~ 2010, period, reflecting the year-over-year decrease in housing revenues. Sequentially, selling, general and administrative expenses as a percentage of housing revenues for the second quarter of 2011 improved by 2.2 percentage points from 25.4% for the first quarter of 2011.this ratio was 15.8%.

Our homebuilding business posted operating losses of ~~$105.3~~$103.9 million for the ~~six~~nine months ended ~~May~~August 31, 2011 and ~~$53.6~~$45.1 million for the ~~six~~nine months ended ~~May~~August 31, 2010, due to losses from housing operations. Within our homebuilding operations, our operating loss for the first ~~six~~nine months of 2011 increased by ~~$51.8~~$58.8 million from the year-earlier period due to higher pretax, noncash inventory impairment and land option contract abandonment charges, lower gross profits compared to the year-earlier period and a $37.3 million loss on loan guaranty. The decrease in gross profits for the ~~six~~nine months ended ~~May~~August 31, 2011 reflected fewer homes delivered and a lower housing gross margin. The loss on loan guaranty resulted from recording our estimate of our probable net payment obligation related to the Springing Guaranty during the first quarter of 2011 and updating this estimate in the second quarter of 2011 to reflect the terms of the consensual agreement effective June 10, 2011 regarding the Plan. The $37.3 million ~~charge we recognized to reflect the~~ loss on loan guaranty iswas in addition to the pretax, noncash

In the first ~~six~~nine months of 2011, our housing gross margin decreased by ~~6.6~~4.0 percentage points to ~~9.5%~~12.7% from ~~16.1%~~16.7% in the year-earlier period. For the nine months ended August 31, 2011, our housing gross margin included $23.5 million of inventory impairments and land option contract abandonments, which were partly offset by $6.2 million of favorable net warranty adjustments, largely due to the $7.4 million of favorable warranty adjustments recorded in the 2011 third quarter. For the nine months ended August 31, 2010, our housing gross margin included inventory impairments and land option contract abandonments of $16.7 million. Our housing gross margin, excluding inventory impairment and land option contract abandonment charges, was ~~14.3%~~15.6% in the ~~six~~nine months ended ~~May~~August 31, 2011 and 18.2% in the ~~six~~nine months ended ~~May~~August 31, 2010. The year-over-year decrease in our housing gross margin, excluding inventory impairment and land option contract abandonment charges, reflected the same factors described above ~~regarding the reduction in our housing gross margin in~~for the 2011 ~~second~~third quarter.

Selling, general and administrative expenses decreased by ~~$43.1~~$61.5 million, or ~~28%~~26%, to ~~$112.1~~$172.3 million in the ~~six~~nine months ended ~~May~~August 31, 2011 from ~~$155.2~~$233.8 million in the corresponding period of ~~2010.~~2010 primarily due to our ongoing efforts to streamline our organizational structure and reduce overhead costs while maintaining a solid growth platform, the recovery of legal expenses from insurance carriers and fewer homes delivered. As a percentage of housing revenues, selling, general and administrative expenses ~~decreased to 24.1%~~of 20.8% in the first ~~six~~nine months of 2011 ~~from 24.5%~~were nearly flat with the 20.7% posted in the year-earlier ~~period, primarily due to the year-over-year reduction in our expenses.~~period.

Our land sales generated break-even results in the ~~six~~nine months ended ~~May~~August 31, 2011 and 2010.

Pretax, noncash inventory impairment and land option contract abandonment charges totaled $20.6 million in the three months ended May 31, 2011. There were no such charges for the three months ended May 31, 2010. For the six months ended May 31, 2011 and 2010, pretax, noncash inventory impairment and land option contract abandonment charges totaled $22.4 million and $13.4 million, respectively. Each land parcel or community in our owned inventory is assessed to determine if indicators of potential impairment exist. Impairment indicators are assessed separately for each land parcel or community on a quarterly basis. We evaluated 33 land parcels or communities and 28 land parcels or communities for recoverability during the three months ended May 31, 2011 and 2010, respectively. We evaluated 64 land parcels or communities and 55 land parcels or communities for recoverability during the six months ended May 31, 2011 and 2010, respectively.

When an indicator of potential impairment is identified for a land parcel or community, we test the asset for recoverability by comparing the carrying value of the asset to the undiscounted future net cash flows expected to be generated by the asset. The undiscounted future net cash flows are impacted by then-current conditions and trends in the market in which an asset is located as well as factors known to us at the time the cash flows are calculated. The undiscounted future net cash flows consider recent trends in our sales, backlog and cancellation rates. Among the trends considered with respect to the three-month and six-month periods ended May 31, 2011 and 2010 was the impact on demand of the April 30, 2010 expiration of the federal homebuyer tax credit. Also taken into account are our future expectations related to the following: market supply and demand, including estimates concerning average selling prices; sales and cancellation rates; and anticipated land development, construction and overhead costs to be incurred. With respect to the three-month and six-month periods ended May 31, 2011, these expectations have reflected our experience that market conditions for our assets in inventory where impairment indicators are identified have been generally stable in 2010 and into 2011, with no significant deterioration or improvement identified as to revenue and cost drivers, excluding the temporary, though significant impact of the expiration of the federal homebuyer tax credit. Our inventory assessments therefore considered an expected improved sales pace as we move through the remainder of 2011. Our considerations in this regard took into account that, on a sequential basis, net orders for the second quarter of 2011 increased 53% from the first quarter of 2011.

Given the inherent challenges and uncertainties in forecasting future results, our inventory assessments at the time they are made generally assume the continuation of then-current market conditions, subject to identifying information suggesting a sustained deterioration or improvement in such conditions or other significant changes. Therefore, for most of our assets in inventory where impairment indicators are identified, our quarterly inventory assessments in 2011 will, at the time they are made, anticipate sales rates, average selling prices and costs to generally continue at or near then-current levels through an affected asset’s estimated remaining life. These estimates, trends and expectations are specific to each land parcel or community and may vary among land parcels or communities.

In our inventory assessments during the second quarter of 2011, we determined that the declines in our sales and backlog levels that we experienced in the third and fourth quarters of 2010 did not reflect a sustained change in market conditions preventing recoverability. Rather, they reflected the effects of the temporary surge in demand motivated by the April 30, 2010 expiration of the federal homebuyer tax credit. Also contributing to these declines in our sales and backlog levels were strategic community count reductions we made in selected underperforming markets in previous quarters.

Based on the results of our evaluations, we recognized pretax, noncash inventory impairment charges of $20.1 million in the three months ended May 31, 2011 associated with five land parcels or communities with a post-impairment fair value of $27.6 million. These charges reflect an $18.1 million adjustment to the fair value of real estate collateral in our Southwest reporting segment that we took back on a note receivable. There were no such charges in the three months ended May 31, 2010. In the six months ended May 31, 2011, we recognized pretax, noncash inventory impairment charges of $21.1 million associated with eight land parcels or communities with a post-impairment fair value of $28.8 million. In the six months ended May 31, 2010, we recognized $6.8 million of such charges associated with four land parcels or communities. The inventory impairments we recorded during the three-month and six-month periods ended May 31, 2011 and the six-month period ended May 31, 2010 reflected declining asset values in certain markets due to unfavorable economic and competitive conditions.

As of May 31, 2011, the aggregate carrying value of our inventory that had been impacted by pretax, noncash inventory impairment charges was $391.6 million, representing 59 communities and various other land parcels. As of November 30, 2010, the aggregate carrying value of our inventory that had been impacted by pretax, noncash inventory impairment charges was $418.5 million, representing 72 communities and various other land parcels.

In the second quarter of 2011, pretax, noncash land option contract abandonment charges totaled $.5 million and corresponded to 117 lots. In the second quarter of 2010, there were no such land option contract abandonment charges. In the six months ended May 31, 2011 and 2010, we recognized pretax, noncash land option contract abandonment charges of $1.3 million corresponding to 258 lots and $6.5 million corresponding to 401 lots, respectively. The charges for land option contract abandonments reflected our termination of land option contracts on projects that no longer met our investment standards or marketing strategy.

Interest Income. Interest income, which is generated from short-term investments and mortgages receivable, totaled ~~$.3~~$.1 million for the three months ended ~~May~~August 31, 2011 and $.6 million for the year-earlier period. For the ~~six~~nine months ended ~~May~~August 31, 2011, interest income totaled ~~$.7~~$.8 million compared to ~~$1.0~~$1.6 million for the corresponding period of 2010. Generally, increases and decreases in interest income are attributable to changes in the interest-bearing average balances of short-term investments and mortgages receivable, as well as fluctuations in interest rates.

Interest Expense. Interest expense results principally from borrowings to finance land purchases, housing inventory and other operating and capital needs. Our interest expense, net of amounts capitalized, totaled ~~$13.1~~$12.3 million for the three months ended ~~May~~August 31, 2011 and ~~$16.5~~$16.2 million for the three months ended May 31, 2010. Interest expense for the three months ended May 31, 2010 included $.4 million of debt issuance costs written off in connection with our voluntary termination of the Credit Facility on MarchAugust 31, 2010. For the ~~six~~nine months ended ~~May~~August 31, 2011 and 2010, our interest expense, net of amounts capitalized, totaled ~~$24.6~~$36.9 million and ~~$35.9~~$52.1 million, respectively. Interest expense for the ~~six~~nine months ended ~~May~~August 31, 2011 included a $3.6 million gain on the early extinguishment of secured debt. Interest expense for the ~~six~~nine months ended ~~May~~August 31, 2010 included $1.8 million of debt issuance costs written off in connection with our voluntary reduction of the aggregate commitment under the Credit Facility from $650.0 million to $200.0 million and the subsequent voluntary termination of the Credit Facility. The percentage of interest capitalized rose to ~~55%~~58% in the ~~second quarter of~~three months ended August 31, 2011 from ~~45%~~46% in the year-earlier ~~quarter.~~period. For the ~~six~~nine months ended ~~May~~August 31, 2011, the percentage of interest capitalized increased to ~~52%~~54% from ~~43%~~44% for the year-earlier period. The year-over-year increases in the percentage of interest capitalized ~~increased~~ in ~~both~~the three-month and nine-month periods of 2011 were due to an increase in the amount of inventory qualifying for interest capitalization. Gross interest incurred decreased to ~~$29.5~~$29.1 million for the three months ended ~~May~~August 31, 2011 from ~~$29.8~~$30.0 million for the year-earlier ~~period, which included $.4 million of debt issuance costs written off in connection with our voluntary termination of the Credit Facility.~~period. For the ~~six~~nine months ended ~~May~~August 31, 2011, gross interest incurred decreased to ~~$55.4~~$84.5 million from ~~$61.9~~$91.9 million in the corresponding period of 2010 as a result of a lower average debt level in 2011 and the $3.6 million gain on the early extinguishment of secured debt included in 2011, compared to the write-off of $1.8 million of debt issuance costs included in 2010.

Equity in ~~Loss~~Income (Loss) of Unconsolidated Joint Ventures. Our equity in ~~loss~~income of unconsolidated joint ventures was $.1 million for the three months ended ~~May~~August 31, 2011, ~~and totaled $1.5~~compared to equity in loss of unconsolidated joint ventures of $2.0 million for the three months ended ~~May~~August 31, 2010. Our unconsolidated joint ventures delivered no homes in the three months ended ~~May~~August 31, 2011 and 3424 homes in the year-earlier period. Our unconsolidated joint ventures posted no combined revenues in the ~~second~~third quarter of 2011 compared to ~~$14.3~~$10.4 million in the year-earlier quarter. Our unconsolidated joint ventures generated combined ~~losses~~income of ~~$.2~~$.1 million in the ~~second~~third quarter of 2011 and ~~$6.5~~combined losses of $4.2 million in the ~~second~~third quarter of 2010.

For the ~~six~~nine months ended ~~May~~August 31, 2011, our equity in loss of unconsolidated joint ventures increased to $55.9 million from ~~$2.7~~$4.7 million for the ~~six~~nine months ended ~~May~~August 31, 2010. The increased loss in the ~~six~~nine months ended ~~May~~August 31, 2011 was primarily due to our ~~recognizing~~recognition of a pretax, noncash charge of $53.7 million to write off our remaining investment in South Edge based on the February 3, 2011 court decision discussed below under “Off-Balance Sheet Arrangements, Contractual Obligations and Commercial

Commitments” and “Part II — Item 1. Legal Proceedings.” Given the court decision, we ~~determined that~~wrote off our investment in South Edge as the joint venture was no longer ~~recoverable.~~able to perform its activities as originally intended.

Activities performed by our unconsolidated joint ventures generally include acquiring, developing and selling land, and, in some cases, constructing and delivering homes. Our unconsolidated joint ventures delivered 1one home in the first ~~six~~nine months of 2011 and 5579 homes in the first ~~six~~nine months of 2010. Our unconsolidated joint ventures posted combined revenues of $.2 million for the ~~six~~nine months ended ~~May~~August 31, 2011 compared to ~~$100.1~~$110.5 million for the ~~year-earlier quarter.~~same period of 2010. The year-over-year decrease in unconsolidated joint venture revenues in 2011 was primarily due to the sale of land by an unconsolidated joint venture in our Southeast homebuilding reporting segment in 2010. Our unconsolidated joint ventures generated combined losses of ~~$4.6~~$4.5 million for the ~~six~~nine months ended ~~May~~August 31, 2011 and ~~$9.5~~$13.7 million for the corresponding period of 2010.

