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                                                                    EXHIBIT 10.1

                    AMENDED AND RESTATED EMPLOYMENT AGREEMENT

                THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this
"Agreement") is dated as of JULY 11, 2001 (the "Effective Date"), between KB
Home, a Delaware corporation (the "Company"), and Bruce Karatz (the
"Executive").

                WHEREAS, the Company and the Executive previously have entered
into that certain letter agreement, dated as of December 1, 1995 (the "1995
Letter Agreement"), pursuant to which the Company currently employs the
Executive; and

                WHEREAS, the Company and the Executive each have determined that
it would be to the advantage and best interest of the Company and the Executive
to enter into this Agreement to extend the Executive's employment term and to
modify certain of the Executive's and the Company's obligations and
responsibilities under the 1995 Letter Agreement; and

                WHEREAS, the Company and the Executive desire to have this
Agreement amend and restate the 1995 Letter Agreement in its entirety and
supersede the 1995 Letter Agreement in all respects effective as of the
Effective Date, except as expressly provided otherwise by this Agreement;

                NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:

        1. Employment. As of the Effective Date, the Company hereby employs the
Executive and the Executive hereby accepts employment by the Company in
accordance with the terms and provisions of this Agreement. The Executive shall
be an employee exclusively of the Company and shall serve the Company to the
best of the Executive's abilities, devoting the Executive's full productive
time, energies, and abilities to the fulfillment of the Executive's obligations
hereunder, except for the Executive's (a) service on corporate, civic or
charitable boards or committees which does not significantly interfere with the
performance of the Executive's responsibilities hereunder; provided, however,
that the Executive shall not serve as a member of the board of directors of any
corporation whose activities involve or relate to the Company's business without
the prior approval of the Compensation Committee of the Board and (b) management
of the Executive's personal investments. All improvements, discoveries, business
relationships, corporate opportunities, management procedures, and goodwill
conceived, divested, established, developed, or perfected by the Executive
during the period of the Executive's employment and related in any way to the
business of the Company or any of its affiliates shall promptly be disclosed to
and be the exclusive property of the Company.

        2. Term. The term of this Agreement shall commence on the Effective
Date, and, subject to earlier termination as provided herein, shall continue
until the seventh year anniversary of the Effective Date; provided, however,
that on January 1, 2002, the term shall automatically

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be extended until December 31, 2008, unless the Executive shall give the Company
prior written notice to the contrary. By mutual agreement in writing, at anytime
during the period beginning on January 1, 2008 and ending on December 31, 2008,
the term may be extended for any period agreed to by the Company and the
Executive.

        3. Duties and Responsibilities. The Executive shall be employed as the
Chairman and Chief Executive Officer of the Company, and as such shall have
responsibility for the supervision and management of the world-wide activities
of the Company and its subsidiaries. The Executive shall manage such activities
and perform such duties in accordance with the Executive's judgment and in the
best interests of the Company and its shareholders, subject to such policies and
directives as promulgated by the Board.

        4. Compensation. For all services to be rendered by the Executive to the
Company and its affiliates hereunder, including without limitation, services as
an officer, director, or member of any committee, the Executive shall be
compensated as follows:

                (a) Base Salary. The Executive shall receive a fixed base
salary, which shall be payable in semi-monthly installments, in accordance with
the customary payroll practices of the Company. For the calendar year ending
December 31, 2001, the Executive's base salary shall be at an annual rate of
$900,000 and commencing January 1, 2002 and annually thereafter, the Executive's
salary shall be adjusted in accordance with the judgment and discretion of the
Compensation Committee of the Board, provided that in no event shall the
Executive's base salary during the term of this Agreement be less than at the
annual rate of $900,000.

                (b) Incentive Compensation. The Executive shall be entitled to
earn annual incentive compensation for the fiscal year ending November 30, 2001,
and each subsequent fiscal year during the term of this Agreement. All incentive
compensation, including restricted stock awards, to which the Executive is
entitled under this subsection (b), shall be made under and subject to the terms
of the Performance-Based Incentive Plan for Senior Management (the "Plan") or
other Company plan pursuant to which such incentive compensation constitutes
"qualified performance-based compensation" ("QPBC") within the meaning of
Treasury Regulation Section 1.162-27(e).

                        (i) For the fiscal year ending November 30, 2001, the
        Executive shall be entitled to earn the incentive compensation set forth
        in Section 4(b)(i) of the 1995 Letter Agreement.

                        (ii) For the fiscal year ending November 30, 2002 and
        each subsequent fiscal year during the term of this Agreement, the
        Executive shall be entitled to earn the following incentive
        compensation:

                                (aa) Subject to approval by the Company's
                shareholders of an amendment to the Plan increasing the maximum
                cash incentive payable to any person under the Plan from
                $3,000,000 to $5,000,000 or of an amendment to an other Company
                plan which permits an aggregate amount of $5,000,000 of annual
                cash compensation to qualify as QPBC (the "QPBC Amendment"), the
                Executive shall be entitled to the following annual incentive
                compensation based on the

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                return on equity on a net income basis ("ROE") of the Company,
                as defined and further described in Appendix A, payable in cash
                and shares of restricted stock as provided below:

                                        (1) If the ROE of the Company is at
                least 6.5% but less than 10%, then an annual incentive
                compensation equal to 1% of the pretax, preincentive income
                ("PPI") of the Company;

                                        (2) If the ROE of the Company is at
                least 10% but less than 15%, then an annual incentive
                compensation equal to 1.25% of the PPI of the Company plus .05%
                of PPI for each additional whole percentage of ROE in excess of
                10%;

                                        (3) If the ROE of the Company is at
                least 15% but less than 20%, then an annual incentive
                compensation equal to 1.50% of PPI plus .10% of PPI for each
                additional whole percentage of ROE in excess of 15%; and

                                        (4) If the ROE of the Company equals or
                exceeds 20%, then an annual incentive compensation equal to 2%
                of the PPI of the Company.

                                        (5) On the Payment Date (as defined in
                subsection (iii) below), the annual incentive compensation
                payable to the Executive under clauses (1) through (4) shall be
                paid to the Executive 75% in cash and 25% in shares of
                restricted stock based on the fair market value of the stock
                (without regard on any restrictions on the stock) on the last
                date of the fiscal year for which the payment is being made;
                provided, however, that in no event shall the amount of the cash
                incentive compensation to be paid to the Executive be greater in
                any fiscal year than $5,000,000 (the "Maximum Limit"). If the
                cash portion of the annual incentive compensation earned by the
                Executive exceeds the Maximum Limit, the Executive shall be paid
                the excess amount in shares of restricted stock.

                                        (6) Notwithstanding any other provisions
                of this Agreement, if the Company's shareholders fail to approve
                the QPBC Amendment, the Executive shall be entitled to earn the
                incentive compensation provided by Section 4(b)(i) of the 1995
                Letter Agreement for each fiscal year during the term of this
                Agreement.

