UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended February 29, 2004.

or

For the transition period from [     ] to [     ].

Commission File No. 1-9195

KB HOME

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

(Address and telephone number of principal executive offices)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

Yes x       No o

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).

Yes x       No o

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT’S CLASSES OF COMMON STOCK AS OF FEBRUARY 29, 2004.

Common stock, par value $1.00 per share, 46,713,954 shares outstanding, including 7,419,320 shares held by the Registrant’s Grantor Stock Ownership Trust and excluding 7,448,100 shares held in treasury.

KB HOME
FORM 10-Q
INDEX

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

See accompanying notes.

3

KB HOME
CONSOLIDATED BALANCE SHEETS
(In Thousands — Unaudited)

See accompanying notes.

4

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

See accompanying notes.

5

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		Basis of Presentation and Significant Accounting Policies
		The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.
		In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of February 29, 2004, the results of its consolidated operations for the three months ended February 29, 2004 and February 28, 2003, and its consolidated cash flows for the three months ended February 29, 2004 and February 28, 2003. The results of operations for the three months ended February 29, 2004 are not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet at November 30, 2003 has been taken from the audited financial statements as of that date. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended November 30, 2003 contained in the Company’s 2003 Annual Report to Stockholders.
		Segment information
		The Company has identified two reportable segments: construction and mortgage banking. Information for the Company’s reportable segments is presented in its consolidated statements of income and consolidated balance sheets included herein. The Company’s reporting segments follow the same accounting policies used for the Company’s consolidated financial statements. Management evaluates a segment’s performance based upon a number of factors including pretax results.
		Stock based compensation
		The Company has elected to account for stock-based compensation using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations and, therefore, recorded no compensation expense in the determination of net income during the three-month periods ended February 29, 2004 and February 28, 2003. The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in the three-month periods ended February 29, 2004 and February 28, 2003 (in thousands, except per share amounts):

6

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		Basis of Presentation and Significant Accounting Policies (continued)
		Earnings per share
		Basic earnings per share is calculated by dividing net income by the average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income by the average number of common shares outstanding including all dilutive potentially issuable shares under various stock option plans and stock purchase contracts.
		The following table presents a reconciliation of average shares outstanding (in thousands):

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

		The accumulated balances of other comprehensive income in the balance sheets as of February 29, 2004 and November 30, 2003 are comprised solely of cumulative foreign currency translation adjustments of $47.1 million and $38.5 million, respectively.
2.		Inventories
		Inventories consist of the following (in thousands):

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KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

3.		Consolidation of Variable Interest Entities
		In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FASB Interpretation No. 46”). FASB Interpretation No. 46 is intended to clarify the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities (referred to as “variable interest entities” or “VIEs”) in which equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Pursuant to FASB Interpretation No. 46, an enterprise that absorbs a majority of the VIEs expected losses, receives a majority of the VIEs expected residual returns, or both, is determined to be the primary beneficiary of the VIE and must consolidate the entity. FASB Interpretation No. 46 applied immediately to VIEs created after January 31, 2003. For VIEs created on or before January 31, 2003, FASB Interpretation No. 46 is effective no later than the first interim or annual period ending after March 15, 2004.
		In the ordinary course of its business, the Company enters into land option contracts in order to procure land for the construction of homes. Under such land option contracts, the Company will fund a specified option deposit or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. Under the requirements of FASB Interpretation No. 46, certain of the Company’s land option contracts may create a variable interest for the Company, with the land seller being identified as a VIE.
		In compliance with FASB Interpretation No. 46, the Company analyzed its land option contracts and other contractual arrangements entered into after January 31, 2003 and has consolidated the fair value of certain VIEs from which the Company is purchasing land under option contracts. The consolidation of these VIEs, where the Company was determined to be the primary beneficiary, added $36.4 million to inventory and other liabilities in the Company’s consolidated balance sheet at February 29, 2004. The Company’s cash deposits related to these land option contracts totaled $1.9 million at February 29, 2004. Creditors, if any, of these VIEs have no recourse against the Company. As of February 29, 2004, excluding consolidated VIEs, the Company had cash deposits and/or letters of credit totaling $107.6 million which were associated with land option contracts having an aggregate purchase price of $1.99 billion. The Company is in the process of evaluating contracts entered into on or before January 31, 2003 in order to assess the extent of its interests. Depending upon the specific terms or conditions of such entities, the Company may be required to consolidate other VIEs in subsequent periods. This evaluation will be completed for the quarter ending May 31, 2004.