NON-GAAP FINANCIAL MEASURES

This report contains information about our housing gross margin, excluding inventory impairment and land option contract abandonment charges, and our ratio of net debt to total capital, both of which are not calculated in accordance with GAAP. We believe these non-GAAP financial measures are relevant and useful to investors in understanding our operations and the leverage employed in our operations, and may be helpful in comparing us with other companies in the homebuilding industry to the extent they provide similar information. However, because the housing gross margin, excluding inventory impairment and land option contract abandonment charges, and the ratio of net debt to total capital are not calculated in accordance with GAAP, these financial measures may not be completely comparable to other companies in the homebuilding industry and, thus, should not be considered in isolation or as an alternative to operating performance measures prescribed by GAAP. Rather, these non-GAAP financial measures should be used to supplement their respective most directly comparable GAAP financial measures in order to provide a greater understanding of the factors and trends affecting our operations.

Housing Gross Margin, Excluding Inventory Impairment and Land Option Contract Abandonment Charges.The following table reconciles our housing gross margin calculated in accordance with GAAP to the non-GAAP financial measure of our housing gross margin, excluding inventory impairment and land option contract abandonment charges (dollars in thousands):

Six Months Ended May 31, Three Months Ended May 31,
2011 2010 2011 2010

Housing revenues $ 465,206 $ 632,579 $ 269,983 $ 370,421
Housing construction and land costs (421,052 ) (530,950 ) (250,381 ) (304,756 )

Housing gross margin 44,154 101,629 19,602 65,665
Add: Inventory impairment and land option contract abandonment charges 22,294 13,362 20,591 —

Housing gross margin, excluding inventory impairment and land option contract abandonment charges $ 66,448 $ 114,991 $ 40,193 $ 65,665

in evaluating our performance as it measures the gross profit we generated specifically on the homes delivered during a given period and enhances the comparability of housing gross margin between periods. This financial measure assists us in making strategic decisions regarding product mix, product pricing and construction pace. We also believe investors will find housing gross margin, excluding inventory impairment and land option contract abandonment charges, relevant and useful because it represents a profitability measure that may be compared to a prior period without regard to variability of charges for inventory impairments or land option contract abandonments.

Ratio of Net Debt to Total Capital.The following table reconciles our ratio of debt to total capital calculated in accordance with GAAP to the non-GAAP financial measure of our ratio of net debt to total capital (dollars in thousands):


	May 31,			November 30,			August 31,				November 30,
	2011			2010			2011				2010

Mortgages and notes payable	$	1,691,659		$	1,775,529		$	1,586,703			$	1,775,529
Stockholders’ equity		443,452			631,878			431,967				631,878


Total capital	$	2,135,111		$	2,407,407		$	2,018,670			$	2,407,407


Ratio of debt to total capital		79.2	%		73.8	%		78.6	%			73.8	%


Mortgages and notes payable	$	1,691,659		$	1,775,529		$	1,586,703			$	1,775,529
Less: Cash and cash equivalents and restricted cash		(735,267	)		(1,019,878	)			(590,592	)			(1,019,878	)

Net debt		956,392			755,651			996,111				755,651
Stockholders’ equity		443,452			631,878			431,967				631,878


Total capital	$	1,399,844		$	1,387,529		$	1,428,078			$	1,387,529


Ratio of net debt to total capital		68.3	%		54.5	%		69.8	%			54.5	%


	Six Months Ended May 31,						Three Months Ended May 31,
	2011			2010			2011			2010
West Coast:
Revenues	$	178,914		$	272,089		$	107,143		$	163,655
Construction and land costs		(147,630	)		(207,707	)		(89,351	)		(127,678	)
Selling, general and administrative expenses		(15,614	)		(32,732	)		(14,475	)		(16,394	)

Operating income		15,670			31,650			3,317			19,583
Other, net		(9,079	)		(15,594	)		(5,591	)		(6,884	)


Pretax income (loss)	$	6,591		$	16,056		$	(2,274	)	$	12,699
													Nine Months Ended August 31,						Three Months Ended August 31,
													2011			2010			2011			2010
Southwest:
Revenues	$	51,932		$	93,450		$	28,632		$	59,602		$	91,411		$	149,364		$	39,479		$	55,914
Construction and land costs		(59,095	)		(72,159	)		(42,277	)		(45,136	)		(88,706	)		(113,296	)		(29,611	)		(41,137	)
Selling, general and administrative expenses		(12,721	)		(22,732	)		(6,426	)		(16,143	)		(19,789	)		(35,316	)		(7,068	)		(12,584	)
Loss on loan guaranty		(37,330	)		—			(14,572	)		—			(37,330	)		—			—			—

Operating loss		(57,214	)		(1,441	)		(34,643	)		(1,677	)
Operating income (loss)														(54,414	)		752			2,800			2,193
Other, net		(59,607	)		(8,556	)		(1,849	)		(3,857	)		(59,206	)		(12,551	)		401			(3,995	)


Pretax loss	$	(116,821	)	$	(9,997	)	$	(36,492	)	$	(5,534	)
Pretax income (loss)													$	(113,620	)	$	(11,799	)	$	3,201		$	(1,802	)


Central:
Revenues	$	144,790		$	174,751		$	84,201		$	91,826		$	247,492		$	314,786		$	102,702		$	140,035
Construction and land costs		(124,952	)		(149,691	)		(71,701	)		(76,023	)		(211,771	)		(264,088	)		(86,819	)		(114,397	)
Selling, general and administrative expenses		(26,337	)		(28,030	)		(14,444	)		(14,850	)		(42,887	)		(45,844	)		(16,550	)		(17,814	)

Operating loss		(6,499	)		(2,970	)		(1,944	)		953
Operating income (loss)														(7,166	)		4,854			(667	)		7,824
Other, net		(3,703	)		(6,137	)		(1,549	)		(2,756	)		(5,223	)		(8,520	)		(1,520	)		(2,383	)


Pretax loss	$	(10,202	)	$	(9,107	)	$	(3,493	)	$	(1,803	)
Pretax income (loss)													$	(12,389	)	$	(3,666	)	$	(2,187	)	$	5,441


Southeast:
Revenues	$	89,648		$	94,735		$	50,007		$	57,431		$	136,565		$	186,313		$	46,917		$	91,578
Construction and land costs		(86,649	)		(98,918	)		(45,488	)		(55,306	)		(127,361	)		(181,998	)		(40,712	)		(83,080	)
Selling, general and administrative expenses		(18,005	)		(17,755	)		(9,481	)		(8,301	)		(27,485	)		(32,649	)		(9,480	)		(14,894	)

Operating loss		(15,006	)		(21,938	)		(4,962	)		(6,176	)		(18,281	)		(28,334	)		(3,275	)		(6,396	)
Other, net		(8,015	)		(9,323	)		(4,031	)		(4,899	)		(11,896	)		(13,780	)		(3,881	)		(4,457	)


Pretax loss	$	(23,021	)	$	(31,261	)	$	(8,993	)	$	(11,075	)	$	(30,177	)	$	(42,114	)	$	(7,156	)	$	(10,853	)

West Coast. ~~Total revenues from our~~Our West Coast homebuilding reporting segment ~~decreased 35% to $107.1~~generated total revenues of $175.4 million for the three months ended ~~May~~August 31, 2011, down 17% from ~~$163.7~~$211.3 million for the year-earlier period, with revenues ~~for each period~~in both periods generated entirely from housing operations. Housing revenues for the ~~second~~third quarter of 2011 ~~declined~~decreased from the year-earlier quarter due to a ~~29%~~13% decrease in homes delivered and a 7%5% decline in the average selling price. WeThis segment delivered ~~353~~524 homes in the three months ended ~~May~~August 31, 2011, down from ~~500~~600 homes delivered in the year-earlier period, primarily due to this segment having ~~37%~~21% fewer homes in backlog at the beginning of the 2011 ~~second~~third quarter, on a year-over-year ~~basis, as~~basis. The year-over-year decrease in backlog was due to lower net orders ~~declined~~ in the ~~fourth quarter~~first two quarters of 2011, reflecting the after effects of a temporary surge in demand in the first two quarters of 2010 ~~and the first quarter of 2011 primarily reflecting the impact of~~that was motivated by the April 30, 2010 expiration of the federal homebuyer tax credit. The average selling price decreased to ~~$303,500~~$334,800 in the ~~second~~third quarter of 2011 from ~~$327,300~~$352,200 in the ~~second~~third quarter of 2010, primarily due to a ~~shift~~change in product mix.

months of both 2011 and 2010 were generated entirely from housing operations. For the ~~six~~nine months ended ~~May~~August 31, 2011, housing revenues declined ~~34%~~27% from the year-earlier period due to a ~~31%~~24% decrease in homes delivered and a 4% decline in the average selling price. Homes delivered decreased to ~~577~~1,101 in the ~~six~~nine months ended ~~May~~August 31, 2011 from ~~840~~1,440 in the ~~six~~nine months ended ~~May~~August 31, 2010, reflecting lower backlog levels at the beginning of ~~the first and second quarters~~each quarter of ~~2011 as compared to the corresponding year-earlier periods.~~2011. The average selling price declined to ~~$310,100~~$321,800 in the first ~~six~~nine months of 2011 from ~~$323,900~~$335,700 in the year-earlier period for the reasons described above with respect to the three-month period ended ~~May~~August 31, 2011.

~~This~~Pretax income from this segment ~~posted pretax income of $6.6~~totaled $9.9 million for the ~~six~~nine months ended ~~May~~August 31, 2011 and ~~$16.1~~$31.1 million for the ~~six~~nine months ended ~~May~~August 31, 2010. The year-over-year decrease in pretax ~~results~~income was primarily due to lower gross profits, partly offset by decreases in selling, general and administrative expenses. The gross margin decreased to 17.5% in the first ~~six~~nine months of 2011 from ~~23.7%~~21.6% in the year-earlier period for the reasons described above with respect to the three-month period ended ~~May~~August 31, 2011. Pretax, noncash charges for inventory impairments and land option contract abandonments were ~~$1.5~~$1.8 million in the ~~six~~nine months ended ~~May~~August 31, 2011 and ~~$1.2~~$3.3 million in the year-earlier period. Selling, general and administrative expenses decreased by ~~$17.1~~$15.5 million, or ~~52%~~31%, to ~~$15.6~~$35.1 million in the first ~~six~~nine months of 2011 from ~~$32.7~~$50.6 million in the first ~~six~~nine months of 2010, largely due to a gain on the sale of a multi-level residential building we operated as a rental property and our efforts to reduce overhead costs.

Southwest. ~~Our~~Total revenues from our Southwest homebuilding reporting segment ~~generated total revenues of $28.6~~decreased 29% to $39.5 million for the three months ended ~~May~~August 31, 2011 ~~down 52%~~ from ~~$59.6~~$55.9 million for the year-earlier period, due to lower housing and land sale revenues. All of the revenues for the three months ended August 31, 2011 were generated entirely from housing operations. Housing revenues ~~of $28.6 million~~ for the 2011 ~~second~~third quarter decreased ~~50%~~27% to $39.5 million from ~~$57.6~~$54.0 million for the year-earlier quarter due to a ~~49%~~31% decrease in the number of homes delivered, ~~and~~partly offset by a ~~3% decline~~6% increase in the average selling price. We delivered ~~183~~232 homes at an average selling price of ~~$156,500~~$170,200 in the ~~second~~third quarter of 2011 compared to ~~359~~337 homes delivered at an average selling price of ~~$160,600~~$160,200 in the year-earlier quarter. The year-over-year decrease in the number of homes delivered was largely due to this segment having ~~51%~~26% fewer homes in backlog at the start of the 2011 ~~second~~third quarter compared to the start of the 2010 ~~second~~third quarter, which reflected lower net orders driven by weak housing market conditions and a highly competitive environment ~~for net orders~~ in the ~~fourth quarter of 2010 and the~~ first ~~quarter~~two quarters of 2011. The ~~decline~~increase in the average selling price reflected ~~market conditions and our rollout of new~~a shift in product ~~in this segment at lower price points compared to our previous product.~~mix. This segment generated no land sale revenues for the ~~second~~third quarter of 2011 ~~compared to $2.0~~and $1.9 million of land sale revenues for the year-earlier quarter.

This segment posted pretax ~~losses~~income of ~~$36.5~~$3.2 million for the three months ended ~~May~~August 31, 2011, ~~and $5.5~~compared to a pretax loss of $1.8 million for the three months ended ~~May~~August 31, 2010. The pretax ~~loss was higher~~results for the ~~second~~third quarter of 2011 improved compared to the year-earlier quarter primarily due to ~~lower gross profits~~a reduction in selling, general and ~~the $14.6 million loss on loan guaranty related to South Edge.~~administrative expenses. The gross margin decreased to ~~negative 47.7%~~25.0% in the ~~second~~third quarter of 2011 from ~~24.3%~~26.4% in the ~~second~~third quarter of 2010, ~~largely due to pretax, noncash inventory impairment and land option contract abandonment charges. These charges totaled $18.7 million in~~reflecting reduced leverage from the ~~second quarter~~lower number of 2011, compared to no such charges in the year-earlier quarter, primarily reflecting an $18.1 million adjustment to fair value of real estate collateral in this segment that we took back on a note receivable.homes delivered, which was partly offset by favorable warranty adjustments. Selling, general and administrative expenses decreased by ~~$9.7~~$5.5 million, or ~~60%~~44%, to ~~$6.4~~$7.1 million in the ~~quarter~~three months ended ~~May~~August 31, 2011 from ~~$16.1~~$12.6 million in the year-earlier quarter, mainly due to overhead cost reductions, ~~and other cost-saving initiatives, a drop in legal expenses,~~ and a lower volume of homes delivered in this segment.