                                        (7) The shares of restricted stock
                granted under clause (5) vest upon the third anniversary of the
                date of grant, provided the Executive is still employed by the
                Company on such date and shall vest earlier upon the Executive's
                termination of employment due to death, disability, involuntary
                termination of employment by the Company without Cause, or
                voluntary termination of employment for Good Reason. Such shares
                of restricted stock shall be forfeited upon the termination of
                the Executive employment for Cause or by the Executive's
                voluntary termination of employment without Good Reason before
                the third anniversary of the date of grant. The terms and
                conditions of the

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                shares of restricted stock are more fully defined in Appendix B.
                No fractional shares shall be issued hereunder.

                (iii) By no later than February 1, 2002, and each anniversary
thereof, the Personnel, Compensation and Stock Plan Committee of the Board, or
its successor committee (the "Committee"), will certify the amount of incentive
compensation to which the Executive is entitled, if any, for the preceding
fiscal year under subsections (b)(i) and (ii) above as required under the
applicable plan. Promptly following the effective date of the certification and
in accordance with the Company's incentive compensation payout policy in effect
from time to time and on the date that the Company pays the annual bonuses to
other participants in the applicable plan (the "Payment Date"), the Company will
deliver any cash award and prepare an agreement substantially in the form of
Appendix B, evidencing the restricted stock award earned under subsection
(b)(ii). The grant date of any shares of restricted stock awarded under
subsection (b)(ii)(aa)(5) shall be the Payment Date.

                (c) Retention Grant of Restricted Stock. In order to induce the
Executive to enter into this Agreement and to agree to continue in the Company's
employment during the term of this Agreement, as of the Effective Date, the
Company shall grant the Executive a grant of 350,000 shares of restricted stock
which shall vest 100% upon the occurrence of any of the following: (i) on
December 31, 2008 provided the Executive is still employed by the Company on
such date and shall vest earlier upon the Executive's termination of employment
due to death, disability, involuntary termination of employment by the Company
without Cause, or voluntary termination of employment for Good Reason, or (ii)
upon a Change of Ownership (as defined below). Except as provided above, the
shares of restricted stock granted under this subsection (c) shall be forfeited
upon the termination of the Executive employment for Cause or by the Executive's
voluntary termination of employment without Good Reason before December 31,
2008. The terms and conditions of the shares of restricted stock are more fully
defined in Appendix C.

                (d) Employment Benefits. The Executive shall also be entitled to
receive during the term of this Agreement all other employee benefits, including
reimbursement for bona fide business expenses, club membership fees paid by the
Company, a car leased by the Executive and paid for by the Company, all
automobile expenses, vacations, life and medical insurance, key man motivational
programs, the deferred profit sharing program, and stock option, restricted
stock and similar plans as may be offered by the Company to its key executive
personnel. The Executive shall further be entitled to receive up to $50,000 per
year to pay for personal financial management services, in addition to tax and
financial counseling services which will be offered to the Executive on the same
basis as offered by the Company to its key executives.

                (e) Vacation. The Executive shall receive four (4) weeks paid
vacation annually, subject to the terms of the Company's vacation policies as
they relate to senior executive officers.

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                (f) SERP Benefits. The Executive shall be entitled to receive a
benefit under a defined benefit supplemental retirement plan (the "SERP") which
shall provide an annual retirement benefit for a period of 25 years to the
Executive equal to 100% of the Executive's annual average base salary during the
final three years of the Executive's employment if the Executive retires on or
after November 30, 2008. The terms and conditions of this SERP are more fully
defined in Appendix D. The SERP may be funded with a rabbi trust which may own a
life insurance policy on the Executive's life as described in Appendix D. In the
event of a Change of Ownership, the Company shall fund the SERP with a rabbi
trust.

                (g) Terms of Stock Options and Restricted Stock.

                        (i) The terms and conditions of any stock options and
        shares of restricted stock granted to the Executive prior to the
        Effective Date shall be subject to Section 4(d) of the 1995 Letter
        Agreement.

                        (ii) All stock options and shares of restricted stock
        granted to the Executive after the Effective Date shall provide that
        such options and restricted stock shall be 100% vested upon the
        Executive's termination of employment due to death, disability,
        involuntary termination of employment by the Company without Cause, or
        voluntary termination of employment for Good Reason. In addition, such
        stock options shall provide that if the Executive retires on or after
        November 30, 2008, such options shall continue to be exercisable until
        the earlier of their original expiration dates or the 5th anniversary of
        such retirement.

        5. Termination.

                (a) Death.

                        (i) In the event of the Executive's death, this
        Agreement and all the Executive's unearned rights hereunder shall
        terminate immediately. In such event, the Company shall promptly pay to
        the Executive's estate all earned but unpaid incentive compensation. In
        addition, the Company shall pay the Executive's estate the current year
        incentive compensation as if the Executive survived until November 30 of
        that year and any amounts due under the SERP. Any unvested stock options
        or restricted stock which the Executive then holds shall become vested
        upon the Executive's death. The Company shall also pay to the
        Executive's estate an additional death benefit equal to two times the
        sum of the Executive's average annual base salary and the average "Value
        of the Incentive Compensation Earned" (as defined in Section 5(f) below)
        in each case, for the three fiscal years prior to the date of
        termination, which will be payable by the Company in a lump sum to the
        Executive's estate.

                        (ii) In lieu of payments to the Executive's estate
        following the Executive's death, the Executive may designate a
        beneficiary or beneficiaries to whom all payments which may be due under
        this Agreement will be made in the event of the Executive's death. Such
        designation shall be made on a form delivered to the Company. The
        Executive shall have the right to change or revoke any such designation
        from time to time by filing a new designation or notice of revocation
        with the Company, and no notice

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        to any beneficiary nor consent by any beneficiary shall be required to
        effect any such change or revocation. If the Executive shall fail to
        designate a beneficiary before the Executive's death, or if no
        designated beneficiary survives the Executive, any payments which may be
        due under this Agreement following the Executive's death will be paid to
        the Executive's estate.

                (b) Disability. In the event the Executive shall become unable
to perform the services contemplated by this Agreement due to a physical or
mental disability for a continuous period of six months or an aggregate of six
months in any eighteen month period, the Company may, to the extent consistent
with the federal Family and Medical Leave Act and the California Family Rights
Act, terminate this Agreement by giving written notice of such termination to
the Executive. In the event of any such termination by the Company, the Company
shall promptly pay to the Executive all earned but unpaid incentive
compensation. In addition, the Company shall pay the Executive the current year
incentive compensation as if the disability did not occur until November 30 of
that year. The Company shall also pay to the Executive an amount equal to two
times the sum of the Executive's average annual base salary and the average
Value of the Incentive Compensation Earned, in each case, for the three fiscal
years prior to the date of termination, reduced by amounts paid under a Company
disability or income replacement plan, in twelve monthly installments following
this termination. The Company may condition the payments set forth above upon
securing from the Executive an appropriate release of claims under the federal
Family and Medical Leave Act and the California Family Rights Act.

