specified in the applicable Award. For purposes of an Award that is intended to qualify as“performance-based compensation” under Code Section 162(m), the term “Performance Objective” shallmean any one or more of the following performance criteria, either individually, alternatively orin any combination, applied to either the Company as a whole or to a business unit or subsidiary,either individually, alternatively or in any combination, and measured either annually orcumulatively over a period of years, on an absolute basis or relative to a pre-established target,to previous years’ results or to a designated comparison group, in each case as specified by theCommittee in the Award: (i) pre-tax income, (ii) after-tax income, (iii) cash flow, (iv) return onequity, (v) return on capital, (vi) earnings per share (including earnings before interest, taxes,depreciation and amortization), (vii) unit volume, (viii) net sales, (ix) service quality or (v)total shareholder return, in each case as determined in accordance with Generally AcceptedAccounting Principles, if applicable.     (k) Performance Stock Award: Performance Stock is an award of shares of Common Stock madeunder Section 7(a), the grant, issuance, retention and/or vesting of which is subject to suchperformance and other conditions as are expressed in the document(s) evidencing the Award.     (l) Plan: The KB Home 1998 Stock Incentive Plan, as it may be amended from time to time.     (m) Restricted Stock Award: Restricted Stock is a right granted under Section 7(b) to sharesof Common Stock issued or issuable under the Plan but subject during specified periods of time tosuch conditions on vesting, restrictions on transferability and/or repurchase rights as areexpressed in the document(s) evidencing the Award.     (n) Stock Unit Award: An award granted under Section 8 of this Plan.     (o) Subsidiary: Any corporation of which the Corporation owns, directly or indirectly, fiftypercent (50%) or more of the voting or capital stock, or any partnership or other entity of whichthe Company owns, directly or indirectly, a fifty percent (50%) or more participating interest orthe general partner of which is a Subsidiary.     (p) Tax Date: The date on which taxes of any kind are required by law to be withheld withrespect to shares of Common Stock subject to an Option or Award.     SECTION 3. ADMINISTRATION.     (a) The Plan shall be administered by the Board and/or by a committee of the Board, asappointed from time to time by the Board (the “Committee”). The Board shall fill vacancies on, andfrom time to time may remove or add members to, the Committee. The Committee shall act pursuant toa majority vote or unanimous written consent. Notwithstanding the foregoing, with respect to anyAward that is not intended to satisfy the conditions of Rule 16b-3 under the Exchange Act orSection 162(m)(4)(C) of the Code, the Committee may appoint one or more separate committees (anysuch committee, a “Subcommittee”) composed of one or more directors of the Corporation (who may butneed not be members of the Committee) and may delegate to any such Subcommittee(s) the authority togrant Options, Limited Stock Appreciation Rights and/or Awards under the Plan, to determine allterms of such Options, Limited Stock
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Appreciation Rights and /or Awards, and to administer the Plan or any aspect of it. Anyaction by any such Subcommittee shall be deemed for all purposes to have been taken by theCommittee. The Committee may designate the Secretary of the Corporation or other Company employeesto assist the Committee in the administration of the Plan, and may grant authority to such personsto issue and/or execute agreements or other documents under this Plan on behalf of the Committee orthe Company.     (b) The Committee shall have full power and authority, subject to such orders or resolutionsnot inconsistent with the provisions of the Plan as may from time to time be issued or adopted bythe Board, to grant to eligible persons Options, Limited Stock Appreciation Rights and Awardspursuant to the provisions of the Plan, to fix the exercise price and other terms of Options, tofix the terms of any Performance Stock Award and/or Restricted Stock Award in a manner consistentwith the terms of Section 7, to fix the terms of any Stock Unit Award in a manner consistent withthe terms of Section 8, to prescribe, amend and rescind rules and regulations, if any, relating tothe Plan, to interpret the provisions of the Plan, Options, Limited Stock Appreciation Rights andAwards issued under the Plan, to amend such Options, Limited Stock Appreciation Rights and Awardsfrom time to time subject to the provisions of the Plan, and to supervise the administration of thePlan. All decisions made by the Committee pursuant to the provisions of the Plan and relatedorders or resolutions of the Board shall be final, conclusive and binding on all persons, includingthe Company, stockholders, employees and optionees.     (c) Each person who is or shall have been a member of the Committee or of the Board shall beindemnified and held harmless by the Company from any loss, cost, liability or expense that may beimposed upon or reasonably incurred by him or her in connection with any claim, action, suit orproceeding to which he or she may be a party by reason of any action taken or any failure to actunder the Plan. The foregoing right of indemnification shall not be exclusive of any other rightsof indemnification to which such persons may be entitled under the Company’s Articles ofIncorporation or Bylaws, or as a matter of law, or otherwise, or any power that the Company mayhave to indemnify them or hold them harmless.     SECTION 4. SHARES SUBJECT TO THE PLAN.     (a) The shares to be delivered upon exercise of Options or Limited Stock Appreciation Rightsgranted under the Plan or pursuant to Awards, may be made available from the authorized butunissued shares of the Company or from shares reacquired by the Company, including shares purchasedin the open market or in private transactions.     (b) Subject to adjustments made pursuant to the provisions of Section 4(d) and this Section4(b), the aggregate number of shares reserved for issuance upon the exercise of Options andpursuant to Awards which may be granted under the Plan shall not exceed 1,900,000 shares of CommonStock. The aggregate number of shares of Common Stock issued under this Plan shall equal only thenumber of shares actually issued upon exercise or settlement of an Option or vesting or settlementof any Award and not returned to the Company upon cancellation, expiration or forfeiture of Optionsand Awards or delivered (either actually or by attestation) in payment or satisfaction of theexercise price, purchase price or tax obligation of Options and Awards.