For the ~~six~~nine months ended ~~May~~August 31, 2011, total revenues from our Southwest homebuilding reporting segment decreased ~~44%~~39% to ~~$51.9~~$91.4 million from ~~$93.5~~$149.4 million for the year-earlier period, reflecting lower housing and land sale revenues. Housing revenues decreased ~~43%~~37% to ~~$51.9~~$91.4 million from ~~$91.5~~$145.5 million for the year-earlier period due to a ~~41%~~37% decrease in the number of homes ~~delivered and a 4% decline in the average selling price.~~delivered. We delivered ~~341~~573 homes in the ~~six~~nine months ended ~~May~~August 31, 2011 compared to ~~575~~912 homes delivered in the year-earlier period ~~due to~~with the decrease in homes delivered reflecting lower backlog levels at the beginning of ~~the first and second quarters~~each quarter of 2011. The average selling price ~~decreased to $152,300~~of $159,500 in the first ~~six~~nine months of 2011 ~~from $159,100 in~~remained flat with the ~~first six months of 2010, reflecting the downward pricing~~

to the fair value of real estate collateral that we took back on a note receivable in the second quarter of 2011. Selling, general and administrative expenses decreased by ~~$10.0~~$15.5 million, or 44%, to ~~$12.7~~$19.8 million in the first ~~six~~nine months of 2011 from ~~$22.7~~$35.3 million in the year-earlier period ~~for~~as a result of overhead cost reductions, a drop in legal expenses and the ~~reasons described above with respect to the three-month period ended May 31, 2011.~~lower volume of homes delivered.

Central. Total revenues from our Central homebuilding reporting segment decreased 8%27% to ~~$84.2~~$102.7 million for the three months ended ~~May~~August 31, 2011 from ~~$91.8~~$140.0 million for the ~~three months ended May 31,~~corresponding period of 2010, ~~primarily~~ due to a decline in housing revenues. In the ~~second~~third quarter of 2011, housing revenues decreased 8%27% to ~~$84.2~~$102.6 million from ~~$91.7~~$140.0 million in the year-earlier quarter ~~due to~~as a ~~14%~~result of a 29% decrease in homes delivered, partly offset by a 6%3% increase in the average selling price. In the ~~second~~third quarter of 2011, we delivered ~~475~~611 homes at an average selling price of ~~$177,300~~$168,000 compared to ~~550~~855 homes delivered in the ~~second~~third quarter of 2010 at an average selling price of ~~$166,700.~~$163,800. The year-over-year decrease in the number of homes delivered was partly due to the ~~31%~~16% lower backlog at the start of the 2011 ~~second~~third quarter compared to the year-earlier quarter, which was driven by a decline in net orders in the ~~fourth quarter of 2010 and the~~ first ~~quarter~~two quarters of 2011 primarily reflecting the impact of the April 30, 2010 expiration of the federal homebuyer tax credit. The higher average selling price reflected a change in product mix. This segment generated ~~no land sale revenues for the second quarter of 2011, compared to~~ land sale revenues of $.1 million for the third quarter of 2011 and no land sale revenues for the year-earlier quarter.

~~Pretax~~This segment generated pretax losses ~~from this segment totaled $3.5~~of $2.2 million for the three months ended ~~May~~August 31, 2011, ~~and $1.8~~compared to pretax income of $5.4 million for the year-earlier period. In the ~~second~~third quarter of 2011, the pretax loss ~~increased by $1.7 million from the second quarter of 2010,~~was mainly due to lower gross profits reflecting fewer homes delivered in this ~~segment.~~segment and a lower gross margin. The gross margin decreased to ~~14.8%~~15.5% in the ~~second~~third quarter of 2011 from ~~17.2%~~18.3% in the ~~second~~third quarter of 2010, primarily reflecting reduced ~~operating~~ leverage from the lower volume of homes ~~delivered.~~delivered, which was partly offset by favorable warranty adjustments. Selling, general and administrative expenses totaled ~~$14.4~~$16.6 million in the three months ended ~~May~~August 31, 2011, ~~a 3% decrease~~down 7% from ~~$14.9~~$17.8 million in the three months ended ~~May~~August 31, 2010. This decrease reflected overhead cost reductions and the decline in the number of homes delivered.

For the ~~six~~nine months ended ~~May~~August 31, 2011, our Central homebuilding reporting segment posted total revenues of ~~$144.8~~$247.5 million, down ~~17%~~21% from ~~$174.8~~$314.8 million for the year-earlier period, reflecting lower housing revenues. Housing revenues decreased ~~17%~~21% to ~~$144.7~~$247.4 million for the first ~~six~~nine months of 2011 from ~~$174.3~~$314.3 million for the year-earlier period, mainly due to a ~~22%~~25% decrease in homes delivered, partly offset by a 7%5% increase in the average selling price. We delivered ~~838~~1,449 homes in the ~~six~~nine months ended ~~May~~August 31, 2011 compared to ~~1,079~~1,934 homes delivered in the year-earlier period, reflecting lower backlog levels at the ~~beginning~~start of each of the first ~~and second~~three quarters of 2011 ~~and a~~due largely to the strategic community count ~~reduction~~reductions we made in ~~underperforming markets in previous quarters~~prior periods to align our operations in this segment with ~~reduced~~prevailing housing market activity. The average selling price rose to ~~$172,700~~$170,700 in the first ~~six~~nine months of 2011 from ~~$161,500~~$162,500 in the year-earlier period, primarily due to a change in product mix. Land sale revenues totaled $.1 million for the ~~six~~nine months ended ~~May~~August 31, 2011 and $.5 million for the ~~six~~nine months ended ~~May~~August 31, 2010.

~~This~~Pretax losses from this segment ~~posted pretax losses of $10.2~~totaled $12.4 million for the ~~six~~nine months ended ~~May~~August 31, 2011 and ~~$9.1~~$3.7 million for the ~~six months ended May 31,~~corresponding period of 2010. The pretax loss for the first ~~six~~nine months of 2011 included ~~$.3~~$1.1 million of noncash inventory impairment and land option contract abandonment charges, compared to $6.3 million of ~~noncash~~ land option contract abandonment charges in the year-earlier period. The gross margin decreased ~~slightly~~ to ~~13.7%~~14.4% in the ~~six~~nine months ended ~~May~~August 31, 2011 from ~~14.3%~~16.1% in the year-earlier ~~period.~~period for the reasons described above with respect to the three-month period ended August 31, 2011. Selling, general and administrative expenses of ~~$26.3~~$42.9 million in the first ~~half~~nine months of 2011 decreased by ~~$1.7~~$2.9 million, or 6%, from ~~$28.0~~$45.8 million in the corresponding period of ~~2010.~~2010, primarily due to overhead cost reductions and the lower volume of homes delivered.

Southeast. Our Southeast homebuilding reporting segment generated total revenues of ~~$50.0~~$46.9 million for the ~~second~~third quarter of 2011, down ~~13%~~49% from ~~$57.4~~$91.6 million for the year-earlier quarter. ~~All of this segment’s revenues for each period~~Revenues in both periods were generated solely from housing operations. ~~Housing~~The decrease in housing revenues reflected a ~~32%~~55% year-over-year decrease in homes delivered, partly offset by a ~~28%~~15% year-over-year increase in the average selling price. We delivered ~~254~~236 homes in the ~~second~~third quarter of 2011, down from ~~373~~528 homes delivered in the year-earlier quarter, ~~largely~~mainly due to this

Pretax losses from this segment totaled ~~$9.0~~$7.2 million for the three months ended ~~May~~August 31, 2011 and ~~$11.1~~$10.9 million for the year-earlier period. The loss from this segment narrowed for the three months ended ~~May~~August 31, 2011 from the year-earlier period, reflecting ~~higher gross profits, partly offset by an increase~~a decrease in selling, general and administrative ~~expenses.~~expenses, partly offset by lower gross profits stemming from the decrease in homes delivered. The gross margin ~~improved~~increased to ~~9.0%~~13.2% in the ~~second~~third quarter of 2011 from ~~3.7%~~9.3% in the ~~second~~third quarter of 2010. There were ~~$.6 million of pretax,~~no noncash inventory impairment ~~and~~or land option contract abandonment charges in the ~~second~~third quarter of 2011, compared to ~~no such~~noncash charges for land option contract abandonments of $1.2 million in the ~~second~~third quarter of 2010. Selling, general and administrative expenses ~~increased~~decreased by ~~$1.2 million, or 14%,~~36% to $9.5 million in the ~~second~~third quarter of 2011 from ~~$8.3~~$14.9 million in the year-earlier ~~quarter.~~quarter reflecting overhead cost reductions as well as the lower volume of homes delivered.

For the first ~~six~~nine months of 2011, total revenues from our Southeast homebuilding reporting segment ~~decreased to $89.6~~totaled $136.6 million, down 5%27% from ~~$94.7~~$186.3 million for the year-earlier period. ~~All of this segment’s revenues~~Revenues in each period were generated solely from housing operations. Housing revenues for the first ~~half~~nine months of 2011 declined year over year due to a ~~25%~~39% decrease in the number of homes delivered, partly offset by a ~~27%~~21% increase in the average selling price. We delivered ~~458~~694 homes in the ~~six~~nine months ended ~~May~~August 31, 2011 compared to ~~614~~1,142 homes delivered in the ~~year-earlier~~corresponding period of 2010, largely due to ~~the~~ lower backlog levels at the beginning of ~~the first and second quarters~~each quarter of ~~2011 as compared to the year-earlier periods.~~2011. The lower backlog levels in the 2011 period ~~was~~were due in part to a strategic reduction in our market presence in the Carolinas. The average selling price rose to ~~$195,700~~$196,800 in the first ~~six~~nine months of 2011 from ~~$154,300~~$163,100 in the year-earlier period for the reasons described above with respect to the three-month period ended ~~May~~August 31, 2011.

This segment posted pretax losses of ~~$23.0~~$30.2 million for the ~~six~~nine months ended ~~May~~August 31, 2011 and ~~$31.3~~$42.1 million for the ~~six~~nine months ended ~~May~~August 31, 2010. The pretax loss for the ~~six~~nine months ended ~~May~~August 31, 2011 narrowed on a year-over-year basis due to an increase in the gross margin, ~~partly offset by~~and a ~~slight increase~~decrease in selling, general and administrative expenses. In the ~~six~~nine months ended ~~May~~August 31, 2011, ~~pretax,~~ noncash charges for inventory impairments and land option contract abandonments totaled $1.6 million, compared to ~~$4.9~~$6.1 million in the year-earlier period. The gross margin improved to ~~3.3%~~6.7% in the ~~six~~nine months ended ~~May~~August 31, 2011, from ~~negative 4.4%~~2.3% in the ~~six~~nine months ended ~~May~~August 31, 2010, largely due to the increase in the average selling price. Selling, general and administrative expenses of ~~$18.0~~$27.5 million in the first ~~six~~nine months of 2011 ~~increased~~decreased by ~~$.2~~$5.1 million, or 1%16%, from ~~$17.8~~$32.6 million in the first ~~six~~nine months of ~~2010.~~2010 for the reasons described above with respect to the three-month period ended August 31, 2011.

FINANCIAL SERVICES

Our financial services segment provides title and insurance services to our homebuyers. This segment also provided mortgage banking services to our homebuyers indirectly through KBA Mortgage, a joint venture of a subsidiary of ours and a subsidiary of Bank of America, N.A., with each partner having a 50% ownership interest in ~~KBA Mortgage.~~the venture. The Bank of America, N.A. subsidiary partner operated KBA Mortgage. We ~~have~~ accounted for KBA Mortgage as an unconsolidated joint venture in the financial services reporting segment of our consolidated financial statements. From its formation in 2005 until June 30, 2011, KBA Mortgage provided mortgage banking services to a significant proportion of our homebuyers. During the first quarter of 2011, the Bank of America, N.A. subsidiary partner in KBA Mortgage approached us about exiting the joint venture due to the desire of Bank of America, N.A. to cease participating in joint venture structures in its business. As a result, effective June 27, 2011, KBA Mortgage ~~ceased~~stopped accepting loan applications, and it ceased offering mortgage banking services to our homebuyers after June 30, 2011. After June 30, 2011, Bank of America, N.A. is processing and closing only the residential consumer mortgage loans that KBA Mortgage originated for our homebuyers on or before June 26, 2011. We entered into a marketing services agreement with MetLife Home Loans, a division of MetLife Bank, N.A., effective June 27, 2011. Under the agreement, MetLife Home Loans’ personnel, located onsite at ~~each~~several of our new home communities, can offer (i) financing options and mortgage loan products to our homebuyers, (ii) to prequalify homebuyers for residential consumer mortgage loans, and (iii) to commence the loan origination process for homebuyers who elect to use MetLife Home Loans. We ~~will~~ make marketing materials and other information regarding MetLife Home Loans’ financing options and mortgage loan products available to our homebuyers and ~~will be~~are compensated solely for the fair market value of these services. MetLife Home Loans and MetLife Bank, N.A. are not affiliates of ours or any of our subsidiaries. Our homebuyers are under no obligation to use MetLife Home Loans and may select any lender of their choice to obtain mortgage financing for the purchase of a home. We do not have any ownership, joint venture or other interests in or with

Equity in Income (Loss) of Unconsolidated Joint Venture. The equity in loss of unconsolidated joint venture of $.9 million for the three months ended August 31, 2011 and the equity in income of unconsolidated joint venture of ~~$.7~~$1.0 million for the three months ended ~~May 31, 2011 and $3.6 million for the three months ended May~~August 31, 2010 ~~related~~both relate to our 50% interest in KBA Mortgage. For the ~~six~~nine months ended ~~May~~August 31, 2011, the equity in loss of unconsolidated joint venture totaled $.4 million, compared to equity in income of unconsolidated joint venture ~~totaled $.5 million, compared to $5.0~~of $5.9 million for the ~~six~~nine months ended ~~May~~August 31, 2010. The year-over-year decreases in the equity in income of unconsolidated joint venture for the three-month and six-month periods ended May 31, 2011 were mainly due to the lower number of loans originated and a reduced profit per loan. KBA Mortgage originated ~~801~~234 loans in the ~~second~~third quarter of 2011 compared to ~~1,484~~1,827 loans in the year-earlier quarter. In the first ~~six~~nine months of 2011, KBA Mortgage originated ~~1,399~~1,633 loans, down from ~~2,526~~4,353 loans originated in the year-earlier period. The percentage of our homebuyers using KBA Mortgage as a loan originator decreased to ~~69%~~57% for the three months ended ~~May~~August 31, 2011 from ~~86%~~83% for the three months ended ~~May~~August 31, 2010. For the ~~six~~nine months ended ~~May~~August 31, 2011, the rate was ~~68%~~66% compared to ~~84%~~83% for the year-earlier period.