8

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4.		Goodwill
		The changes in the carrying amount of goodwill for the three months ended February 29, 2004, by segment, are as follows (in thousands):

5.		Accounting for Derivative Instruments and Hedging Activities
		To meet the financing needs of its customers, the Company’s mortgage banking subsidiary is party to interest rate lock commitments (“IRLCs”), which are extended to borrowers who have applied for funding and meet certain defined credit and underwriting criteria. In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), the Company’s mortgage banking subsidiary classifies and accounts for IRLCs as non-designated derivative instruments at fair value with gains and losses recorded to earnings.
		In the normal course of business and pursuant to its risk management policy, the Company’s mortgage banking subsidiary uses derivative financial instruments to reduce its exposure to fluctuations in interest rates. When interest rates rise, loans held for sale and any applications in process with locked-in interest rates decline in value. To preserve the value of such loans, the mortgage banking operations enter into mortgage forward delivery contracts and non-mandatory commitments to minimize the impact of movements in market interest rates on the mortgage loans held for sale and IRLCs.
		On May 31, 2003, the Company’s mortgage banking subsidiary elected to discontinue its accounting for derivative instruments as cash flow hedges. Accordingly, all derivative instruments as of June 1, 2003 are carried in the balance sheet at fair value, with changes in the value recorded directly to earnings. Prior to this election, the mortgage forward delivery contracts and non-mandatory commitments were designated as cash flow hedges and changes in the fair value of these instruments were recognized in other comprehensive income until such time that earnings were affected by the underlying hedged item. The Company intends to designate mortgage forward delivery contracts and non-mandatory commitments as fair value hedges in the third quarter of fiscal year 2004. The Company believes this designation will not materially impact its financial position or results of operations.
		The following table summarizes the interest rate sensitive instruments of the mortgage banking operations (in thousands):

9

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6.		Mortgages and Notes Payable
		On January 28, 2004, the Company issued $250.0 million of 5 3/4% senior notes (“$250.0 Million Senior Notes”) at 99.474% of the principal amount of the notes in a private placement. The notes, which are due February 1, 2014, with interest payable semi-annually, represent senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The $250.0 Million Senior Notes may be redeemed, in whole at any time or from time to time in part, at a price equal to 100% of their principal amount, plus a premium, plus accrued and unpaid interest to the applicable redemption date. The $250.0 Million Senior Notes are unconditionally guaranteed jointly and severally by certain of the Company’s domestic operating subsidiaries (“Guarantor Subsidiaries”), on a senior unsecured basis. The Company used all of the net proceeds from the issuance of the $250.0 Million Senior Notes to repay borrowings outstanding under its $1.00 billion unsecured revolving credit facility (“$1 Billion Credit Facility”). The Company has agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the $250.0 Million Senior Notes for registered notes issued by the Company on substantially identical terms, except that they will be fully transferable.
7.		Commitments and Contingencies
		The Company provides a limited warranty on all of its homes. The specific terms and conditions of warranties vary depending upon the market in which the Company does business. For homes sold in the United States, the Company generally provides a structural warranty of 10 years, a warranty on electrical, heating, cooling, plumbing and other building systems each varying from two to five years based on geographic market and state law, and a warranty of one year for other components of the home such as appliances. The Company estimates the costs that may be incurred under each limited warranty and records a liability in the amount of such costs at the time the revenue associated with the sale of each home is recognized. Factors that affect the Company’s warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
		Changes in the Company’s warranty liability are as follows (in thousands):