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     (c) The aggregate number of shares of Common Stock issued and issuable pursuant to ISOs maynot exceed 1,900,000 shares. The maximum number of shares of Common Stock subject to Optionsgranted during any calendar year to any one Participant shall not exceed 1,000,000. The maximumnumber of shares of Common Stock subject to Awards (other than Stock Units issued or issuable uponexercise of Options) that may be granted during any calendar year to any one Participant shall notexceed 250,000 in the aggregate.     (d) In the event of any stock dividend, extraordinary cash dividend, recapitalization,reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares,warrants or rights offering to purchase Common Stock at a price substantially below fair marketvalue, or other similar corporate event affecting the Common Stock such that an adjustment isrequired in order to preserve the benefits or potential benefits intended to be made available toParticipants under this Plan, the Committee shall make appropriate proportional adjustments to anyor all of (1) the number and kind of shares which thereafter may be awarded or optioned and sold ormade the subject of Limited Stock Appreciation Rights under the Plan, (2) the number and kind ofshares subject to outstanding Options and Awards, and Limited Stock Appreciation Rights, and (3)the option price with respect to any of the foregoing and/or, if deemed appropriate, make provisionfor a cash payment to a Participant, including to reflect such an event occurring prior to anOption or Award, the grant of which was intentionally deferred in anticipation of such event;provided, however, that the number of shares subject to any Option or Award shall always be a wholenumber. Any adjustment under this Section 4(d) shall be made only to the extent that suchadjustment will not cause a violation of the requirements of Section 409A.     SECTION 5. ELIGIBILITY AND EXTENT OF PARTICIPATION.     (a) The persons eligible to receive Awards, Options and associated Limited Stock AppreciationRights under the Plan shall consist of employees or prospective employees of the Company andconsultants or advisors of the Company who, in the Committee’s judgment, can make substantialcontributions to the Company’s long-term profitability and value. For purposes of theadministration of previously granted Options and Awards, the term “Participant” shall also includea former Participant and any permitted transferee (including any trust, partnership or estate) of aParticipant or former Participant.     (b) Subject to the limitations of the Plan, the Committee shall, after such consultation withand consideration of the recommendations of management as the Committee considers desirable, selectfrom eligible persons those Participants to be granted Options and Awards and determine the timewhen each Option and Award shall be granted, the number of shares subject to each Option and Awardand whether Limited Stock Appreciation Rights should be granted in connection with such Option, thenumber of shares for each Award and the restrictions associated with such Award. Subject to theprovisions of Section 4, both Options and Awards may be granted to the same Participant.     SECTION 6. GRANTS OF OPTIONS AND LIMITED STOCK APPRECIATION RIGHTS.     (a) Grant of Options. Options on shares of Common Stock may be granted to
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Participants by the Committee from time to time at its sole discretion. Options intended toqualify as ISOs pursuant to Code Section 422 and Non-Qualified Options which are not intended toqualify as ISOs may be granted as the Committee in its sole discretion shall determine. EachOption grant shall contain such terms and conditions as may be approved by the Committee. Subjectto the terms of the Plan, the Committee may establish provisions regarding (1) the number of sharesof Common Stock which may be issued upon exercise of the Option, (2) the purchase price of theshares of Common Stock and the means of payment for the shares of Common Stock, (3) the term of theOption, (4) such terms and conditions of exercisability as may be determined from time to time bythe Committee, (5) restrictions on the transfer of the Option and forfeiture provisions, and (6)such further terms and conditions, in each case not inconsistent with the Plan as may be determinedfrom time to time by the Committee. The grant of an Option shall not constitute or be evidence ofany agreement or other understanding, express or implied, on the part of the Company or anySubsidiary to employ an individual for any specific period.     (b) Grant of Limited Stock Appreciation Rights in the Event of Change of Ownership. If deemedby the Committee to be in the best interests of the Company, any Option granted on or after theeffective date of the Plan may include a Limited Stock Appreciation Right at the time of grant ofthe Option; also, the Committee may grant a Limited Stock Appreciation Right with respect to anyunexercised Option at any time after granting such Option prior to the end of its term, providedsuch Option was granted after the effective date of the Plan. Unless otherwise specified, anyreference in this Plan to an Option or Options shall include any associated Limited StockAppreciation Right. Such Limited Stock Appreciation Rights shall be subject to such terms andconditions not inconsistent with the Plan as the Committee shall impose, provided that: (1) A Limited Stock Appreciation Right shall be exercisable only during theninety-one (91) day period