Loans will not result in any income for us based on an equity interest. We will be compensated solely for the fair market value of the services we provide.

INCOME TAXES

~~Our~~We had no income tax benefit ~~totaled $.3~~or expense for the three months ended August 31, 2011 and an income tax benefit of $5.3 million for the three months ended ~~May 31, 2011, compared to income tax expense of $.1 million for the three months ended May~~August 31, 2010. For the ~~six~~nine months ended ~~May~~August 31, 2011, ~~and 2010,~~ our income tax expense totaled $.1 million, ~~and $.3~~compared to an income tax benefit of $5.0 million ~~respectively.~~for the nine months ended August 31, 2010. Due to the effects of our deferred tax asset valuation allowances, carrybacks of our NOLs, and changes in our unrecognized tax benefits, our effective tax rates for the three-month and ~~six-month~~nine-month periods ended ~~May~~August 31, 2011 and 2010 are not meaningful items as our income tax amounts are not directly correlated to the amount of our pretax losses for those periods.

In accordance with ASC 740, we evaluate our deferred tax assets quarterly to determine if valuation allowances are required. During the three months ended ~~May~~August 31, 2011, we recorded a valuation allowance of ~~$25.7~~$2.5 million against net deferred tax assets generated from the loss for the period. During the three months ended ~~May~~August 31, 2010, we recorded a net reduction of $2.4 million to the valuation allowance ~~of $12.8 million~~ against net deferred tax assets. ~~For~~The net reduction was comprised of a $5.4 million federal income tax benefit from the ~~six months ended May 31, 2011~~increased carryback of our 2009 net operating loss to offset earnings we generated in 2004 and ~~2010, we~~2005, partially offset by a $3.0 million valuation allowance recorded ~~valuation allowances of $70.8 million and $34.0 million, respectively,~~ against the net deferred tax assets generated from the loss for the period. For the nine months ended August 31, 2011, we recorded valuation allowances of $73.3 million against the net deferred tax assets generated from losses for ~~those periods.~~the period. For the nine months ended August 31, 2010, we recorded a net increase of $31.6 million to the valuation allowance against net deferred tax assets. The net increase was comprised of a $37.0 million valuation allowance recorded against the net deferred tax assets generated from the loss for the period, partially offset by the $5.4 million federal income tax benefit from the increased carryback of our 2009 net operating loss to offset earnings we generated in 2004 and 2005.

Our net deferred tax assets totaled $1.1 million at both ~~May~~August 31, 2011 and November 30, 2010. The deferred tax asset valuation allowance increased to ~~$841.9~~$844.4 million at ~~May~~August 31, 2011 from $771.1 million at November 30, 2010. This increase reflected the net impact of the ~~$70.8~~$73.3 million valuation allowance recorded during the ~~six~~nine months ended ~~May~~August 31, 2011.

The benefits of our NOLs, built-in losses and tax credits would be reduced or potentially eliminated if we experienced an “ownership change” under Section 382. Based on our analysis performed as of ~~May~~August 31, 2011, we do not believe that we have experienced an ownership change as defined by Section 382, and, therefore, the NOLs, built-in losses and tax credits we have generated should not be subject to a Section 382 limitation as of this reporting date.

Liquidity and Capital Resources

Overview.We historically have funded our homebuilding and financial services activities with internally generated cash flows and external sources of debt and equity financing.

During the period from 2006 through 2009, amid ~~challenging conditions~~the general downturn in the housing market, we focused on generating cash by exiting or reducing our investments in certain markets, selling land positions and interests, and improving the financial performance of our homebuilding operations. The cash generated from these efforts improved our liquidity, enabled us to reduce debt levels and strengthened our consolidated financial position. Based on the prolonged housing downturn and our goals of maintaining a strong and liquid balance sheet and positioning our business to capitalize on future growth opportunities, in 2010 and in the first six months of 2011, we continuedWhile continuing to manage our use of cash to operate our business ~~and~~to position our operations to capitalize on future growth opportunities, from 2009 through the first nine months of 2011, we made strategic acquisitions of attractive land assets that met our investment and marketing standards and invested in land development to ~~facilitate future~~maintain a solid growth platform in our targeted markets. We invested approximately $409 million in land and land development in the ~~number~~first nine months of ~~communities~~2011, and expect that our total land and land development investment for our 2011 fiscal year will be approximately $550 million, nearly the same as our total investment for our 2010 fiscal year, which was approximately $560 million. While we ~~operate. We~~have made a significant investment in land and land development in 2011 to support our strategic goals, we ended our 2011 ~~second~~third quarter with ~~$735.3~~$590.6 million of cash and cash equivalents and restricted cash, with ~~$621.3~~$113.2 million of this

amount comprised of ~~unrestricted cash and cash equivalents, compared to~~restricted cash. We had $1.02 billion of cash and cash equivalents and restricted cash at November 30, 2010. The majority of our unrestricted cash and cash equivalents at ~~May~~August 31, 2011 ~~were~~was invested in money market accounts and U.S. government securities.

In Our cash, cash equivalents and restricted cash decreased by $144.7 million during the ~~second half~~third quarter of 2011, ~~there are two events that are expected~~primarily due to ~~have a significant negative impact on our balance~~the repayment of ~~unrestricted cash and cash equivalents. On~~the $100 Million Senior Notes upon their August 15, 2011 ~~the remaining $100.0 million balance of our 6 3/8% senior notes matures, and, as~~maturity.

As discussed further below, on or around November 30, 2011 we anticipate that we will ~~potentially~~ need to satisfy a net payment obligation related to South Edge. We estimate that the probable amount of this net payment obligation is $226.4 million based on the terms of the consensual agreement effective June 10, 2011 regarding the Plan. ~~Following~~At the ~~August 2011 maturity of the remaining balance of our 6 3/8% senior notes, our next senior note maturity is not until 2014. We~~same time, we currently expect to have higher home deliveries, higher housing gross margins, and lower selling, general and administrative expenses as a percentage of housing revenues in the second half of 2011 compared to the first half of 2011. Therefore, excluding our ~~potential~~anticipated net

payment obligation related to South Edge, we expect to have positive operating cash flow for the second half of this ~~year.~~year on an overall basis. Considering the above factors as a whole, and by maintaining a disciplined approach to land and land development investments, we ~~currently forecast more than ample liquidity~~believe that at our 2011 fiscal year-end ~~with~~we will have a ~~projected~~ balance of cash and cash equivalents and restricted cash of over $500 million after funding our anticipated 2011 operating ~~needs. While we~~needs (including our anticipated net payment obligation related to South Edge, if satisfied on or before November 30, 2011). We will continue to evaluate our future cash requirements and financing opportunities available in the capital ~~markets, there is no plan to issue equity.~~markets. Depending on housing market conditions, resource allocation priorities and developments relating to South Edge, we plan to use a portion of our unrestricted cash and cash equivalents in 2011 to acquire additional land assets and increase our ~~community count~~new home communities to support our primary strategic goal of ~~restoring and maintaining~~achieving profitability. Our land acquisition and new home community opening plans are further discussed below under “Outlook.”

Capital Resources. At ~~May~~August 31, 2011, we had ~~$1.69~~$1.59 billion of mortgages and notes payable outstanding compared to $1.78 billion outstanding at November 30, 2010, reflecting the repayment of the $100 Million Senior Notes upon their August 15, 2011 maturity and the repayment of secured debt during the first ~~six~~nine months of 2011.

Our financial leverage, as measured by the ratio of debt to total capital, was ~~79.2%~~78.6% at ~~May~~August 31, 2011, compared to 73.8% at November 30, 2010. Our ratio of net debt to total capital at ~~May~~August 31, 2011 was ~~68.3%~~69.8%, compared to 54.5% at November 30, 2010.

Following our voluntary termination of the Credit Facility effective March 31, 2010, we entered into the LOC Facilities with various financial institutions to obtain letters of credit in the ordinary course of operating our business. As of ~~May~~August 31, 2011, ~~$86.2~~$64.3 million of letters of credit were outstanding under the LOC Facilities. The LOC Facilities require us to deposit and maintain cash with the issuing financial institutions as collateral for our letters of credit outstanding. As of ~~May~~August 31, 2011, the amount of cash maintained for the LOC Facilities totaled ~~$87.2~~$65.0 million and was included in restricted cash onin our consolidated balance sheet as of that date. ~~During 2011, we~~We may maintain, revise or, if necessary or desirable, enter into additional or expanded letter of credit facilities with the same or other financial institutions.

In addition to the cash deposits maintained for the LOC Facilities, restricted cash on our consolidated balance sheet at ~~May~~August 31, 2011 included $26.8 million ~~of cash in an escrow account~~ required as collateral for a surety ~~bond.~~bond and $21.4 million of cash deposited in an escrow account pursuant to a consensual plan of reorganization for one of our unconsolidated joint ventures.

The indenture governing our senior notes does not contain any financial maintenance covenants. Subject to specified exceptions, the indenture contains certain restrictive covenants that, among other things, limit our ability to incur secured indebtedness, or engage in sale-leaseback transactions involving property or assets above a certain specified value. Unlike our other senior notes, the terms governing our $265 Million Senior Notes contain certain limitations related to mergers, consolidations, and sales of assets.

As of ~~May~~August 31, 2011, we were in compliance with the applicable terms of our covenants under our senior notes, the indenture, and mortgages and land contracts due to land sellers and other loans. Our ability to secure future debt financing may depend in part on our ability to remain in such compliance.

As further described below under “Part II — Item 1. Legal Proceedings,” on February 3, 2011, athe bankruptcy court entered an order for relief on the Petition and appointed a Chapter 11 trustee for South Edge. As a result of this court decision and based on the terms of the consensual agreement effective June 10, 2011 regarding the Plan, we estimate that our probable net payment obligation related to South Edge is $226.4 million, though we estimate that our net payment obligation could range between approximately $214 million and $240 million. The ultimate payment we may make will depend on a number of factors, including whether the Plan becomes effective. Our estimate of our probable net payment obligation related to South Edge may change if new information subsequently becomes available.

Depending on available terms, we finance certain land acquisitions with purchase-money financing from land sellers or with other forms of financing from third parties. At ~~May~~August 31, 2011, we had outstanding mortgages and land contracts due to land sellers and other loans payable in connection with such financing of ~~$33.6~~$28.4 million, secured primarily by the underlying property.

Consolidated Cash Flows. Operating, investing and financing activities in total used net cash of ~~$281.2~~$428.2 million in the ~~six~~nine months ended ~~May~~August 31, 2011 and ~~$188.6~~$254.4 million in the ~~six~~nine months ended ~~May~~August 31, 2010.

Operating Activities. Operating activities used net cash of ~~$271.3~~$309.9 million in the ~~six~~nine months ended ~~May~~August 31, 2011 and ~~$112.6~~$164.1 million in the corresponding period of 2010. The year-over-year change in net operating cash flows was primarily due to a $190.7 million federal income tax refund we received during the ~~six~~nine months ended ~~May~~August 31, 2010. There was no such refund received in the ~~six~~nine months ended ~~May~~August 31, 2011.

Our uses of cash for operating ~~cash~~activities in the first ~~six~~nine months of 2011 included a net loss of ~~$183.0~~$192.7 million, a net increase in inventories of ~~$167.8~~$177.8 million (excluding the ~~acquired~~ property ~~securing~~we took back on a $40.0 million note receivable; inventory impairment and land option contract abandonment charges; and an increase of ~~$12.8~~$9.6 million in consolidated inventories not owned) in conjunction with our land asset acquisition activities, a net decrease in accounts payable, accrued expenses and other liabilities of ~~$28.1~~$47.0 million, ~~other operating uses of $6.0 million and~~ a net increase in receivables of ~~$1.4~~$10.9 million and other operating uses of $1.6 million.

In the first ~~six~~nine months of 2010, our uses of cash for operating ~~cash~~activities included a net increase in inventories of ~~$155.2~~$149.0 million (excluding inventory impairment and land option contract abandonment charges; ~~$6.3~~$53.1 million of inventories acquired through seller financing; and a decrease of ~~$35.6~~$37.6 million in consolidated inventories not owned), ~~a net loss of $85.4 million,~~ a net decrease in accounts payable, accrued expenses and other liabilities of ~~$81.6~~$147.3 million, a net loss of $86.8 million, and other operating uses of ~~$2.7~~$2.8 million. The cash used in the first ~~six~~nine months of 2010 was partly offset by a net decrease in receivables of ~~$183.4~~$182.8 million, mainly due to the $190.7 million federal income tax refund we received during the period.

Investing Activities. Investing activities provided net cash of $78.6 million in the ~~three~~nine months ended ~~May~~August 31, 2011 and used net cash of $2.2 million in the year-earlier period. The year-over-year change in net investing cash flows was primarily due to proceeds of $80.6 million received in the first ~~six~~nine months of 2011 from the sale of a multi-level residential building we operated as a rental property. The cash provided was partly offset by $1.9 million used for investments in unconsolidated joint ventures and $.1 million used for net purchases of property and equipment. In the first ~~six~~nine months of 2010, we used cash of ~~$1.8~~$1.5 million for investments in unconsolidated joint ventures and ~~$.4~~$.7 million for net purchases of property and equipment.

Financing Activities. Financing activities used net cash of ~~$88.5~~$196.8 million in the first ~~six~~nine months of 2011 and ~~$73.8~~$88.1 million in the first ~~six~~nine months of 2010. The year-over-year change resulted primarily from ~~a larger amount~~the repayment of ~~cash used for~~the $100 Million Senior Notes and an increase in net payments on mortgages and land contracts due to land sellers and other loans in 2011 compared to ~~2010, and the fluctuation in our restricted cash balance.~~2010. In the first ~~six~~nine months of 2011, cash was used for the repayment of the $100 Million Senior Notes at their scheduled August 15, 2011 maturity, and for net payments on mortgages and land contracts due to land sellers and other loans of ~~$80.8~~$86.1 million, primarily related to the repayment of debt secured by the multi-level residential building we sold during the period. Uses of cash in the first ~~six~~nine months of 2011 also included dividend payments on our common stock of ~~$9.6~~$14.4 million. The cash used was partially offset by a ~~$1.5~~$2.3 million decrease in our restricted cash balance and ~~$.4~~$1.4 million of cash provided from the issuance of common stock under employee stock plans.

In the first ~~six~~nine months of 2010, cash was used for net payments of ~~$71.8~~$73.4 million on mortgages and land contracts due to land sellers and other loans, dividend payments on common stock of ~~$9.6~~$14.4 million, an

increase in our restricted cash balance of $2.1 million, and repurchases of common stock of $.4 million in connection with the satisfaction of employee withholding taxes on vested restricted stock. The cash used was partially offset by ~~$6.5~~$1.6 million provided ~~from a reduction in the restricted cash balance, $.9 million~~ from the issuance of common stock under employee stock plans and $.6 million from excess tax benefits associated with the exercise of stock options.

During the three months ended February 28, 2011, our board of directors declared a cash dividend of $.0625 per share of common stock, which was paid on February 17, 2011 to stockholders of record on February 3, 2011. During the three months ended May 31, 2011, our board of directors declared a cash dividend of $.0625 per share of common stock, which was paid on May 19, 2011 to stockholders of record on May 5, 2011. During the three months ended August 31, 2011, our board of directors declared a cash dividend of $.0625 per share of common stock, which was paid on August 18, 2011 to stockholders of record on August 4, 2011. A cash dividend of $.0625 per share of common stock was also declared and paid during each of the ~~three months~~three-month periods ended February 28, 2010, May 31, 2010 and ~~the three months ended May~~August 31, 2010. The declaration and payment of future cash dividends on our common stock are at the discretion of our board of directors, and depend upon, among other things, our expected future earnings, cash flows, capital requirements, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions.

Shelf Registration Statement. We have an automatically effective universal shelf registration statement on file with the SEC. The ~~registration statement~~2011 Shelf Registration, which was filed on September 20, 2011, registers the offering of debt and equity securities that we may issue from time to time in amounts to be determined.

Share Repurchase Program. At ~~May~~August 31, 2011, we were authorized to repurchase 4,000,000 shares of our common stock under a board-approved share repurchase program. We did not repurchase any shares of our common stock under this program in 2011. We have not repurchased common shares pursuant to a common stock repurchase plan for the past several years and any resumption of such stock repurchases will be at the discretion of our board of directors.

In the present environment, we are managing our use of cash for investments to maintain and grow our business. Based on our current capital position, and notwithstanding ~~the August 15, 2011 maturity of the remaining balance of~~ our ~~6 3/8% senior notes and our potential~~anticipated net payment obligation related to South Edge, we believe we will have adequate resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated future requirements for funds to acquire capital assets and land, ~~consistent with our investment, marketing and operational standards,~~ to construct homes, to finance our financial services operations, and to meet any other needs in the ordinary course of our ~~business, both on a short- and long-term basis.~~business. Although our land ~~asset~~ acquisition and land development activities in the fourth quarter of 2011 and into 2012 will remain subject to market conditions, ~~in 2011,~~ we are analyzing potential acquisitions and will use our present financial position and a portion of our unrestricted cash resources to purchase assets in desirable, long-term markets when the prices, timing and strategic fit meet our investment and marketing standards. WeIn the fourth quarter of 2011, we may also use or redeploy our unrestricted cash and cash equivalents or engage in other financial transactions, including capital markets transactions, ~~in 2011,~~ though there is no plan to issue equity.

Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments

We have investments in unconsolidated joint ventures that conduct land acquisition, development and/or other homebuilding activities in various markets where our homebuilding operations are located. Our partners in these unconsolidated joint ventures are unrelated homebuilders, and/or land developers and other real estate entities, or commercial enterprises. We entered into these unconsolidated joint ventures in previous years to reduce or share market and development risks and to increase the number of our owned and controlled homesites. In some instances, participation in these unconsolidated joint ventures has enabled us to acquire and develop land that we might not otherwise have had access to due to a project’s size, financing needs, duration of development or other circumstances. While we have viewed our participation in these unconsolidated joint ventures as potentially beneficial to our homebuilding activities, we do not view such participation as essential and have unwound our participation in a number of these unconsolidated joint ventures in the past few years.

We typically have obtained rights to purchase portions of the land held by the unconsolidated joint ventures in which we currently participate. When an unconsolidated joint venture sells land to our homebuilding operations, we defer recognition of our share of such unconsolidated joint venture earnings until a home sale is

closed and title passes to a homebuyer, at which time we account for those earnings as a reduction of the cost of purchasing the land from the unconsolidated joint venture.

We and our unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata ~~basis.~~basis equal to their respective equity interests. The obligations to make capital contributions are governed by each such unconsolidated joint venture’s respective operating agreement and related governing documents. We also share in the profits and losses of these unconsolidated joint ventures generally in accordance with our respective equity interests. These unconsolidated joint ventures had total assets of ~~$193.0~~$192.9 million at ~~May~~August 31, 2011 and $789.4 million at November 30, 2010. Our investment in these unconsolidated joint ventures totaled ~~$51.1~~$51.3 million at ~~May~~August 31, 2011 and $105.6 million at November 30, 2010.

Our unconsolidated joint ventures finance land and inventory investments for a project through a variety of arrangements. To finance their respective land acquisition and development activities, certain of our unconsolidated joint ventures have obtained loans from third-party lenders that are secured by the underlying property and related project assets. Of our unconsolidated joint ventures at November 30, 2010, only South Edge had outstanding debt, which was secured by a lien on South Edge’s assets, with a principal balance of $327.9 million. As of ~~May~~August 31, 2011, the principal balance of South Edge’s outstanding debt remained at $327.9 million.

In certain instances, we and/or our partner(s) in an unconsolidated joint venture have provided completion and/or carve-out guarantees to the unconsolidated joint venture’s lenders. A completion guaranty refers to the physical completion of improvements for a project and/or the obligation to contribute equity to an unconsolidated joint venture to enable it to fund its completion obligations. Our potential responsibility under our completion

guarantees, if triggered, is highly dependent on the facts of a particular case. A carve-out guaranty refers to the payment of losses a lender suffers due to certain bad acts or omissions by an unconsolidated joint venture or its partners, such as fraud or misappropriation, or due to environmental liabilities arising with respect to the relevant project.

In addition to completion and carve-out guarantees, we provided the Springing Guaranty to the Administrative Agent in connection with ~~the~~secured loans made to South Edge that comprise its outstanding debt. By its terms, the Springing Guaranty’s obligations arise after the occurrence of an involuntary bankruptcy proceeding or an involuntary bankruptcy petition filed against South Edge that is not dismissed within 60 days or for which an order or decree approving or ordering any such proceeding or petition is entered. On February 3, 2011, a bankruptcy court entered an order for relief on the Petition filed against South Edge and appointed a Chapter 11 trustee for South Edge. Although we believe that there are potential offsets or defenses to prevent or minimize the enforcement of the Springing Guaranty, as a result of the February 3, 2011 order for relief on the Petition, we consider it probable that we became responsible to pay certain amounts to the Administrative Agent related to the Springing Guaranty. Therefore, our consolidated financial statements at ~~May~~August 31, 2011 reflect a net payment obligation of $226.4 million, representing our estimate of the probable amount that we would pay to the Administrative Agent (on behalf of the South Edge lenders) related to the Springing Guaranty and to pay for certain fees, expenses and charges and for certain allowed general unsecured claims in the South Edge bankruptcy case. This estimate ~~which updates our estimate of our probable net payment obligation at February 28, 2011,~~ is based on the terms of a consensual agreement, effective June 10, 2011, regarding the Plan. As a result of recording our probable net payment obligation at February 28, 2011, and taking into account accruals we had previously established with respect to South Edge and factoring in an offset for the estimated fair value of the South Edge land we expect to acquire as a result of satisfying the payment obligation, as discussed below, we recognized a charge of $22.8 million in the first quarter of 2011 that was reflected as a loss on loan guaranty in our consolidated statements of operations. This charge was in addition to the joint venture impairment charge of $53.7 million that we recognized in the first quarter of 2011 to write off our investment in South Edge. In the second quarter of 2011, in updating our estimate of our probable net payment obligation to reflect the terms of the consensual agreement effective June 10, 2011 regarding the Plan, we recorded an additional loss on loan guaranty of $14.6 million. The consensual agreement effective June 10, 2011 and the Plan are discussed further below under “Part II — Item 1. Legal Proceedings.” Our probable net obligation related to South Edge may change if new information subsequently becomes available.

Based on the terms of the Plan, we anticipate acquiring approximately 600 developable acres of the land owned by South Edge. Therefore, we consider our probable net payment obligation to be partially offset by $75.2 million, ~~this~~the estimated fair value of our share of the South Edge land at ~~May~~August 31, 2011. We calculated this estimated fair value using a present value methodology and assuming that we would develop the land, build and

sell homes on most of the land, and sell the remainder of the developed land. This fair value estimate at ~~May~~August 31, 2011 reflected our expectations of the price we would receive for our share of the South Edge land in the land’s then-current state in an orderly (not a forced) transaction under then-prevailing market conditions. This fair value estimate also reflected judgments and key assumptions concerning (a) housing market supply and demand conditions, including estimates of average selling prices; (b) estimates of potential future home sales and cancellation rates; (c) anticipated entitlements and development plans for the land; (d) anticipated land development, construction and overhead costs to be incurred; and (e) a risk-free rate of return and an expected risk premium, in each case in relation to an expected 15-year life for the South Edge project.

Among the key assumptions used in the present value methodology was the anticipated appreciation in revenues and costs over the expected life of the South Edge project, which is further discussed ~~above~~ in Note 10. Investments in Unconsolidated Joint ~~Ventures.~~Ventures in the Notes to Consolidated Financial Statements in this report. Due to the judgment and assumptions applied in the estimation process with respect to the fair value of our share of the South Edge land at ~~May~~August 31, 2011, including as to the anticipated appreciation in revenues and costs over the life of the South Edge project, it is possible that actual results could differ substantially from those estimated. We will continue to review and update as appropriate our fair value estimates of our share of the South Edge land to reflect changes in relevant market conditions and other applicable factors.

The ultimate outcome of the South Edge bankruptcy, including whether the Plan becomes effective, is uncertain. We believe, however, that we will realize the value of our share of the South Edge land in the bankruptcy proceeding in accordance with the Plan. If the Plan becomes effective, we anticipate that we would (a) acquire our share of the South Edge land as a result of a bankruptcy court-approved disposition of the land to a newly created entity in which we would expect to be a part owner, and (b) without further payment, satisfy or assume the respective liens of the Administrative Agent and the South Edge lenders on the land. If, on the other hand, the Plan does not become effective and instead we assume the lenders’ lien position through payment on our

Springing Guaranty obligation to the Administrative Agent, we would become a secured lender with respect to our share of the South Edge land and would expect to have first claim on the value generated from the land.

If we are not able to realize some or all of the value of our share of the South Edge land, we may be required to recognize an additional expense. Based on our current estimates, this additional expense could range from near zero to potentially as much as $75 million.

Our investments in ~~unconsolidated~~ joint ventures may create a variable interest in a VIE, depending on the contractual terms of the arrangement. We analyze our joint ventures in accordance with ASC 810 to determine whether they are VIEs and, if so, whether we are the primary beneficiary. All of our joint ventures at ~~May~~August 31, 2011 and November 30, 2010 were determined under the provisions of ASC 810 to be unconsolidated joint ventures and were accounted for using the equity method, either because they were not VIEs or, if they were VIEs, we were not the primary beneficiary of the VIEs.

In the ordinary course of our business, we enter into land option and other similar contracts to procure rights to land parcels for the construction of homes. The use of such land option and other similar contracts generally allows us to reduce the market risks associated with direct land ownership and development, to reduce our capital and financial commitments, including interest and other carrying costs, and to minimize the amount of our land inventories in our consolidated balance sheets. Under such contracts, we typically pay 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 ASC 810, certain of these contracts may create a variable interest for us, with the land seller being identified as a VIE.

In compliance with ASC 810, we analyze our land option and other similar contracts to determine whether the corresponding land sellers are VIEs and, if so, whether we are the primary beneficiary. Although we do not have legal title to the ~~optioned~~underlying land, ASC 810 requires us to consolidate a VIE if we are determined to be the primary beneficiary. As a result of our analyses, we determined that, as of ~~May~~August 31, 2011 and November 30, 2010, we were not the primary beneficiary of any VIEs from which we are purchasing land under land option and other similar contracts. In determining whether we are the primary beneficiary, we consider, among other things, whether we have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Such activities would include, among other things, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. We also consider whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE.

As of ~~May~~August 31, 2011, we had cash deposits totaling ~~$2.9~~$2.6 million associated with land option and other similar contracts that we determined to be unconsolidated VIEs, having an aggregate purchase price of ~~$119.1~~$110.6 million, and had cash deposits totaling ~~$10.9~~$13.0 million associated with land option and other similar contracts that we determined were not VIEs, having an aggregate purchase price of ~~$250.7~~$219.3 million. As of November 30, 2010, we had cash deposits totaling $2.6 million associated with land option and other similar contracts that we determined to be unconsolidated VIEs, having an aggregate purchase price of $86.1 million, and had cash deposits totaling $12.2 million associated with land option and other similar contracts that we determined were not VIEs, having an aggregate purchase price of $274.3 million.

We also evaluate our land option ~~contracts~~ and other similar contracts involving financing arrangements in accordance with ASC 470, and, as a result of our evaluations, increased inventories, with a corresponding increase to accrued expenses and other liabilities, onin our consolidated balance sheets by ~~$28.4~~$25.1 million at ~~May~~August 31, 2011 and $15.5 million at November 30, 2010.

Critical Accounting Policies

The preparation of our consolidated financial statements requires the use of judgment in the application of accounting policies and estimates of uncertain matters. There have been no significant changes to our critical accounting policies and estimates during the ~~six~~nine months ended ~~May~~August 31, 2011 from those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended November 30, 2010. Below is supplemental information regarding our critical accounting policy for inventory impairments and land option contract abandonments.

As discussed in Note 7. Inventory Impairments and Land Option Contract Abandonments in the Notes to Consolidated Financial Statements in this report, each land parcel or community in our owned inventory is assessed to determine if indicators of potential impairment exist. Impairment indicators are assessed separately for each land parcel or community on a quarterly basis and include, but are not limited to the following: significant decreases in sales rates, average selling prices, volume of homes delivered, gross margins on homes delivered or projected margins on homes in backlog or future housing sales; significant increases in budgeted land development and construction costs or cancellation rates; or projected losses on expected future land sales. If indicators of potential impairment exist for a land parcel or community, the identified asset is evaluated for recoverability in accordance with ASC 360. We evaluated 33 land parcels or communities for recoverability during each of the three-month periods ended August 31, 2011 and 2010. We evaluated 97 land parcels or communities and 88 land parcels or communities for recoverability during the nine months ended August 31, 2011 and 2010, respectively. Some of these land parcels or communities evaluated during the nine months ended August 31, 2011 and 2010 were evaluated in more than one quarterly period.

When an indicator of potential impairment is identified for a land parcel or community, we test the asset for recoverability by comparing the carrying value of the asset to the undiscounted future net cash flows expected to be generated by the asset. The undiscounted future net cash flows are impacted by then-current conditions and trends in the market in which an asset is located as well as factors known to us at the time the cash flows are calculated. The undiscounted future net cash flows consider recent trends in our sales, backlog and cancellation rates. Among the trends considered with respect to the three-month and nine-month periods ended August 31, 2011 and 2010 were the after effects of a temporary surge in demand in the first two quarters of 2010 that was motivated by the April 30, 2010 expiration of the federal homebuyer tax credit. Also taken into account were our future expectations related to the following: market supply and demand, including estimates concerning average selling prices; sales and cancellation rates; and anticipated land development, construction and overhead costs to be incurred. With respect to the three-month and nine-month periods ended August 31, 2011, these expectations reflected our experience that market conditions for our assets in inventory where impairment indicators were identified have been generally stable in 2010 and into 2011, with no significant deterioration or improvement identified as to revenue and cost drivers, excluding the temporary, though significant impact of the expiration of the federal homebuyer tax credit. Based on this experience, and taking into account the year-over-year increase in net orders in the third quarter of 2011 and the year-over-year increase in the number of new home communities, our inventory assessments considered an expected improved sales pace for the remainder of 2011.

Given the inherent challenges and uncertainties in forecasting future results, our inventory assessments at the time they are made generally assume the continuation of then-current market conditions, subject to identifying information suggesting a sustained deterioration or improvement in such conditions or other significant changes. Therefore, for most of our assets in inventory where impairment indicators are identified, our quarterly inventory assessments for the remainder of 2011, at the time made, will anticipate sales rates, average selling prices and costs to generally continue at or near then-current levels through an affected asset’s estimated remaining life. These estimates, trends and expectations are specific to each land parcel or community and may vary among land parcels or communities.

In our inventory assessments during the third quarter of 2011, we determined that the declines in our sales and backlog levels that we experienced in the third and fourth quarters of 2010 did not reflect a sustained change in market conditions preventing recoverability. Rather, we considered that they reflected the after effects of a temporary surge in demand in the first two quarters of 2010 that was motivated by the April 30, 2010 expiration of the federal homebuyer tax credit. Also contributing to these declines in our sales and backlog levels were strategic community count reductions we made in select markets in prior periods to align our operations with market activity levels.

A real estate asset is considered impaired when its carrying value is greater than the undiscounted future net cash flows the asset is expected to generate. Impaired real estate assets are written down to fair value, which is primarily based on the estimated future cash flows discounted for inherent risk associated with each asset. The discount rates used in our estimated discounted cash flows were 17% and 18% during the three months ended August 31, 2011 and 2010, respectively, and ranged from 17% to 20% during the nine-month periods ended August 31, 2011 and 2010. These discounted cash flows are impacted by the following: the risk-free rate of return; expected risk premium based on estimated land development, construction and delivery timelines; market risk from potential future price erosion; cost uncertainty due to development or construction cost increases; and other risks specific to the asset or conditions in the market in which the asset is located at the time the assessment is made. These factors are specific to each land parcel or community and may vary among land parcels or communities.

Based on the results of our evaluations, we recognized pretax, noncash inventory impairment charges of $.3 million in the three months ended August 31, 2011 associated with one community with a post-impairment fair value of $1.1 million. In the three months ended August 31, 2010, we recognized $1.4 million of pretax, noncash inventory impairment charges associated with one community with a post-impairment fair value of $2.7 million. In the nine months ended August 31, 2011, we recognized pretax, noncash inventory impairment charges of $21.4 million associated with nine land parcels or communities with a post-impairment fair value of $29.9 million. These charges included an $18.1 million adjustment to the fair value of real estate collateral in our Southwest homebuilding reporting segment that we took back on a note receivable in the second quarter of 2011. In the nine months ended August 31, 2010, we recognized $8.2 million of pretax, noncash inventory impairment charges associated with five land parcels or communities with a post-impairment fair value of $6.6 million. The inventory impairments we recorded during the three-month and nine-month periods ended August 31, 2011 and 2010 reflected declining asset values in certain markets due to unfavorable economic and competitive conditions.

As of August 31, 2011, the aggregate carrying value of our inventory that had been impacted by pretax, noncash inventory impairment charges was $366.8 million, representing 56 land parcels or communities. As of November 30, 2010, the aggregate carrying value of our inventory that had been impacted by pretax, noncash inventory impairment charges was $418.5 million, representing 72 land parcels or communities.

Our inventory held under land option and other similar contracts is assessed to determine whether it continues to meet our internal investment and marketing standards. Assessments are made separately for each such land parcel on a quarterly basis and are affected by the following, among other factors: current and/or anticipated sales rates, average selling prices and home delivery volume; estimated land development and construction costs; and projected profitability on expected future housing or land sales. When a decision is made to not exercise certain land option and other similar contracts due to market conditions and/or changes in marketing strategy, we write off the costs, including non-refundable deposits and pre-acquisition costs, related to the abandoned projects. Based on the results of our assessments, we recognized pretax, noncash land option contract abandonment charges of $.8 million corresponding to 209 lots in the three months ended August 31, 2011 and $1.9 million of such charges corresponding to 284 lots in the three months ended August 31, 2010.

In the nine months ended August 31, 2011 and 2010, we recognized pretax, noncash land option contract abandonment charges of $2.1 million corresponding to 467 lots and $8.5 million corresponding to 685 lots, respectively. The charges for land option contract abandonments reflected our termination of land option contracts on projects that no longer met our investment standards or marketing strategy.

Inventory impairment and land option contract abandonment charges are included in construction and land costs in our consolidated statements of operations.

The estimated remaining life of each land parcel or community in our inventory depends on various factors, such as the total number of lots remaining; the expected timeline to acquire and entitle land and develop lots to build homes; the anticipated future sales and cancellation rates; and the expected timeline to build and deliver homes sold. While it is difficult to determine a precise timeframe for any particular inventory asset, we estimate our inventory assets’ remaining operating lives under current and expected future market conditions to range generally from one year to in excess of 10 years. Based on current market conditions and expected delivery timelines, we expect to realize, on an overall basis, the majority of our current inventory balance within three to five years. The following table presents our inventory balance as of August 31, 2011, based on our current estimated timeframe as to when the last home within an applicable land parcel or community will be delivered (in millions):


					Greater than
Less than 2 years	3-5 years		6-10 years		10 years		Total

$1,046.6	$	403.7	$	326.5	$	123.8	$	1,900.6

Due to the judgment and assumptions applied in the estimation process with respect to inventory impairments, land option contract abandonments and the remaining operating lives of our inventory assets, it is possible that actual results could differ substantially from those estimated.

We believe that the carrying value of our inventory balance as of August 31, 2011 is recoverable. Our considerations in making this determination include the factors and trends incorporated into our impairment analyses, and as applicable, the regulatory environment, the competition from other homebuilders, the inventory levels and sales activity of resale and foreclosure homes, and the local economic conditions where an asset is located. However, if conditions in the overall housing market or in specific markets worsen in the future beyond our current expectations, if future changes in our marketing strategy significantly affect any key assumptions used in our fair value calculations, or if there are material changes in the other items we consider in assessing recoverability, we may recognize pretax, noncash charges in future periods for inventory impairments or land option contract abandonments, or both, related to our current inventory assets. Any such pretax, noncash charges could be material to our consolidated financial statements.

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, which provides amendments to ~~Accounting Standards Codification Subtopic No. 820-10, “Fair Value Measurements and Disclosures — Overall.”~~ASC 820-10. ASU 2010-06 requires additional disclosures and clarifications of existing disclosures for recurring and nonrecurring fair value measurements. The revised guidance was effective for us in the second quarter of 2010, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010. ASU 2010-06 concerns disclosure only and will not have a material impact on our consolidated financial position or results of operations.

In December 2010, the FASB issued ASU 2010-29, which addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in ASU 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in ASU 2010-29 also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in ASU 2010-29 are effective prospectively for business combinations for which the acquisition date is on or after the

beginning of the first annual reporting period beginning on or after December 15, 2010. We believe the adoption of this guidance concerns disclosure only and will not have a material impact on our consolidated financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, which changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements in order to improve consistency in the application and description of fair value between U.S. GAAP and IFRS. ASU 2011-04 clarifies how the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or liabilities. In addition, the guidance expanded the disclosures for the unobservable inputs for Level 3 fair value measurements, requiring quantitative information to be disclosed related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. The revised guidance is effective for interim and annual periods beginning after December 15, 2011 and early application by public entities is prohibited. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial position and results of operations.

In June 2011, the FASB issued ASU 2011-05. The amendments in ASU 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments in ASU 2011-05 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We believe the adoption of this guidance concerns disclosure only and will not have a material impact on our consolidated financial position or results of operations.

Outlook

At ~~May~~August 31, 2011, our backlog totaled ~~2,422~~2,657 homes, representing projected future housing revenues of approximately ~~$501.5~~$559.3 million. By comparison, at ~~May~~August 31, 2010, our backlog totaled ~~3,175~~2,169 homes, representing projected future housing revenues of approximately ~~$648.2~~$455.3 million. The ~~24%~~22% year-over-year ~~decrease~~increase in the number of homes in our backlog was mainly due to the ~~decrease~~increase in our net orders in the ~~first six months~~third quarter of 2011 compared to 2010. The 23% year-over-year ~~decline~~increase in the projected future housing revenues in our backlog at ~~May~~August 31, 2011 reflected the ~~lower~~higher number of homes in ~~backlog.~~backlog across all of our homebuilding reporting segments.

Net orders generated by our homebuilding operations ~~decreased 11%~~increased 40% to ~~1,998~~1,838 in the ~~second quarter of~~three months ended August 31, 2011 from the ~~2,244~~1,314 net orders generated in the corresponding ~~quarter~~period of 2010. Net orders rose in each of our four homebuilding reporting segments, with increases ranging from 22% in our Central homebuilding reporting segment to 73% in our West Coast homebuilding reporting segment. The ~~negative~~favorable year-over-year net order comparison ~~was primarily due to generally weak housing market conditions and to~~in the third quarter of 2011 partly reflected activity from recently opened communities as well as the depressed net order level in the year-earlier quarter stemming from the April 30, 2010 expiration of the federal ~~homebuyer~~ tax credit which motivated a surge in demand and a significant increase in net order volume in the second quarter of 2010, but was followed by sharp declines in the second half of 2010 and into 2011 as demand returned towards its trend pattern levels of the past few years. Notwithstanding the impact of the expiration of the federal homebuyer tax credit, the year-over-year second quarter net order comparison showed improvement from the 32% year-over-year decrease in net orders that we reported in the first quarter of 2011.for first-time homebuyers. As a percentage of gross orders, our ~~second~~third quarter cancellation rate ~~increased~~decreased to ~~25%~~29% in 2011 from ~~24%~~33% in 2010.

InDuring the first ~~half~~nine months of 2011, we and the homebuilding industry continued to face difficult market conditions that have persisted to varying degrees since the housing market downturn began in 2006. We believe it is likely that market conditions will remain challenging ~~for~~in the ~~balance~~fourth quarter of ~~the year. While~~2011 and into 2012. Although turbulent macroeconomic conditions, weak growth in employment and low consumer confidence are currently hindering a broader housing market recovery, ~~remains stalled,~~ we are ~~observing~~seeing some encouraging signs of stability in certain ~~desirable~~ markets that are located close to active employment centers, that feature a relative balance of housing

supply and demand, and that offer historically high affordability levels. ~~While~~Therefore, in the ~~April 30, 2010 expiration~~short term, we are managing our business to these current market realities while also positioning our operations to take advantage of anticipated future growth driven by demographic trends and improved economic conditions as they unfold.

For the federal homebuyer tax credit was the primary factor driving the negative year-over-year net order comparisons that we experienced in each of the first two quarters of 2011, as we moved beyond April 2011 our net orders improved on a year-over-year basis. We expect an improved sales pace as we move through the remainder of 2011. On a sequential basis, net orders for the secondfourth quarter of 2011, ~~increased 53% from the first quarter of 2011.~~

Our top priority for 2011 continues to be restoring and maintaining the profitability of our homebuilding operations at the scale of prevailing housing market activity. To support the achievement of our profitability goal, we ~~intend to~~will continue to focus on pursuing the integrated strategic actions we have taken in the past few years to transform ~~and position~~ our business ~~to capitalize on future growth opportunities,~~with the changing housing market dynamics, including following the principles of our KBnxt operational business model; ~~expanding~~increasing the number of our ~~community count;~~new home communities; making targeted inventory investments in attractive ~~markets;~~markets to maintain a solid growth platform; driving additional operational efficiencies and overhead ~~expense~~cost reductions; maintaining a strong balance sheet; and remaining attentive to market conditions and the needs of our core customers. ~~Foremost among these~~We believe the year-over-year growth in net orders and backlog we generated in the third quarter of 2011, and the sequential improvement during the year in our housing gross margin and selling, general and administrative expenses as a percentage of housing revenues, demonstrate that our strategic focus is working and that it is helping us make tangible progress towards our top priority of restoring and maintaining the profitability of our homebuilding operations. Presently, at the forefront of our strategic actions are our ongoing initiatives to ~~acquire ownership~~own or control of well-priced finished or partially finished lots that meet our investment and marketing standards, ~~within or near our existing served markets,~~ and to open new home communities, in select locations that are expected to offer attractive near term and long term sales growth. We ~~have~~ invested approximately ~~$300~~$409 million in land and land development in the first ~~six~~nine months of 2011, and expect that our total land and land development investment for our 2011 fiscal year will be approximately $550 million, nearly the same as our total investment for our 2010 fiscal year, which was approximately $560 million. We ~~currently expect to open~~opened over 90 new home ~~communities throughout our 2011 fiscal year and believe that this will help us achieve higher net orders in the second half of 2011 relative to year-ago levels. We have opened over 60~~ communities in the first ~~half~~nine months of 2011, ~~and~~bringing our total community count, net of communities closed out, at the end of the third quarter to 233, a 10% increase from the prior year. We expect to open anapproximately 20 additional ~~45 to 50~~communities in the ~~second half~~fourth quarter of this year. Continuing a strategic emphasis that began in 2009, during the ~~year, with~~first nine months of 2011, the majority of our land and land development investments and many of ~~these~~our new home community openings have been weighted to California and ~~Texas. Many~~Texas, which we see as having relatively stronger growth prospects than other areas of ~~these~~the country. Substantially all of the new home communities opened this year feature, or will feature, our value-engineered ~~new~~ product and, with the improved operating efficiencies ~~and opportunistic inventory investments~~ we have ~~made,~~implemented, they are expected to generate revenues at a lower cost basis compared to our older communities, helping to restore the profitability of our homebuilding operations. AsIn addition, we have seen our homebuyer profile at several of the ~~remainder of 2011 unfolds,~~communities we have opened this year shift to higher income first-time and move-up consumers, which has resulted in our generating increased revenues from homes delivered from these communities relative to our older communities.

We currently expect our net orders, home deliveries, overall average selling price, revenues and ~~revenues~~housing gross margin in the fourth quarter of 2011 to increase sequentially, and our selling, general and administrative expenses as a percentage of housing revenues to decrease sequentially, in each case as compared to our ~~second~~third quarter results, generating a corresponding improvement in our operating leverage and bringing our financial metrics into better balance while also driving stronger bottom line results infor the second half of the year as compared to the first half. We also expect to end 2011 with a higher number of homes in backlog than we had at year-end 2010. Due to the relatively weak financial results we have experienced in the first ~~two~~three quarters, though, we do not anticipate a net profit for 2011. However, we believe that ~~our operating strategy~~we will ~~position us to~~ achieve profitability in the fourth quarter of 2011, assuming housing markets remain at or close to current activity levels.

Despite the progress we have made over the past several quarters and our current expectations for the fourth quarter of 2011, our ability to generate positive results from our strategic initiatives, including achieving and maintaining profitability and increasing the number of homes delivered, remains constrained by, among other things, the current unbalanced supply and demand conditions in many housing markets, which are unlikely to abate soon given the present economic and employment environment; by low levels of consumer confidence; by the cautiousness of qualified homebuyers in making home purchase decisions, which we believe is, among other things, is moderating the pace of sales at our new home communities; by tight residential consumer mortgage lending standards; and by the reduction in or unwinding of government programs and incentives designed to support homeownership and/or home ~~purchases.~~purchases, including as to applicable limits and standards for government-insured residential consumer mortgage loans. The pace and the extent to which we acquire new land interests, invest in land development and open new home communities will depend significantly on market and economic conditions, including actual and expected sales rates, and the availability of desirable land assets. It may also depend on the ultimate resolution of the bankruptcy proceedings and related matters

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~~matters~~ impacting South Edge (including our ~~potential~~anticipated net payment obligation, as discussed above), and on our using or redeploying our unrestricted cash and cash equivalents and/or our engaging in capital market transactions.

Nonetheless, ~~notwithstanding the August 15, 2011 maturity of the remaining balance of our 6 3/8% senior notes and our potential net payment obligation related to South Edge,~~ we believe ~~we will have more than ample liquidity~~that at our 2011 fiscal year-end ~~with~~we will have a ~~projected~~ balance of cash and cash equivalents and restricted cash of over $500 million after funding our anticipated 2011 operating ~~needs.~~needs (including our anticipated net payment obligation related to South Edge, if satisfied on or before November 30, 2011). While we will continue to evaluate our future cash requirements and financing opportunities available in the capital markets, there is no plan to issue equity.

We continue to believe that a meaningful improvement in housing market conditions will require a sustained decrease in unsold homes, selling price stabilization, reduced mortgage delinquency and foreclosure rates, and a significantly improved economic climate, particularly with respect to ~~employment levels~~job growth and consumer and credit market confidence that support a decision to buy a home. We cannot predict when or the extent to which these events may occur. Moreover, if conditions in our served markets decline further, we may need to take additional pretax, noncash charges for inventory and joint venture impairments and land option contract abandonments, and we may decide that we need to reduce, slow or even abandon our present land acquisition and development and new home community opening plans for those markets. Our present land acquisition and development and new home community opening plans may also be curtailed by the outcome of matters involving South Edge, as noted above. Our results could also be adversely affected if general economic conditions do not notably improve or actually decline, if job losses accelerate or weak employment levels persist, if residential consumer mortgage delinquencies, short sales and foreclosures increase, if residential consumer mortgage lending becomes less available or more expensive, or if consumer confidence weakens, any or all of which could further delay a recovery in housing markets or result in further deterioration in operating conditions, and if competition for home sales intensifies. Despite these difficulties and risks, we believe we are favorably positioned financially and operationally to succeed in advancing our primary strategic goals, particularly in view of longer-term demographic, economic and population-growth trends that we expect will once again drive future demand for homeownership.

Forward-Looking Statements

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

Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The most important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to: general economic, employment and business conditions; adverse market conditions that could result in additional impairments or abandonment charges and operating losses, including an oversupply of unsold homes, declining home prices and increased foreclosure and short sale activity, among other things; conditions in the capital and credit markets (including residential consumer mortgage lending standards, the availability of residential consumer mortgage financing and mortgage foreclosure rates); material prices and availability; labor costs and availability; changes in interest rates; inflation; our debt level, including our ratio of debt to ~~total capital, and our~~

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total capital, and our ability to adjust our debt level and structure; weak or declining consumer confidence, either generally or specifically with respect to purchasing homes; competition for home sales from other sellers of new and existing homes, including sellers of homes obtained through foreclosures or short sales; weather conditions, significant natural disasters and other environmental factors; government actions, policies, programs and regulations directed at or affecting the housing market (including, but not limited to, the Dodd-Frank Act, tax credits, tax incentives and/or subsidies for home purchases, tax deductions for residential consumer mortgage interest payments and property taxes, tax exemptions for profits on home sales, and programs intended to modify existing mortgage loans and to prevent mortgage foreclosures), the homebuilding industry, or construction activities; the availability and cost of land in desirable areas and our ability to identify and acquire such land; our warranty claims experience with respect to homes previously delivered and actual warranty costs incurred; legal or regulatory proceedings or claims, including the involuntary bankruptcy and other legal proceedings involving South Edge described in this report; the confirmation by the bankruptcy court of a consensual plan of reorganization for South Edge and the implementation of such a plan in accordance with the terms of the consensual agreement effective June 10, 2011 among us, the Administrative Agent, several of the lenders to South Edge, and certain of the other members of South Edge and their respective parent companies; the ability and/or willingness of participants in our unconsolidated joint ventures to fulfill their obligations; our ability to access capital; our ability to use the net deferred tax assets we have generated; our ability to successfully implement our current and planned product, geographic and market positioning (including, but not limited to, our efforts to expand our inventory base/pipeline with desirable land positions or interests at reasonable cost and to expand the number of our ~~community count and open~~ new home communities), revenue growth and cost reduction strategies; consumer traffic to our new home communities and consumer interest in our product designs, includingThe Open Series™; the impact of KBA Mortgage ceasing to accept loan applications effective June 27, 2011 and ceasing to offer mortgage banking services to our homebuyers after June 30, 2011; the manner in which our homebuyers are offered and obtain residential consumer mortgage loans and mortgage banking services; and other events outside of our control. Please see our periodic reports and other filings with the SEC for a further discussion of these and other risks and uncertainties applicable to our business.

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PART II. OTHER INFORMATION


~~Item 1.~~		Item 1. Legal Proceedings

South Edge, LLC Litigation

On December 9, 2010, certain lenders to South Edge filed the Petition against South Edge in the United States Bankruptcy Court, District of Nevada, titledJPMorgan Chase Bank, N.A. v. South Edge, LLC (Case No. 10-32968-bam). The petitioning lenders were JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A., and Crédit Agricole Corporate and Investment Bank. KB HOME Nevada Inc., our wholly-owned subsidiary, is a member of South Edge together with unrelated homebuilders and a third-party property development firm.

The Petition alleged that South Edge failed to undertake certain development-related activities and to repay amounts due on the Loans, that the petitioning lenders were undersecured, and that South Edge was generally not paying its debts as they became due. The Loans were used by South Edge to partially finance both the purchase of certain real property located near Las Vegas, Nevada and the development of a residential community on that property. The Loans are secured by the underlying property and related South Edge assets. As of ~~May~~August 31, 2011, the outstanding principal balance of the Loans was $327.9 million.

As a result of the February 3, 2011 order for relief on the Petition, we consider it probable that we became responsible to pay certain amounts to the Administrative Agent related to the Springing Guaranty that we provided in connection with the Loans, as discussed further above under “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments.” Each of KB HOME Nevada Inc., the other members of South Edge and their parent companies provided a similar repayment guaranty to the Administrative Agent.

Effective June 10, 2011, we and the other Participating Members of South Edge became parties to a consensual agreement together with the Administrative Agent and several of the lenders to South Edge, as discussed above under “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments.” The Chapter 11 trustee for South Edge has expressed its consent to the agreement. Each of the parties has agreed to use commercially reasonable efforts to support the Plan, to obtain bankruptcy court approval of a disclosure statement that will accompany the Plan, to obtain bankruptcy court confirmation of the Plan following, and subject to, the bankruptcy court’s approval of a disclosure statement, to obtain the requisite support of the South Edge lenders to the Plan, and to consummate the Plan promptly after confirmation, in each case by certain specified dates. Under the agreement, the effective date of the Plan following its confirmation is to occur on or before November 30, 2011, though it may be extended by the Participating Members and the Administrative Agent jointly by up to 30 days, depending on the date of Plan confirmation.

Pursuant to the terms of the Plan, we would pay to the South Edge lenders an amount between approximately $214 million and $225 million on the effective date of the Plan. We have deposited ~~approximately $21~~$21.4 million of this amount in an escrow ~~account.~~account, which is reflected as restricted cash in our consolidated balance sheet as of August 31, 2011. The other Participating Members also would pay certain amounts to the South Edge lenders on the effective date of the Plan and have similarly deposited amounts into ~~the~~an escrow account. The exact sum that we and the other Participating Members would pay to the South Edge lenders depends on the outcome of proceedings the Chapter 11 trustee for South Edge has commenced against, among others, a South Edge member that is not a Participating Member in order to determine the amount of pledged infrastructure development funds that can be applied to the South Edge debt. In addition to their payments to the South Edge lenders, we and the other Participating Members would each be responsible for certain fees, expenses and charges and for certain allowed general unsecured claims, and would receive the benefit of potential contributions and recoveries that would, in the aggregate, affect our respective costs related to the Plan. Taking all of this into account, we

If the Plan becomes effective, we anticipate that we would (a) acquire our share of the land owned by South Edge (amounting to at least approximately 65% of the land and as much as approximately 68%) as a result of a bankruptcy court-approved disposition of the land to a newly created entity in which we would expect to be a part owner, and (b) without further payment, satisfy or assume the respective liens of the Administrative Agent and the South Edge lenders on the land. In addition, if the Plan becomes effective, we anticipate that all South Edge-related claims, potential guaranty obligations (including our potential Springing Guaranty obligation), and litigation between the Administrative Agent (on behalf of itself and the South Edge lenders) and the Participating Members would be resolved, although lenders holding less than 8% ownership in the ~~loans~~Loans made to South Edge that are not currently expected to consent to the Plan and members of South Edge that are not Participating Members may assert certain claims against us, which claims we would vigorously dispute.

The agreement ~~is subject to bankruptcy court approval and~~ may be terminated by the Administrative Agent or the Participating Members upon the occurrence of certain specified events, including a failure to meet the specified dates on which the above-described activities in support of the Plan are to occur. ~~The Participating Members and~~On September 8, 2011, the ~~Administrative Agent currently expect~~bankruptcy court approved a disclosure statement designed to ~~file~~implement the Plan, and ~~accompanying disclosure statement with~~a hearing to confirm the ~~bankruptcy court in or around late July~~Plan is scheduled for October 17, 2011. As of the date of this report, we believe that the other Participating Members, the Administrative Agent and the South Edge lenders that are party to the agreement are able to and will fulfill their respective obligations as contemplated under the Plan if it becomes effective.

The Administrative Agent had previously filed the Lender Litigation. The Lender Litigation seeks to enforce completion guarantees provided to the Administrative Agent in connection with the Loans, seeks to compel the South Edge members (including KB HOME Nevada Inc.) to purchase land parcels from South Edge, seeks to compel the South Edge members to provide certain financial support to South Edge, and also seeks various damages based on other guarantees and claims. The Lender Litigation has been stayed in light of the South Edge bankruptcy and, as stated above, would be resolved between the Administrative Agent (on behalf of itself and the South Edge lenders consenting to the Plan) and the Participating Members if the Plan becomes effective.

A separate arbitration proceeding was also commenced in May 2009 to address one South Edge member’s claims for specific performance by the other members to purchase land parcels from and to make certain capital contributions to South Edge or, in the alternative, damages. On July 6, 2010, the arbitration panel issued a decision denying the specific performance and damages claim asserted on behalf of South Edge, but the panel awarded the claimant damages of $36.8 million against all of the respondents. Motions to partially vacate the award were denied and judgment was entered on the award, which the respondents have appealed to the United States Courts of Appeal for the Ninth Circuit, titledFocus South Group, LLC, et al. v. KB HOME Nevada Inc, et al., (Case No. 10-17562).The appeal is pending. If the appeals of the arbitration panel’s July 6, 2010 decision ultimately are not successful, we have estimated that our probable maximum share of the $36.8 million awarded as damages to the claimant in the arbitration is approximately $25.5 million. This estimate is based on KB HOME Nevada Inc.’s interest in South Edge in relation to that of the other four respondents in the arbitration and our assumption that liability for the awarded amount would be joint and several among the five respondents. Although the appeal remains pending, we have since the third quarter of 2010 segregated an accrual for $25.5 million for this matter from our previously established reserve balances relating to South Edge. The ultimate amount of our share, however, could be subject to negotiations and/or potential arbitration among all of the respondents in the arbitration. The accrual for this matter is separate from the accrual we established with respect to our probable net payment obligation related to South Edge.

The ultimate resolution of the South Edge bankruptcy, the Lender Litigation and the appeal of the arbitration panel decision, and the time at which any resolution is reached with respect to each matter, are uncertain and involve multiple factors, including whether the Plan becomes effective, the actions of the Chapter 11 trustee for South Edge, and court decisions. Further, the ultimate resolution of the South Edge bankruptcy (including with respect to our ~~potential~~anticipated net payment obligation related to South Edge), the Lender Litigation and the appeal of the arbitration panel decision could have a material effect on our liquidity, as further discussed above under “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

In addition to the specific proceedings described above, we are involved in other litigation and regulatory proceedings incidental to our business that are in various procedural stages. We believe that the accruals we have recorded for probable and reasonably estimable losses with respect to these proceedings are adequate and that, as


~~Item 6.~~		Item 6. Exhibits

Exhibits

10.43

Consensual agreement effective June 10, 2011.

~~10.41~~	*	Amendment to the KB Home 2010 Equity Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2011, is incorporated by reference herein.

~~10.42~~	*	~~Executive Severance Benefit Decisions, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2011, is incorporated by reference herein.~~

31.1		Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


	31.2			Certification of Jeff J. Kaminski, Executive Vice President and Chief Financial Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


	32.1			Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	32.2			Certification of Jeff J. Kaminski, Executive Vice President and Chief Financial Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	101			The following materials from KB Home’s Quarterly Report on Form 10-Q for the quarter ended ~~May~~August 31, 2011, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

INDEX OF EXHIBITS

10.43

Consensual agreement effective June 10, 2011.

31.1

Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Jeff J. Kaminski, Executive Vice President and Chief Financial Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Jeff J. Kaminski, Executive Vice President and Chief Financial Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

The following materials from KB Home’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2011, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements ~~tagged as blocks~~ of ~~text.~~Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


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

6771

~~INDEX OF EXHIBITS~~


~~10.41~~	*	Amendment to the KB Home 2010 Equity Incentive Plan, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2011, is incorporated by reference herein.

~~10.42~~	*	~~Executive Severance Benefit Decisions, filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2011, is incorporated by reference herein.~~

~~31.1~~		~~Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~

~~31.2~~		~~Certification of Jeff J. Kaminski, Executive Vice President and Chief Financial Officer of KB Home Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~

~~32.1~~		~~Certification of Jeffrey T. Mezger, President and Chief Executive Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~

~~32.2~~		Certification of Jeff J. Kaminski, Executive Vice President and Chief Financial Officer of KB Home Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~101~~		The following materials from KB Home’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2011, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


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


	Page
	Number
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Operations — ~~Six~~Nine Months and Three Months Ended ~~May~~August 31, 2011 and 2010		3

Consolidated Balance Sheets — ~~May~~August 31, 2011 and November 30, 2010		4

Consolidated Statements of Cash Flows — ~~Six~~Nine Months Ended ~~May~~August 31, 2011 and 2010		5

Notes to Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		38

Item 3. Quantitative and Qualitative Disclosures About Market Risk		6365

Item 4. Controls and Procedures		6365

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		6466

Item 1A. Risk Factors		6668

Item 6. Exhibits		6769

SIGNATURES		6870

INDEX OF EXHIBITS		6971

Exhibit 10.43
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


	Six Months Ended May 31,						Three Months Ended May 31,
	2011			2010			2011			2010			Nine Months Ended August 31,						Three Months Ended August 31,
													2011			2010			2011			2010
Capitalized interest at beginning of period	$	249,966		$	291,279		$	253,040		$	290,451		$	249,966		$	291,279		$	249,792		$	275,405
Capitalized interest related to consolidation of previously unconsolidated joint ventures		—			9,914			—			—			—			9,914			—			—
Interest incurred (a)		55,399			61,906			29,462			29,855			84,489			91,907			29,090			30,001
Interest expensed (a)		(24,560	)		(35,925	)		(13,121	)		(16,518	)		(36,902	)		(52,108	)		(12,342	)		(16,183	)
Interest amortized to construction and land costs		(31,013	)		(51,769	)		(19,589	)		(28,383	)		(52,746	)		(79,454	)		(21,733	)		(27,685	)


Capitalized interest at end of period (b)	$	249,792		$	275,405		$	249,792		$	275,405		$	244,807		$	261,538		$	244,807		$	261,538


	Six Months Ended May 31,						Three Months Ended May 31,
	2011			2010			2011			2010			Nine Months Ended August 31,						Three Months Ended August 31,
	2011			2010			2011			2010
Balance at beginning of period	$	93,988		$	135,749		$	87,061		$	130,549		$	93,988		$	135,749		$	82,630		$	117,753
Warranties issued		1,981			1,937			1,133			1,086			3,236			3,720			1,255			1,783
Payments		(14,471	)		(17,252	)		(6,662	)		(10,889	)		(20,483	)		(35,210	)		(6,012	)		(17,958	)
Adjustments		1,132			(2,681	)		1,098			(2,993	)		(6,242	)		(2,329	)		(7,374	)		352


Balance at end of period	$	82,630		$	117,753		$	82,630		$	117,753		$	70,499		$	101,930		$	70,499		$	101,930


(a)		Corporate and other includes corporate general and administrative expenses.


	(a)		Amount represents the aggregate fair values for land parcels or communities for which the Company recognized inventory impairment charges during the reporting period, as of the date that the fair value measurements were made. The carrying value for these land parcels and communities may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date.


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


	Three Months Ended May 31,														Three Months Ended August 31,
	Homes Delivered				Net Orders				Cancellation Rates						Homes Delivered				Net Orders				Cancellation Rates
Segment	2011		2010		2011		2010		2011			2010			2011		2010		2011		2010		2011			2010

West Coast		353		500		542		608		22	%		15	%		524		600		581		335		27	%		23	%

Southwest		183		359		270		351		18			16			232		337		259		186		20			26

Central		475		550		838		796		29			31			611		855		677		556		34			37

Southeast		254		373		348		489		24			26			236		528		321		237		30			40


Total		1,265		1,782		1,998		2,244		25	%		24	%		1,603		2,320		1,838		1,314		29	%		33	%


Unconsolidated joint ventures		—		34		—		27		—	%		—	%		—		24		—		16		—	%		—	%


	May 31,								August 31,
					Backlog - Value								Backlog - Value
	Backlog - Homes				(In Thousands)				Backlog - Homes				(In Thousands)
Segment	2011		2010		2011		2010		2011		2010		2011		2010

West Coast		572		720	$	172,147	$	241,383		629		455	$	211,360	$	165,546

Southwest		274		371		43,572		60,278		301		220		51,262		34,490

Central		1,141		1,351		199,350		224,212		1,207		1,052		199,503		171,577

Southeast		435		733		86,475		122,365		520		442		97,205		83,703


Total		2,422		3,175	$	501,544	$	648,238		2,657		2,169	$	559,330	$	455,316


Unconsolidated joint ventures		—		28	$	—	$	11,760		—		20	$	—	$	7,480


(a)		Loan originations and sales occur within KBA ~~Mortgage.~~Mortgage, which stopped accepting loan applications effective June 27, 2011 and ceased offering mortgage banking services to our homebuyers after June 30, 2011.


~~Item 3.~~		Item 3. Quantitative and Qualitative Disclosures About Market Risk


			Weighted Average					Weighted Average
Fiscal Year of Expected Maturity	Fixed Rate Debt		Interest Rate			Fixed Rate Debt		Interest Rate

2011	$	99,977		6.4	%	$	—		—	%
2012		—		—			—		—
2013		—		—			—		—
2014		249,571		5.8			249,609		5.8
2015		748,939		6.1			749,003		6.1
Thereafter		559,552		8.1			559,710		8.1


Total	$	1,658,039		6.7	%	$	1,558,322		6.8	%


Fair value at May 31, 2011	$	1,634,946
Fair value at August 31, 2011						$	1,378,550


	KB HOME Registrant
Dated October 7, 2011	By:	/s/ JEFF J. KAMINSKI
		Jeff J. Kaminski
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)


Dated October 7, 2011	By:	/s/ WILLIAM R. HOLLINGER
		William R. Hollinger
		Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)


	~~KB HOME~~ ~~Registrant~~
~~Dated July 11, 2011~~	~~By:~~	~~/s/ JEFF J. KAMINSKI~~
		~~Jeff J. Kaminski~~
		~~Executive Vice President and Chief Financial Officer~~ ~~(Principal Financial Officer)~~

~~Dated July 11, 2011~~	~~By:~~	~~/s/ WILLIAM R. HOLLINGER~~
		~~William R. Hollinger~~
		~~Senior Vice President and Chief Accounting Officer~~ ~~(Principal Accounting Officer)~~