		In the normal course of its business, the Company issues certain representations, warranties and guarantees related to its home sales, land sales, commercial construction and mortgage loan originations that may be affected by FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Based on historical evidence, the Company does not believe any of these representations, warranties or guarantees would result in a material effect on its financial condition or results of operations.
		The Company is often required to obtain bonds and letters of credit in support of its related obligations with respect to subdivision improvement, homeowners association dues, start-up expenses, warranty work, contractors license fees and earnest money deposits, among other things. At February 29, 2004, the Company had outstanding approximately $712.3 million and $112.6 million of performance bonds and letters of credit, respectively. In the event any such bonds or letters of credit are called, the Company would be obligated to reimburse the issuer of the bond or letter of credit. However, the Company does not believe that any currently outstanding bonds or letters of credit are likely to be called.

10

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7.		Commitments and Contingencies (continued)
		The Company conducts a portion of its land acquisition, development and other activities through its participation in joint ventures in which the Company holds less than a majority interest. The Company’s investment in these unconsolidated joint ventures was $36.4 million at February 29, 2004. These joint ventures had secured construction debt of approximately $76.5 million outstanding at February 29, 2004. The Company does not typically guarantee the debt of joint ventures.
		Borrowings outstanding and letters of credit issued under the Company’s $1 Billion Credit Facility are guaranteed by the Guarantor Subsidiaries. As of February 29, 2004, such borrowings and letters of credit totaled $131.2 million and $112.5 million, respectively.
8.		Stockholders Equity
		On December 5, 2003, the Company’s board of directors increased the annual cash dividend on the Company’s common stock to $1.00 per share from $.30 per share. The first quarterly dividend at the increased rate of $.25 per share was paid on February 25, 2004 to shareholders of record on February 11, 2004.
9.		Acquisition
		On January 6, 2004, the Company acquired Palmetto Traditional Homes (“Palmetto”), a privately-held builder of single-family homes in several metropolitan areas of South Carolina, including Charleston and Columbia. The Palmetto acquisition marks the Company’s entry into South Carolina. The results of Palmetto were reflected as part of the Company’s Southeast region operations as of the acquisition date. The pro forma results of the Company for the three months ended February 29, 2004 and February 28, 2003, assuming the acquisition had been made at the beginning of each period, would not be materially different from reported results.
10.		Recent Accounting Pronouncement
		On March 9, 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (“SAB No. 105”), which provides guidance regarding IRLCs that are accounted for as derivative instruments under SFAS No. 133. In SAB No. 105, the Securities and Exchange Commission stated that the value of expected future cash flows related to servicing rights and other intangible components should be excluded when determining the fair value of derivative IRLCs and such value should not be recognized until the underlying loans are sold. This guidance must be applied to IRLCs initiated after March 31, 2004. The Company’s current accounting policy for fair value determination of IRLCs requires consideration of the terms of the individual IRLCs in comparison to available market rates. The value of servicing rights and other intangible components representing potential economic gains the Company expects to receive upon disposition of its funded loans is not included in the determination of the fair value of IRLCs throughout the period IRLCs are outstanding. Accordingly, the Company believes that implementation of SAB No. 105 will not have a material impact on its results of operations.
11.		Supplemental Guarantor Information
		The Company’s obligation to pay principal, premium, if any, and interest under certain debt instruments are guaranteed on a joint and several basis by the Guarantor Subsidiaries. The guarantees are full and unconditional and the Guarantor Subsidiaries are 100% owned by KB Home. The Company has determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented.

11

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11.		Supplemental Guarantor Information (continued)
		Condensed Consolidating Income Statements Three Months Ended February 29, 2004 (in thousands)

12

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11.

Supplemental Guarantor Information (continued)

Condensed Consolidating Balance Sheet February 29, 2004 (in thousands)

13

KB HOME
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11.