specified in the last sentence of Section 9(a), provided,however, that except in connection with a Change of Ownership, no Limited StockAppreciation Right granted to a Participant who is subject to Section 16 of theExchange Act shall be exercisable within six (6) months of the date of its grant; and  (2) A Limited Stock Appreciation Right shall, upon its exercise, entitle theoptionee to whom such Limited Stock Appreciation Right was granted to receive an amountof cash equal to the amount by which the “Offer Price per Share” (as such term ishereinafter defined) shall exceed the exercise price of the associated Option,multiplied by the number of shares of Common Stock with respect to which such LimitedStock Appreciation Right shall have been exercised. Upon the exercise of a LimitedStock Appreciation Right, any associated Option shall cease to be exercisable to theextent of the shares of Common Stock with respect to which such Limited StockAppreciation Right was exercised. Upon the exercise or termination of an associatedOption, any related Limited Stock Appreciation Right shall terminate to the extent ofthe shares of Common Stock with respect to which such associated Option was exercisedor terminated.    The term “Offer Price per Share” as used in this Section 6(b) shall mean with
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   respect to a Limited Stock Appreciation Right the higher of (i) the fair marketvalue per share of Common Stock on the date of exercise of such Limited StockAppreciation Right or (ii) the highest price per share for Common Stock paid or tobe paid in the transaction, if any, giving rise to the event specified in clauses(1) or (2) (as the case may be) of Section 9(a) which triggered the exercisabilityof such Limited Stock Appreciation Right. For purposes of clause (ii) above, anysecurities or property which are part of the consideration paid or to be paid insuch transactions shall be valued in determining the Offer Price per Share at thehighest of (A) the valuation placed on such securities or property by the company,person or other entity engaging in such transaction, or (B) the valuation placed onsuch securities or property by the Committee.  (c) Option Price.  (1) The price at which each share of Common Stock may be purchased upon exercise ofa particular Option shall be as specified by the Committee, in its sole discretion, butin no event shall the exercise price be less than 100% of the fair market value of ashare of Common Stock at the time such Option is granted, except that (i) in the eventthat an optionee is required to make a payment or to forego the receipt of othercompensation pursuant to paragraph (c)(3) below prior to receiving such Option, theexercise price per share of Common Stock of such Option shall not be less than 100% ofthe fair market value of a share of Common Stock at the time such Option is grantedless the purchase price per share of Common Stock of such Option, and (ii) theCommittee may specifically provide that the exercise price of an Option may be higheror lower in the case of an Option granted to employees of a company acquired by theCompany in assumption and substitution of options held by such employees at the timesuch company is acquired.  (2) Unless approved by shareholders and subject to adjustment pursuant to Section4(d), the exercise price of any Option previously awarded under the Plan may not beadjusted downward, whether through amendment, cancellation or replacement grants, or byany other means.  (3) If the Committee, in its discretion, shall deem it desirable, the grant of anOption may be made conditional upon the receipt of a payment therefor by the optioneeor upon the optionee agreeing to forego receipt of an amount of other compensation.Such condition and the terms and conditions as to its satisfaction may also provide forthe reimbursement to the optionee of any part or all of such payment under suchcircumstances as the Committee may specify.  (d) Exercise.  (1) Each Option shall be exercisable at such times and subject to such terms andconditions as the Committee may, in its sole discretion, specify, provided, however,that except in connection with a Change of Ownership, (i) Options granted toParticipants who are subject to Section 16 of the Exchange Act shall
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   not become exercisable within six (6) months from the date of grant and (ii) in noevent may any Option granted hereunder be exercisable after the expiration of 15years from the date of such grant. Subject to the foregoing, each Option grantshall specify the effect thereon of the death, retirement or other termination ofemployment of the optionee. In addition, the Committee may impose such otherconditions with respect to the exercise of Options, including without limitation,any relating to the application of Federal or state securities laws, as it may deemnecessary or advisable.  (2) No shares shall be delivered pursuant to any exercise of an Option until theParticipant has made payment in full of the option price therefor or provision for suchpayment satisfactory to the Committee. The exercise price of an Option may be paid incash or certified or cashiers’ check or by delivery (either actually or by attestation)of shares of Common Stock that have been acquired or held by the Participant in suchmanner as to not result in an accounting charge. To the extent authorized by theCommittee, either at the time of grant or at the time of exercise of an Option, theexercise price of an Option also may be paid through one of more of the following: