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 31, 2011, as well as stock options activity during the six months then ended:


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

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

Options exercisable at end of period		6,110,686			28.58

As of May 31, 2011, the weighted average remaining contractual life of stock options outstanding and stock options exercisable was 7.3 years and 6.8 years, respectively. There was $4.8 million of total unrecognized compensation cost related to unvested stock option awards as of May 31, 2011. For the three months ended May 31, 2011 and 2010, stock-based compensation expense associated with stock options totaled $1.3 million and $1.4 million, respectively. For the six months ended May 31, 2011 and 2010, stock-based compensation expense associated with stock options totaled $2.7 million and $2.9 million, respectively. The aggregate intrinsic value of stock options outstanding and stock options exercisable was $1.7 million and $.1 million, respectively, as of 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 of $.4 million in the three months ended May 31, 2011 and total compensation income of $1.4 million in the three months ended May 31, 2010 related to restricted stock, phantom shares and SARs awards. The Company recognized total compensation expense of $1.4 million in the six months ended May 31, 2011 and $4.3 million in the six months ended May 31, 2010 related to these stock-based awards. Some of the stock-based awards outstanding at May 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.