Supplemental Guarantor Information (continued)

Condensed Consolidating Statements of Cash Flows Three Months Ended February 29, 2004 (in thousands)

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

Results of Operations

		OVERVIEW
		Total revenues of $1.35 billion for the three months ended February 29, 2004 increased $258.5 million, or 23.6%, from $1.09 billion for the three months ended February 28, 2003 primarily due to higher housing revenues. Net income for the first quarter of 2004 increased $21.4 million, or 40.4%, to $74.2 million from $52.8 million in the same quarter of 2003. The combined effects of higher revenues and an improved operating income margin drove the year-over-year earnings growth in the first quarter of 2004. Net income in the first quarter of 2003 was reduced by an after tax charge of $2.9 million (or $.07 per diluted share) associated with the Company’s early extinguishment of debt and by an after tax impact of $3.1 million (or $.07 per diluted share) resulting from a change in accounting in its mortgage banking operations. Diluted earnings per share for the quarter ended February 29, 2004 rose 40.0% to $1.75 from $1.25 for the year-earlier quarter as a result of a corresponding increase in net income.
		CONSTRUCTION
		Revenues increased by $260.5 million, or 24.1%, to $1.34 billion in the first quarter of 2004 from $1.08 billion in the first quarter of 2003 primarily due to higher housing revenues. The Company’s construction revenues are generated from operations in the U.S. and France. The Company’s U.S. operating divisions are grouped into four regions: “West Coast” — California; “Southwest” — Arizona, Nevada and New Mexico; “Central” — Colorado, Illinois and Texas; and “Southeast” — Florida, Georgia, North Carolina and South Carolina.
		Housing revenues for the three months ended February 29, 2004 rose by $270.3 million, or 25.5%, to $1.33 billion from $1.06 billion in the year-earlier period as a result of a 17.7% increase in unit deliveries and a 6.6% increase in the Company’s average selling price. All of the Company’s geographic regions posted year-over-year growth in housing revenues in the first quarter of 2004. Housing revenues in the United States rose to $1.15 billion on 5,336 unit deliveries in the first three months of 2004 from $935.8 million on 4,477 units in the first three months of 2003. In the West Coast region, housing revenues rose 6.3% to $430.6 million in the first quarter of 2004 from $404.9 million in the year-earlier quarter, due to an increase in the average selling price, which more than offset the 4.7% decrease in unit deliveries to 1,106 units from 1,161 units. Housing revenues from the Southwest region rose 36.2% to $320.1 million in the first quarter of 2004 from $235.1 million in the first quarter of 2003, as deliveries increased 20.3% to 1,654 units from 1,375 units in the year-earlier quarter. In the Central region, first quarter housing revenues increased 3.5% to $247.1 million in 2004 from $238.7 million in 2003, as deliveries rose 3.6% to 1,658 units from 1,600 units in the prior year quarter. Housing revenues in the Southeast region rose 163.8% to $150.5 million in the first three months of 2004 from $57.1 million in the same period of 2003. Unit deliveries in the Southeast region increased 169.2% to 918 units in the first quarter of 2004 from 341 units in the year-earlier quarter as a result of the Company’s expansion in the southeastern U.S., including its acquisition of Atlanta, Georgia-based Colony Homes (“Colony”) in the second quarter of 2003 and South Carolina-based Palmetto Traditional Homes (“Palmetto”) in the first quarter of 2004. Revenues from French housing operations increased 45.9% to $183.6 million on 860 units during the first three months of 2004 from $125.9 million on 786 units in the year-earlier period.
		The Company-wide average new home price increased 6.6% in the first quarter of 2004 to $215,000 from $201,700 in the first quarter of 2003. During the quarter, the Company’s domestic average selling price rose 3.0% to $215,200 from $209,000. The average selling price in the Company’s West Coast region rose 11.6% to $389,300 in the first three months of 2004 from $348,800 in the same period of 2003, while in the Southwest region, the average selling price increased 13.2% to $193,600 from $171,000. In both the West Coast and Southwest regions, the high demand for housing combined with the constrained housing supply continued to support higher prices. In the Central region, the average selling price remained relatively flat at $149,000 in the first quarter of 2004 when compared to the first quarter of 2003. The average selling price in the Southeast region decreased 2.0% to $164,000 from $167,400 in 2003 due to a change in product mix, as the Company expanded into additional markets in the region. In France, the average selling price for the quarter ended February 29, 2004 increased 33.4% to $213,500 from $160,100 in the year-earlier quarter primarily due to favorable foreign exchange rates.

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		The Company’s commercial business in France generated revenues of $3.1 million in the first quarter of 2004, down from $17.3 million in the first quarter of 2003 on decreased commercial activities. Company-wide revenues from land sales totaled $6.9 million in the first three months of 2004 compared to $2.5 million in the first three months of 2003. Generally, land sale revenues fluctuate with management decisions to maintain or decrease the Company’s land ownership position in a particular market or markets based upon the volume of its holdings, the strength and number of competing developers entering the particular market at given points in time, the availability of land in the particular market served by the Company and prevailing market conditions.
		Operating income increased $32.8 million to $119.5 million in the first three months of 2004 from $86.7 million in the first three months of 2003 due to the combined effects of higher housing revenues and an improved operating margin. As a percentage of construction revenues, operating income rose .9 percentage points to 8.9% in the first quarter of 2004 from 8.0% in the first quarter of 2003 due to an increase in the housing gross margin and improvement in the selling, general and administrative expense ratio. Gross profits rose $65.4 million, or 28.0%, to $298.8 million in the first quarter of 2004 from $233.4 million in the year-earlier quarter. Gross profits as a percentage of construction revenues rose mainly due to an increase in the housing gross margin. The housing gross margin increased .8 percentage points to 22.3% in the first three months of 2004 from 21.5% in the first three months of 2003, reflecting both enhanced operating efficiencies and higher average selling prices. Commercial activities in France generated profits of $.9 million during the three months ended February 29, 2004 compared with $4.0 million generated during the three months ended February 28, 2003. Company-wide land sales generated profits of $.7 million and $.6 million in the first quarter of 2004 and 2003, respectively.
		Selling, general and administrative expenses increased to $179.3 million in the three months ended February 29, 2004 from $146.7 million in the corresponding 2003 period. As a percentage of housing revenues, selling, general and administrative expenses improved to 13.5% in the first quarter of 2004 from 13.8% in the year-earlier quarter. This improvement in the first quarter of 2004 primarily resulted from the Company’s Southeast region operations being more fully integrated and delivering additional revenues, and Central region costs being resized to align with the region’s lower unit delivery volume.
		Interest income totaled $1.2 million in the first quarter of 2004 and $.8 million in the first quarter of 2003. 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 (net of amounts capitalized) totaled $4.5 million in the first quarter of 2004, down from $10.4 million for the same period of 2003. Gross interest incurred during the three months ended February 29, 2004 decreased $.2 million from the amount incurred in the same period of 2003. Interest expense and gross interest incurred in the first quarter of 2003 included a pretax charge of $4.3 million associated with the Company’s early extinguishment of its 9 5/8% senior subordinated notes. Excluding this charge, gross interest expense increased by $4.1 million in first three months of 2004 compared to the same period of 2003 due to higher debt levels in 2004. The percentage of interest capitalized was 85.2% in the first quarter of 2004 and 76.8% in the first quarter of 2003, excluding the early extinguishment charge. The increase in the percentage of interest capitalized in the first quarter of 2004 resulted from a higher proportion of land under development in 2004 compared to 2003.
		Minority interests totaled $8.7 million in the first quarter of 2004, increasing from $2.1 million in the first quarter of 2003. Minority interests for the three-month periods ended February 29, 2004 and February 28, 2003 were comprised of the minority ownership portion of income from consolidated subsidiaries and joint ventures related to residential and commercial activities. The increase in minority interests in the first quarter of 2004 primarily relates to increased activity from a consolidated joint venture in Northern California.
		Equity in pretax income of unconsolidated joint ventures totaled $1.2 million in the first quarter of 2004 and $.2 million in the first quarter of 2003. The Company’s joint ventures recorded combined revenues of $30.5 million in the first three months of 2004 compared to $5.8 million in the corresponding period of 2003. All of the joint venture revenues in the first three months of 2004 and 2003 were generated from residential properties. Unconsolidated joint ventures generated combined pretax income of $3.1 million in the first quarter of 2004 and $.9 million in the corresponding period of 2003. The increased results from unconsolidated joint ventures in the first quarter of 2004 primarily reflected additional joint venture activity in France.

16

		MORTGAGE BANKING
		Interest income and interest expense totaled $2.6 million and $1.1 million, respectively, in the first quarter of 2004. Interest income decreased $1.9 million from the year-earlier quarter primarily due to a lower average balance of first mortgages held under commitments of sale and other receivables outstanding during the first three months of 2004 compared to the first three months of 2003 as a result of a decrease in the mortgage banking subsidiary’s retention rate. The term “retention” refers to the percentage of the Company’s domestic homebuyers using its mortgage banking subsidiary as a loan originator. Interest expense decreased $1.1 million in the first quarter of 2004, mainly due to a lower average balance of notes payable outstanding and lower interest rates on notes payable outstanding during the period as compared to the year-earlier period.
		The following table presents mortgage loan origination and sales data, including loans brokered to wholesale mortgage bankers, for the Company’s mortgage banking operations (dollars in thousands):

		The mortgage banking subsidiary’s retention rate decreased to 62% in the first quarter of 2004 from 82% in the first quarter of 2003 due to several factors which include: efforts to build a mortgage pipeline in the Company’s recently expanded Southeast region, increased referrals by cooperating brokers to outside mortgage bankers, increased competition in the mortgage banking marketplace, particularly Internet-based lenders, and consumer demand for more diverse loan products such as interest only payment loans.
		Other mortgage banking revenues, which principally consist of gains on sales of mortgages and servicing rights and, to a lesser extent mortgage loan origination fees and mortgage servicing income, decreased slightly to $9.0 million in the first three months of 2004 from $9.1 million in the first three months of 2003.
		General and administrative expenses totaled $8.4 million for the quarter ended February 29, 2004 and $7.6 million for the quarter ended February 28, 2003. General and administrative expenses for the first quarter of 2004 increased primarily as a result of higher staff levels in place to accommodate the Company’s increasing backlog and the expansion of the Company’s operations into new markets.
		INCOME TAXES
		Income tax expense totaled $36.5 million in the first quarter of 2004 and $26.0 million in the first quarter of 2003. These amounts represented effective income tax rates of approximately 33% in both 2004 and 2003.

Liquidity and Capital Resources

		The Company assesses its liquidity in terms of its ability to generate cash to fund its operating and investing activities. Historically, the Company has funded its construction and mortgage banking activities with internally generated cash flows and external sources of debt and equity financing. In the first quarter of 2004, operating, investing and financing activities provided net cash of $91.1 million. In the first quarter of 2003, operating, investing and financing activities used net cash of $76.2 million.
		Operating activities used cash of $141.5 million during the first three months of 2004 and provided $55.4 million during the same period of 2003. The Company’s uses of operating cash in the first quarter of 2004 included net

17

		investments in inventories of $267.3 million (excluding the effect of the Palmetto acquisition, $16.3 million of inventories acquired through seller financing and $9.0 million of inventory of consolidated variable interest entities), a decrease in accounts payable, accrued expenses and other liabilities of $18.7 million, and other operating uses of $1.8 million. The uses of cash in the first quarter of 2004 were partially offset by first quarter earnings of $74.2 million, a decrease in receivables of $55.4 million and various noncash items deducted from net income.
		In the first quarter of 2003, sources of operating cash included a decrease in receivables of $285.3 million, first quarter earnings of $52.8 million and various noncash items deducted from net income. Partially offsetting these sources were a decrease in accounts payable, accrued expenses and other liabilities of $143.4 million, net investments in inventories of $119.3 million (excluding $17.0 million of inventories acquired through seller financing) and other operating uses of $28.9 million.
		Investing activities used cash of $52.4 million in the first three months of 2004 and $.6 million in the year-earlier period. In the first quarter of 2004, $46.9 million, net of cash acquired, was used for the acquisition of Palmetto, $4.1 million was used for net purchases of property and equipment and $2.3 million was used for investments in unconsolidated joint ventures. The cash used was partially offset by $.8 million received from mortgage-backed securities, which were principally used to pay down the collateralized mortgage obligations for which the mortgage-backed securities have served as collateral and $.1 million provided from net sales of mortgages held for long-term investment. In the first quarter of 2003, investing activities used $3.7 million for investments in unconsolidated joint ventures and $2.1 million for net purchases of property and equipment. The cash used in 2003 was partly offset by $3.8 million from net sales of mortgages held for long-term investment and $1.4 million in proceeds received from mortgage-backed securities.
		Financing activities provided cash of $284.9 million in first three months of 2004 and used $131.0 million in the first three months of 2003. In the first quarter of 2004, sources of cash included $248.7 million in proceeds from the sale of 5 3/4% senior notes, $32.6 million in proceeds from short-term borrowings, $15.5 million from the issuance of common stock under employee stock plans and $.5 million of payments from minority interests. Partially offsetting the cash provided were $9.8 million used for dividend payments and $2.5 million used for payments on collateralized mortgage obligations. On January 28, 2004, the Company issued $250.0 million of 5 3/4% senior notes (“$250.0 Million Senior Notes”) at 99.474% of the principal amount of the notes in a private placement. The notes, which are due February 1, 2014, with interest payable semi-annually, represent senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness. The $250.0 Million Senior Notes may be redeemed, in whole at any time or from time to time in part, at a price equal to 100% of their principal amount, plus a premium, plus accrued and unpaid interest to the applicable redemption date. The $250.0 Million Senior Notes are unconditionally guaranteed jointly and severally by certain of the Company’s domestic operating subsidiaries (“Guarantor Subsidiaries”) on a senior unsecured basis. The Company used all of the net proceeds from the issuance of the $250.0 Million Senior Notes to repay borrowings outstanding under its $1.00 billion unsecured revolving credit facility (“$1 Billion Credit Facility”). The Company has agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the $250.0 Million Senior Notes for registered notes issued by the Company on substantially identical terms, except that they will be fully transferable.
		Financing activities in first quarter of 2003 used $279.8 million for net payments on borrowings, $129.0 million for the redemption of 9 5/8% senior subordinated notes, $23.8 million for repurchases of common stock, $3.0 million for cash dividend payments, $2.8 million for payments to minority interests and $1.2 million for payments on collateralized mortgage obligations. Partially offsetting these uses were $295.3 million in proceeds from the sale of 7 3/4% senior subordinated notes and $13.3 million from the issuance of common stock under employee stock plans.
		As of February 29, 2004, the Company had $756.3 million available under its $1 Billion Credit Facility, net of $112.5 million of outstanding letters of credit. French unsecured financing agreements, totaling $189.4 million, had in the aggregate $149.5 million available at February 29, 2004. In addition, the Company’s mortgage banking operation had $299.5 million available under its $400.0 million master loan and security agreement and $154.8 million of capacity available under its $180.0 million master loan and security agreement at the end of the first quarter of 2004. The Company’s mortgage banking subsidiary also has a $300.0 million purchase and

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		sale agreement, which allows it to accelerate the sale of its mortgage loan inventory resulting in a more effective use of the warehouse facilities. This agreement is not a committed facility and may be terminated at the discretion of the counterparties. The debt of the Company’s mortgage banking subsidiary is non-recourse to the Company’s construction business.
		The Company’s financial leverage, as measured by the ratio of construction debt to total capital, was 48.2% at February 29, 2004 compared to 50.2% at February 28, 2003. Construction debt to total capital is not a financial measure in accordance with generally accepted accounting principles (“GAAP”). However, the Company believes this ratio is preferable to total debt to total capital, the most comparable GAAP measure, in order to maintain comparability with other publicly traded homebuilders for stockholders, investors and analysts. A reconciliation of the non-GAAP measure, construction debt to total capital, to the most comparable GAAP measure, total debt to total capital, follows (in thousands):