                (c) Without Cause; Good Reason. If the Company shall terminate
the Executive's employment without Cause or the Executive shall terminate the
Executive's employment for Good Reason (in each case, other than within 18
months following a Change of Ownership as provided in subsection (d) below), the
Company shall pay the Executive a lump sum payment in an amount equal to three
times the sum of the Executive's average annual base salary and the average
Value of the Incentive Compensation Earned, in each case, for the three fiscal
years prior to date of termination.

                (d) Termination Following a Change of Ownership.

                        (i) If, within 18 months following a "Change of
        Ownership" (as defined below), the Company shall terminate the
        Executive's employment without Cause or the Executive shall terminate
        the Executive's employment for Good Reason, the Company shall pay the
        Executive, within 10 days following the termination of the Executive's
        employment, a lump sum payment in an amount equal to three times the sum
        of the Executive's average annual base salary and the average Value of
        the Incentive Compensation Earned, in each case, for the three fiscal
        years prior the fiscal year in which the Change of Ownership occurs. In
        the event payment is made under this subsection (d), no amount shall be
        payable under subsection (c) above.

                        (ii) Anything in this Agreement to the contrary
        notwithstanding, if it shall be determined that any payment or
        distribution to the Executive or for the Executive's benefit (whether
        paid or payable or distributed or distributable) pursuant to the terms
        of this Agreement or otherwise pursuant to or by reason of any other
        agreement, policy, plan, program or arrangement, including without
        limitation any stock option,

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        stock appreciation right or similar right, or the lapse or termination
        of any restriction on or the vesting or exercisability of any of the
        foregoing (the "Payments") would be subject to the excise tax imposed by
        section 4999 of the Code by reason of being "contingent on a change in
        the ownership or control" of the Company, within the meaning of Section
        280G of the Code or to any similar tax imposed by state or local law, or
        any interest or penalties with respect to such excise tax (such tax or
        taxes, together with any such interest or penalties, are collectively
        referred to as the "Excise Tax"), then the Executive shall be entitled
        to receive from the Company an additional payment (the "Gross-Up
        Payment") in an amount such that the net amount of the Payments and the
        Gross-Up Payment retained by the Executive after the calculation and
        deduction of all Excise Taxes (including any interest or penalties
        imposed with respect to such taxes) on the payment and all federal,
        state and local income tax, employment tax and Excise Tax (including any
        interest or penalties imposed with respect to such taxes) on the
        Gross-Up Payment provided for in this Section 5(d)(ii), and taking into
        account any lost or reduced tax deductions on account of the Gross-Up
        Payment, shall be equal to the Payments;

                                (aa) All determinations required to be made
                under this Section 5(d)(ii), including whether and when the
                Gross-Up Payment is required and the amount of such Gross-Up
                Payment, and the assumptions to be utilized in arriving at such
                determinations shall be made by the Accountants (as defined
                below) which shall provide the Executive and the Company with
                detailed supporting calculations with respect to such Gross-Up
                Payment within fifteen (15) business days of the receipt of
                notice from the Executive or the Company that the Executive has
                received or will receive a Payment. For purposes of making the
                determinations and calculations required herein, the Accountants
                may make reasonable assumptions and approximations concerning
                applicable taxes and may rely on reasonable, good faith
                interpretations concerning the application of Section 280G and
                4999 of the Code, provided that the Accountant's determinations
                must be made on the basis of "substantial authority" (within the
                meaning of Section 6662 of the Code). For the purposes of this
                Section 5(d)(ii), the "Accountants" shall mean the Company's
                independent certified public accountants serving immediately
                prior to the Change of Ownership. In the event that the
                Accountants are also serving as accountant or auditor for the
                individual, entity or group effecting the Change of Ownership,
                the Executive shall appoint another nationally recognized public
                accounting firm to make the determinations required hereunder
                (which accounting firm shall then be referred to as the
                Accountants hereunder). All fees and expenses of the Accountants
                shall be borne solely by the Company.

                                (bb) For the purposes of determining whether any
                of the Payments will be subject to the Excise Tax and the amount
                of such Excise Tax, such Payments will be treated as "parachute
                payments" within the meaning of section 280G of the Code, and
                all "parachute payments" in excess of the "base amount" (as
                defined under section 280G(b)(3) of the Code) shall be treated
                as subject to the Excise Tax, unless and except to the extent
                that in the opinion of the Accountants such Payments (in whole
                or in part) either do not constitute "parachute payments" or
                represent reasonable compensation for services actually

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                rendered (within the meaning of section 280G(b)(4) of the Code)
                in excess of the "base amount," or such "parachute payments" are
                otherwise not subject to such Excise Tax. For purposes of
                determining the amount of the Gross-Up Payment the Executive
                shall be deemed to pay Federal income taxes at the highest
                applicable marginal rate of Federal income taxation for the
                calendar year in which the Gross-Up Payment is to be made and to
                pay any applicable state and local income taxes at the highest
                applicable marginal rate of taxation for the calendar year in
                which the Gross-Up Payment is to be made, net of the maximum
                reduction in Federal income taxes which could be obtained from
                the deduction of such state or local taxes if paid in such year
                (determined without regard to limitations on deductions based
                upon the amount of the Executive 's adjusted gross income); and
                to have otherwise allowable deductions for Federal, state and
                local income tax purposes at least equal to those disallowed
                because of the inclusion of the Gross-Up Payment in the
                Executive 's adjusted gross income. To the extent practicable,
                any Gross-Up Payment with respect to any Payment shall be paid
                by the Company at the time the Executive is entitled to receive
                the Payments and in no event will any Gross-Up Payment be paid
                later than five days after the receipt by the Executive of the
                Accountant's determination. Any determination by the Accountants
                shall be binding upon the Company and the Executive.

                                (cc) As a result of uncertainty in the
                application of section 4999 of the Code at the time of the
                initial determination by the Accountants hereunder, it is
                possible that the Gross-Up Payment made will have been an amount
                less than the Company should have paid pursuant to this Section
                5(d)(ii) (the "Underpayment"). In the event that the Company
                exhausts its remedies pursuant to Section 5(d)(ii)(bb) and the
                Executive is required to make a payment of any Excise Tax, the
                Underpayment shall be promptly paid by the Company to or for the
                Executive 's benefit.

                                (dd) The Executive and the Company shall each
                provide the Accountants access to and copies of any books,
                records and documents in the possession of the Company or the
                Executive , as the case may be, reasonably requested by the
                Accountants, and otherwise cooperate with the Accountants in
                connection with the preparation and issuance of the
                determination contemplated by this Section 5(d)(ii).

                                (ee) The Executive shall notify the Company in
                writing of any claim by the Internal Revenue Service that, if
                successful, would require the payment by the Company of the
                Gross-Up Payment. Such notification shall be given as soon as
                practicable after the Executive is informed in writing of such
                claim and shall apprise the Company of the nature of such claim
                and the date on which such claim is requested to be paid. the
                Executive shall not pay such claim prior to the expiration of
                the 30-day period following the date on which the Executive give
                such notice to the Company (or such shorter period ending on the
                date that any payment of taxes, interest and/or penalties with
                respect to such claim is due). If the Company notifies the
                Executive in writing prior to the expiration of such period that
                it desires to contest such claim, the Executive shall:

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                                        (i) give the Company any information
                        reasonably requested by the Company relating to such
                        claim;

                                        (ii) take such action in connection with
                        contesting such claim as the Company shall reasonably
                        request in writing from time to time, including, without
                        limitation, accepting legal representation with respect
                        to such claim by an attorney reasonably selected by the
                        Company;

                                        (iii) cooperate with the Company in good
                        faith in order to effectively contest such claim; and

                                        (iv) permit the Company to participate
                        in any proceedings relating to such claims; provided,
                        however, that the Company shall bear and pay directly
                        all costs and expenses (including additional interest
                        and penalties) incurred in connection with such contest
                        and shall indemnify the Executive for and hold the
                        Executive harmless from, on an after-tax basis, any
                        Excise Tax or income tax (including interest and
                        penalties with respect thereto) imposed as a result of
                        such representation and payment of all related costs and
                        expenses. Without limiting the foregoing provisions of
                        this Section 5(d)(ii), the Company shall control all
                        proceedings taken in connection with such contest and,
                        at its sole option, may pursue or forgo any and all
                        administrative appeals, proceedings, hearings and
                        conferences with the taxing authority in respect of such
                        claim and may, at its sole option, either direct the
                        Executive to pay the tax claimed and sue for a refund or
                        contest the claim in any permissible manner, and the
                        Executive agree to prosecute such contest to a
                        determination before any administrative tribunal, in a
                        court of initial jurisdiction and in one or more
                        appellate courts, as the Company shall determine;
                        provided, however, that if the Company directs the
                        Executive to pay such claim and sue for a refund, the
                        Company shall advance the amount of such payment to the
                        Executive , on an interest-free basis, and shall
                        indemnify the Executive for and hold the Executive
                        harmless from, on an after-tax basis, any Excise Tax or
                        income tax (including interest or penalties with respect
                        thereto) imposed with respect to such advance or with
                        respect to any imputed income with respect to such
                        advance (including as a result of any forgiveness by the
                        Company of such advance); provided, further, that any
                        extension of the statute of limitations relating to the
                        payment of taxes for the taxable year of the Executive
                        with respect to which such contested amount is claimed
                        to be due is limited solely to such contested amount.
                        Furthermore, the Company's control of the contest shall
                        be limited to issues with respect to which a Gross-Up
                        Payment would be payable hereunder and the Executive
                        shall be entitled to settle or contest, as the case may
                        be, any other issue raised by the Internal Revenue
                        Service or any other taxing authority.

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                (e) For Cause; Without Good Reason. In the event of the
termination of the Executive's employment by the Company for Cause or by the
Executive without Good Reason, this Agreement and all the Executive's unearned
rights hereunder shall terminate immediately.

                (f) Value of the Incentive Compensation Earned. For purposes of
this Section 5, the "Value of the Incentive Compensation Earned" for the fiscal
year ending on November 30, 2001 and for any fiscal year ending thereafter if
the Company's shareholders do not approve the QPBC Amendment shall be determined
by multiplying 1.75% times PPI for the applicable fiscal year, provided that the
ROE of the Company (as defined in the 1995 Letter Agreement) was equal to or
greater than ten percent (10%) for the applicable fiscal year. For purposes of
this Section 5, the "Value of Incentive Compensation Earned" for the fiscal year
ending on November 30, 2002 and for any fiscal year ending thereafter if the
Company's shareholders approve the QPBC Amendment shall be determined pursuant
to Section 4(b)(ii) for the applicable fiscal year.

                (g) Change of Ownership. A "Change of Ownership" shall mean any
change in control of the Company of a nature that would be required to be
reported in response to Item 1(a) of the Current Report on Form 10-K, as in
effect on the Effective Date, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Act"); provided that, without limitation,
such a "Change of Ownership" shall be deemed to have occurred if:

                        (i) a third person, including a "group" as such term is
        used in Section 13(d)(3) of the Act, becomes the beneficial owner,
        directly or indirectly, of 20% or more of the combined voting power of
        the Company's outstanding voting securities ordinarily having the right
        to vote for the election of directors of the Company, unless such
        acquisition of beneficial ownership is approved by a majority of the
        Incumbent Board (as such term is defined in clause (ii) below); or

                        (ii) individuals who, as of the date hereof, constitute
        the Board (the "Incumbent Board") cease for any reason to constitute at
        least a majority of the Board, provided that any person becoming a
        director subsequent to the date hereof whose election, or nomination for
        election by the Company's shareholders, was approved by a vote of at
        least three-quarters of the directors comprising the Incumbent Board
        (other than an election or nomination of an individual whose initial
        assumption of office is in connection with an actual or threatened
        election contest relating to the election of the Directors of the
        Company, as such terms are used in Rule 14a-11 of Regulation 14A
        promulgated under the Act) shall be, for purposes of this Agreement,
        considered as though such person were a member of the Incumbent Board.

                For purposes of any incentive compensation paid to the Executive
pursuant to this Agreement, the definition of "Change of Ownership" set forth
herein shall prevail over the definition of "Change of Ownership", or any
similar term, contained in any applicable plan, or any other employee
compensation plan, under which such incentive compensation may be granted.

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                (h) Cause. "Cause" shall mean (i) acts of fraud or
misappropriation committed by the Executive and intended to result in
substantial personal enrichment at the expense of the Company or (ii) repeated
violations by the Executive of the Executive's obligations under this Agreement
which are demonstrably willful and deliberate and which result in material
injury to the Company; provided that, in each case, the Executive has received
written notice of the described activity, has been afforded a period of 30 days
to cure or correct the activity described in the notice, and has failed to cure,
correct or cease the activity, as appropriate. The Executive's employment shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters (3/4) of the entire membership
of the Board at a meeting of the Board (excluding the Executive), finding that
in the Board's good faith opinion the Executive was guilty of conduct set forth
above in this Section and specifying the particulars thereof in reasonable
detail.

                (i) Good Reason. "Good Reason" shall mean, without the consent
of the Executive, (i) any changes in the duties and responsibilities of the
Executive which are materially inconsistent with the duties and responsibilities
contemplated in Section 3 hereof, (ii) any reduction of the Executive's salary,
aggregate incentive compensation opportunities (excluding any reduction in
incentive compensation awards due to the economic performance of the Company) or
aggregate benefits, (iii) any required relocation of the Executive's office
beyond a 50 mile radius from the present location of the Executive's office,
(iv) the Company's material breach of the terms of this Agreement, (v) a failure
to re-elect the Executive as a member of the Board, (v) any failure by the
Company to obtain the assumption of this Agreement by a successor of the Company
and (vi) the Company's requiring the Executive to travel materially in excess of
current business travel obligations. Any good faith determination by the
Executive that Good Reason exists shall be presumed correct and shall be binding
on the Company.

        6. Benefits After Retirement. In the event the Executive's employment
with the Company terminates at or after the term of this Agreement or the
Executive retires earlier with the prior consent of the Board, to be determined
in its sole discretion (provided, however, that in the event of a Change of
Ownership, such consent of the Board shall not be required), the Company shall
continue to provide to the Executive and his eligible dependents for the period
of the Executive's lifetime medical and dental benefits at least equal to those
which would have been provided to the Executive and his eligible dependents
under the Company's plan had he not retired, and in the event the Executive and
his eligible dependents are not eligible under the terms of the Company's plans
to continue to be covered, in such event, the Company shall provide the
Executive with substantially equivalent coverage through other sources;
provided, however, that if the Executive becomes re-employed with another
employer and is eligible to receive medical and dental benefits under another
employer's plans, the Company's obligations under this Section 6 shall be
reduced to the extent comparable benefits are actually received by the
Executive, and any such benefits actually received by the Executive shall be
reported promptly to the Company. In addition, at the reasonable request of the
Executive, the Company shall provide to the Executive an appropriate office and
administrative support commensurate with the Executive's former status as Chief
Executive Officer of the Company plus reimbursement of reasonable expenses
attendant to the maintenance of such office and retention of such administrative
support. At the request of the Executive, the Company shall, in lieu of
providing

                                       11
<PAGE>   12

such office and administrative support, reimburse the Executive for expenses of
such office and administrative support.

        7. Exclusive Benefit.

                (a) The Executive and the Company have agreed that a primary
material element of this contract is the desire of the Company to insure to
itself and its affiliates the sole and exclusive right to receive the full
benefit of the Executive's time, skill, and opportunities until the date of
termination of this Agreement, as the same may be extended. Subject only to the
Company's payment to the Executive of the compensation provided hereunder, the
Executive has agreed that until said date the Executive will not, as a director,
officer, agent, employee, partner, owner, five or more percent shareholder, or
otherwise, enter into or conduct any business venture which may be competitive,
directly or indirectly, with that of the Company or any affiliate. A business or
activity shall be deemed to be competitive if it is substantially similar to one
engaged in or conducted by the Company or any affiliate and is conducted within
a radius of one hundred fifty (150) miles from any location in which such
business or activity is engaged in or conducted by the Company or an affiliate.
It is understood that passive investments in income producing properties are
permitted by this subsection. Furthermore, the Executive has agreed that the
Executive will not, during the term of this Agreement or for a period of two
years thereafter, employ or seek to employ any person employed by the Company or
any of its affiliates in connection with any business activities in which the
Executive may engage.

                (b) During the performance of the Executive's duties on behalf
of the Company, the Executive shall receive and be entrusted with certain
confidential and/or secret information of a proprietary nature. The Executive
shall not discuss or use, during the term of this employment agreement or any
time thereafter, any such information which is not otherwise publicly available.

                (c) The Executive acknowledges that the Executive's extensive
experience and knowledge of the Company and relationship with its employees make
the services to be performed by the Executive hereunder of a special, unusual,
and peculiar value to the Company, not readily replaceable, and that by reason
of the Executive's continued employment the Executive will continue to acquire
additional confidential information and trade secrets. The loss of the
Executive's services hereunder or the disclosure of such confidential
information and trade secrets or solicitation by the Executive of employees of
the Company cannot be reasonably or adequately compensated for in money damages.
Accordingly, we have agreed that in addition to any other legal remedies
available, the Company shall be entitled to seek equitable relief to enjoin any
violation by the Executive of this Agreement.

        8. Miscellaneous.

                (a) Reimbursement for Legal Fees. The Company shall reimburse
the Executive for all reasonable legal fees and expenses incurred by the
Executive in connection with the negotiation and preparation of this Agreement.

                (b) Waiver. The waiver of either party hereto of a breach of any
provision of this Agreement by the other party shall not operate or be construed
to operate as a waiver of any subsequent breach by the other party.

                                       12
<PAGE>   13

                (c) No Mitigation. The Executive shall not be required to
mitigate the amount of any payment provided for in Section 5 or Section 6 by
seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in Section 5 or Section 6 be reduced by any compensation
earned by the Executive as the result of employment by another employer or
self-employment, by retirement benefits, by offset against any amount claimed to
be owed by the Executive to the Company, or otherwise, except as expressly
provided by Section 6.

                (d) Entire Agreement. This Agreement contains the entire
agreement between the Executive and the Company concerning the Executive's
employment during the term hereof. On and after the Effective Date, this
Agreement shall supersede the 1995 Letter Agreement, except as expressly
provided otherwise in this Agreement. This Agreement may not be changed orally
but only by an agreement, in writing, signed by the Executive and approved by
the Board.

                (e) Severability. If any of the provisions of this Agreement
shall be unlawful, void, or for any reason unenforceable, they shall be deemed
separate from and in no way affect the validity or enforceability of the
remaining provisions of the Agreement.

                (f) Notice. All notices and other communications under this
Agreement shall be in writing and shall be delivered by hand delivery to the
other party, by telegraph or mailed by certified or registered mail with return
receipt, and shall be deemed delivered when actually received or upon refusal if
properly delivered to the respective persons named below:

               If to the Company:   KB Home
                                    10990 Wilshire Boulevard
                                    Los Angeles, California 90024

               If to the Executive: Bruce Karatz
                                    10990 Wilshire Boulevard
                                    Los Angeles, California 90024

                (g) Governing Law. This Agreement is entered into in Los
Angeles, California and shall be construed and enforced under the laws of the
State of California.

                (h) Dispute. In the event any legal action or arbitration shall
be brought for the enforcement of this Agreement, or because of any alleged
dispute, breach, or default hereunder, the successful or prevailing party or
parties shall be entitled to recover reasonable attorneys' fees and other costs
incurred in such legal action or arbitration, in addition to any other relief to
which it or he may be entitled. Nothing hereunder, however, shall be construed
to authorize filing suit in court with regard to any dispute which is to be
resolved by arbitration pursuant to Section 9 of this Agreement.

                (i) Successors. The Agreement shall bind and benefit the
Company, its successors and assigns and shall inure to the benefit of and be
binding on the Executive, the Executive's heirs, executors and administrators,
provided that the Executive's duties and responsibilities hereunder may not be
assigned or delegated by the Executive.

                                       13
<PAGE>   14

                (j) Withholding. All payments made by the Company under this
Agreement shall be subject to normal deductions and withholding to the extent
required by law.

                (k) Indemnification. The Company shall indemnify the Executive
to the fullest extent permitted by applicable law as a director, executive
officer or employee of the Company.

                (l) Modifications and Amendments. This Agreement may not be
modified, amended, changed or supplemented, nor may any obligations hereunder be
waived, except by written instrument signed by both parties.

        9. Arbitration.

                (a) In the event that any controversy or dispute between the
Executive and the Company arising out of or relating to the employment
relationship, including, but not limited to any disputes in connection with the
validity, construction, application or enforcement of the terms of this
Agreement or the SERP, occurs, any such controversy or dispute shall be
submitted to final and binding arbitration pursuant to the then most applicable
Rules of the American Arbitration Association; provided, however, that unless
the parties otherwise agree, the arbitration shall be before a single arbitrator
selected either by mutual agreement or, failing agreement, from a list of seven
arbitrators provided by AAA, four of whom shall be retired judges of the
Superior or Appellate Courts of California who are residents of Los Angeles or
Orange County and, if such list exists at the time of the dispute, who are
members of the Independent List of Retired Judges and three of whom shall be
members of the National Academy of Arbitrators, resident in Los Angeles or
Orange Counties. In the event the parties are unable to agree upon such an
arbitrator from such list of seven, each party shall strike one name in turn
with the first to strike being chosen by lot. When only one name remains, that
person shall be the parties' arbitrator. The parties hereto expressly waive
their rights, if any, to have such matters heard by a jury or a judge, whether
in state or federal court.

                (b) The cost of the arbitration, including, but not limited to,
any reasonable legal fees or other expenses incident thereto incurred in
connection with such arbitration, shall be determined by the arbitrator(s) and
shall be borne by the nonprevailing party. During the pendency of any
arbitration concerning the propriety of the Executive's termination and up to
the date of the arbitrator's award, the Executive shall participate in all
employee benefit programs of the Company (other than the 401(k) plan) as
provided in Section 4(d) above.

                (c) The Company agrees to pay interest on any amounts payable to
the Executive under this Agreement which are not paid within sixty (60) days
after the date when due and on any money judgment which is awarded to the
Executive following a proceeding to enforce any portion of the Agreement from
the date that payments should have been made under this Agreement. Such interest
shall be calculated at the prime rate offered by Bank of America, or its
successor from the date that payments should have been made under this Agreement
to the time of actual payment.

                            (Signature Page Follows)

                                       14
<PAGE>   15

                IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date and year first above written.

                                       KB HOME

                                       /s/ RAY R. IRANI
                                       -----------------------------------------
                                       Name:
                                       Title:

                                       EXECUTIVE

                                        /s/ BRUCE KARATZ
                                       -----------------------------------------
                                       Bruce Karatz

<PAGE>   16

                                    EXHIBIT A

ROE. A ratio, stated as a percentage, which measures the Company's return on
equity, or the Company's profitability for a given period as it relates to its
shareholders' capital investments. The percentage is calculated by dividing the
Company's consolidated net income for a given fiscal year by the average
consolidated shareholders' equity balance. The average consolidated
shareholders' equity balance is one-half the sum of the Company's consolidated
shareholders' equity balance at the beginning of the given year plus the
Company's consolidated shareholders' equity balance at the end of the same year.

PPI. Total consolidated revenues of the Company and related entities less total
associated consolidated expenses for a given fiscal year determined in
accordance with generally accepted accounting principles, exclusive of all
income taxes and incentive compensation costs.

<TABLE>
<CAPTION>
INCENTIVE PAYOUT PERCENTAGE SCHEDULE

                                              PRETAX PRE-INCENTIVE
                ROE                            PAYOUT PERCENTAGE
         -----------------                    --------------------
<S>                                           <C>
         *6.50% to  9.99%                            1.00%

         10.00% to 10.99%                            1.25%

         11.00% to 11.99%                            1.30%

         12.00% to 12.99%                            1.35%

         13.00% to 13.99%                            1.40%

         14.00% to 14.99%                            1.45%

         15.00% to 15.99%                            1.50%

         16.00% to 16.99%                            1.60%

         17.00% to 17.99%                            1.70%

         18.00% to 18.99%                            1.80%

         19.00% to 19.99%                            1.90%

         20.00% and higher                           2.00%
</TABLE>

*If ROE is less than 6.50%, the payout percentage is 0.00%

<PAGE>   17

                                   Appendix B

                           STOCK RESTRICTION AGREEMENT

                THIS STOCK RESTRICTION AGREEMENT (this "Agreement") is made as
of _______________, 200__ (herein the "Effective Date") by and between KB HOME,
a Delaware corporation (the "Company") and Bruce Karatz (the "Participant").

                                 R E C I T A L S

                By action of the Personnel, Compensation and Stock Plan
Committee (the "Committee") taken on the Effective Date (the "Committee Action")
and in accordance with the terms and conditions of the Amended and Restated
Employment Agreement entered into between the Participant and the Company on
July 11, 2001 (the "Employment Agreement"), the Company desires to award the
Participant shares of restricted common stock of the Company, par value $1.00
per share ("Stock") under the [NAME OF PLAN] (the "Plan").

                                A G R E E M E N T

                In consideration of the provisions contained in this Agreement
and with reference to the foregoing Recitals, the Company and the Participant
agree as follows:

        1. Award. As of the Effective Date, the Company shall issue to the
Participant ______________ shares of Stock (the "Award"), subject to the terms
and conditions set forth in this Agreement, the Plan, the Employment Agreement
and the Committee Action. The certificate(s) representing shares of Stock
granted pursuant to the Award shall not be delivered to the Participant until
the lapse of the restrictions on transferability in accordance with Paragraphs
2, 4 and 5 of this Agreement. Prior to such lapse, the certificate(s) shall be
held by the Company in escrow pursuant to Section [7(d)] of the Plan along with
a stock power duly endorsed in blank by the Participant.

        2. Lapse of Restrictions. The restrictions imposed by this Agreement,
the Employment Agreement and the Plan with respect to the shares covered by this
Award shall lapse on the business day next following the third anniversary of
the Effective Date.

<PAGE>   18

        3. Parties' Obligations. Following the lapse of restrictions, the
Company shall deliver to the Participant as soon as practicable certificate(s)
representing those shares as to which restrictions have lapsed in accordance
with Paragraphs 2, 4 or 5, as the case may be.

        4. Termination of Employment. Except as set forth in Paragraph 5 below,
upon termination of the Participant's employment with the Company by the Company
for "Cause" (as defined in the Employment Agreement) or by the Participant
without "Good Reason" (as defined in the Employment Agreement), the
Participant's right, title and interest in those shares granted pursuant to the
Award as to which the restrictions shall not have lapsed at the time of such
termination of employment shall immediately terminate. The Participant shall
forthwith execute such further assignments or endorsements as the Company may
require to effect the transfer of beneficial ownership to those shares granted
pursuant to the Award back to the KB HOME Grantor Stock Trust (the "Trust"), if
the shares were issued to Participant out of the Trust and the Trust continues
to exist at such time, or otherwise back to the Company. Upon the termination of
the Participant's employment with the Company by reason of the Participant's
death or disability, by the Company without "Cause" or by the Participant for
"Good Reason," the restrictions set forth herein and Section [7] of the Plan
shall lapse immediately upon such termination of employment.

        5. Lapse of Restrictions Upon Change of Ownership. Notwithstanding any
provision of Paragraph 2, but subject to Paragraph 4, all of the restrictions
set forth herein and in Section [7] of the Plan on the shares of Stock granted
under this Award shall lapse as contemplated in Section 4(c) of the Employment
Agreement.

        6. Dividends. Cash dividends or other distributions paid on or in
respect of any shares of Stock subject to the Award shall be paid directly to
Participant at the same time any such dividends or distributions are paid to
holders of shares of Stock that are not restricted and are freely tradeable
("Other Holders"). Any stock or other non-cash distributions issued on or in
respect of any shares of Stock subject to the Award shall be issued at the same
time any such distributions are issued to Other Holders, but shall be held in
escrow and shall be subject to the same restrictions as the shares of Stock
subject to the Award.

        7. Tax Withholding Election. At Participant's discretion, he may direct
the Company to withhold shares of Stock otherwise deliverable upon the lapse of
restrictions on the Award to satisfy any withholding tax liability that may
arise upon such lapse of restrictions, provided that such Stock withholding
complies with Section 16(b) of the Securities Exchange Act of 1934, as amended,
and the rules promulgated thereunder.

<PAGE>   19

        8. Adjustments. The number of shares granted pursuant to the Award shall
be adjusted by the Board, whose determination shall be conclusive, to reflect
any stock split, stock dividend, reorganization, recapitalization, merger,
consolidation, combination or exchange of shares or similar event.

                The Committee shall make any adjustments or modifications, and
its determination thereof shall be conclusive, in the lapse of restrictions set
forth in Section 2 or Section 5 to give effect to the intent of the Plan and the
Employment Agreement in connection with any event affecting the Award, including
without limitation, any reorganization, recapitalization, merger, consolidation,
offering of additional shares of common stock or other change in the Company's
shareholders' equity by means other than earnings, or any similar event. No such
adjustment shall be made if it would reduce the benefits otherwise accruing to
the Participant under this Award.

        9. No Assignment. This Agreement may not be assigned by the Participant
by operation of law or otherwise. Notwithstanding, this Agreement shall be
binding upon and shall inure to the benefit of the personal representatives,
heirs, legatees, successors and assigns of the Company and the Participant.

        10. Governing Law. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of California.

        11. Conflict in Terms. In the event there shall be a conflict in terms
between this Agreement, the Plan, the Employment Agreement and/or the Committee
Action, the terms of the Employment Agreement shall prevail.

        IN WITNESS WHEREOF, the Company and the Participant have duly executed
and delivered this Agreement as of the date first above written.

                                       KB HOME

                                         By:
                                             -----------------------------------
                                             Gary Ray
                                             SVP, Human Resources

                                             -----------------------------------
                                             Bruce Karatz

<PAGE>   20

                                   Appendix C

                           STOCK RESTRICTION AGREEMENT

                THIS STOCK RESTRICTION AGREEMENT (this "Agreement") is made as
of July 11, 2001 (herein the "Effective Date") by and between KB HOME, a
Delaware corporation (the "Company") and Bruce Karatz (the "Participant").

                                 R E C I T A L S

                A. By action of the Personnel, Compensation and Stock Plan
Committee (the "Committee") taken on the Effective Date (the "Committee Action")
and in accordance with the terms and conditions of the Amended and Restated
Employment Agreement entered into between the Participant and the Company on the
Effective Date (the "Employment Agreement"), the Company desires to award the
Participant 350,000 shares of restricted common stock of the Company, par value
$1.00 per share ("Stock").

                B. The Stock issued pursuant to this Agreement will not be
issued under an employee stock plan, however, the Stock will be subject to the
restrictions, conditions and administrative provisions set forth in the
Company's 2001 Stock Incentive Plan (the "Plan") to the same extent as though
the Stock were issued thereunder; further, the Stock shall be subject to such
additional restrictions as maybe set forth in this Agreement, in the Employment
Agreement and the Committee Action.

                                A G R E E M E N T

                In consideration of the provisions contained in this Agreement
and with reference to the foregoing Recitals, the Company and the Participant
agree as follows:

        1. Award. Effective as of the execution of this Agreement, the Company
shall issue to the Participant 350,000 shares of Stock (the "Award"), subject to
the terms and conditions set forth in this Agreement, the Plan, the Employment
Agreement and the Committee Action. The certificate(s) representing shares of
Stock granted pursuant to the Award shall not be delivered to the Participant
until the lapse of the restrictions on transferability in accordance with
Paragraphs 2, 4 and 5 of this Agreement. Prior to such lapse, the certificate(s)
shall be held by the Company in escrow pursuant to Section 7(d) of the Plan
along with a stock power duly endorsed in blank by the Participant.

        2. Lapse of Restrictions. The restrictions imposed by this Agreement,
the Employment Agreement and the Plan with respect to the shares covered by this
Award shall lapse on December 31, 2008.

<PAGE>   21

        3. Parties' Obligations. Following the lapse of restrictions, the
Company shall deliver to the Participant as soon as practicable certificate(s)
representing those shares as to which restrictions have lapsed in accordance
with Paragraphs 2, 4 or 5, as the case may be.

        4. Termination of Employment. Except as set forth in Paragraph 5 below,
upon termination of the Participant's employment with the Company by the Company
for "Cause" (as defined in the Employment Agreement) or by the Participant
without "Good Reason" (as defined in the Employment Agreement), the
Participant's right, title and interest in those shares granted pursuant to the
Award as to which the restrictions shall not have lapsed at the time of such
termination of employment shall immediately terminate. The Participant shall
forthwith execute such further assignments or endorsements as the Company may
require to effect the transfer of beneficial ownership to those shares granted
pursuant to the Award back to the KB HOME Grantor Stock Trust (the "Trust"), if
the Trust continues to exist at such time, or otherwise back to the Company.
Upon the termination of the Participant's employment with the Company by reason
of the Participant's death or disability, by the Company without "Cause" or by
the Participant for "Good Reason," the restrictions set forth herein and Section
7 of the Plan shall lapse immediately upon such termination of employment.

        5. Lapse of Restrictions Upon Change of Ownership. Notwithstanding any
provision of Paragraph 2, but subject to Paragraph 4, all of the restrictions
set forth herein and in Section 7 of the Plan on the shares of Stock granted
under this Award shall lapse as contemplated in Section 4(c) of the Employment
Agreement.

        6. Dividends. Cash dividends or other distributions paid on or in
respect of any shares of Stock subject to the Award shall be paid directly to
Participant at the same time any such dividends or distributions are paid to
holders of shares of Stock that are not restricted and are freely tradeable
("Other Holders"). Any stock or other non-cash distributions issued on or in
respect of any shares of Stock subject to the Award shall be issued at the same
time any such distributions are issued to Other Holders, but shall be held in
escrow and shall be subject to the same restrictions as the shares of Stock
subject to the Award.

        7. Tax Withholding Election. At Participant's discretion, he may direct
the Company to withhold shares of Stock otherwise deliverable upon the lapse of
restrictions on the Award to satisfy any withholding tax liability that may
arise upon such lapse of restrictions, provided that such Stock withholding
complies with Section 16(b) of the Securities Exchange Act of 1934, as amended,
and the rules promulgated thereunder.

<PAGE>   22

        8. Adjustments. The number of shares granted pursuant to the Award shall
be adjusted by the Board, whose determination shall be conclusive, to reflect
any stock split, stock dividend, reorganization, recapitalization, merger,
consolidation, combination or exchange of shares or similar event.

                The Committee shall make any adjustments or modifications, and
its determination thereof shall be conclusive, in the lapse of restrictions set
forth in Section 2 or Section 5 to give effect to the intent of the Plan and the
Employment Agreement in connection with any event affecting the Award, including
without limitation, any reorganization, recapitalization, merger, consolidation,
offering of additional shares of common stock or other change in the Company's
shareholders' equity by means other than earnings, or any similar event. No such
adjustment shall be made if it would reduce the benefits otherwise accruing to
the Participant under this Award.

        9. No Assignment. This Agreement may not be assigned by the Participant
by operation of law or otherwise. Notwithstanding, this Agreement shall be
binding upon and shall inure to the benefit of the personal representatives,
heirs, legatees, successors and assigns of the Company and the Participant.

        10. Governing Law. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of California.

        11. Conflict in Terms. In the event there shall be a conflict in terms
between this Agreement, the Plan, the Employment Agreement and/or the Committee
Action, the terms of the Employment Agreement shall prevail.

        IN WITNESS WHEREOF, the Company and the Participant have duly executed
and delivered this Agreement as of the date first above written.

                                       KB HOME

                                         By:  /s/ GARY A. RAY
                                             -----------------------------------
                                             Gary Ray
                                             SVP, Human Resources

                                              /s/ BRUCE KARATZ
                                             -----------------------------------
                                             Bruce Karatz

<PAGE>   23

                                     KB HOME
                     SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN,
                                   AS RESTATED
                            (Effective July 12, 2001)

<PAGE>   24
<TABLE>
<S>                                                                                        <C>
                                   ARTICLE I

                                    THE PLAN

1.1     Establishment of the Plan...........................................................1
1.2     Purpose.............................................................................1

                                   ARTICLE II

                                  DEFINITIONS

2.1     Definitions.........................................................................1
2.2     Gender and Number...................................................................2

                                  ARTICLE III

                                 PARTICIPATION

3.1     Eligibility for Participation.......................................................2
3.2     Date of Participation...............................................................2
3.3     Duration of Participation...........................................................3

                                   ARTICLE IV

                        SUPPLEMENTAL RETIREMENT BENEFITS

4.1     Supplemental Retirement Benefits....................................................3
4.2     Commencement, Form, and Duration....................................................3
4.3     Reduced Benefit in the Case of Retirement Before December 1, 2005...................3

                                   ARTICLE V

                         PRE-RETIREMENT DEATH BENEFITS

5.1     Eligibility.........................................................................4

                                   ARTICLE VI

                           OPTIONAL FORMS OF BENEFIT

6.1     Lump Sum Option.....................................................................4
6.2     Payment Upon Financial Hardship.....................................................4
</TABLE>

                                      -1-
<PAGE>   25

                                TABLE OF CONTENTS
                                   (CONTINUED)

<TABLE>
<CAPTION>
<S>                                                                                        <C>
                                  ARTICLE VII

                              CHANGE OF OWNERSHIP

7.1     Lump Sum Option Upon Change of Ownership............................................5
7.2     Amount of Lump Sum Benefit..........................................................5
7.3     Definition..........................................................................5
7.4     Advance Election....................................................................6

                                  ARTICLE VIII

                                     TRUST

8.1     Establishment of the Trust..........................................................6
8.2     Contributions.......................................................................6
8.3     Payment of Benefits.................................................................7

                                   ARTICLE IX

                                 ADMINISTRATION

9.1     Administration......................................................................7
9.2     Decisions and Actions of Committee..................................................7
9.3     Rules and Records of the Committee..................................................7
9.4     Employment of Agents................................................................7
9.5     Agent for Service of Legal Process..................................................7
9.6     Plan Expenses.......................................................................8
9.7     Indemnification.....................................................................8
9.8     Tax Withholding.....................................................................8
9.9     Claims Procedure....................................................................8

                                   ARTICLE X

                                 MISCELLANEOUS

10.1    Rights Against the Company..........................................................9
10.2    Rights Under the Company's Other Retirement Plans...................................9
10.3    Payment of Benefits to Incompetent..................................................9
10.4    Missing Person.....................................................................10
10.5    Amendment or Termination...........................................................10
10.6    Merger or Consolidation of Plan and Trust..........................................10
10.7    Arbitration/Interest on Unpaid Amounts/Controlling Law.............................10
10.8    Rights to Trust Fund Assets........................................................11
10.9    Nontransferability.................................................................11
</TABLE>

                                      -2-
<PAGE>   26

                                TABLE OF CONTENTS
                                   (CONTINUED)

<TABLE>
<S>                                                                                       <C>
10.10   Illegality of Particular Provision.................................................11
</TABLE>

                                      -2-
<PAGE>   27

                                    ARTICLE I
                                    THE PLAN

        1.1 ESTABLISHMENT OF THE PLAN

        KB Home has previously established an unfunded supplemental executive
retirement plan for the benefit of Mr. Bruce Karatz, the Chairman and Chief
Executive Officer of Kaufman and Broad Home Corporation. This restated plan is
effective as of July 12, 2001 and shall be known as the KB Home Supplemental
Executive Retirement Plan.

        1.2 PURPOSE

        The purpose of this Plan is to provide retirement income to Mr. Karatz
to supplement the benefits provided under the tax-qualified retirement plans
maintained by KB Home. This Plan is intended to satisfy the supplemental
retirement provisions of section 4(f) of the Amended and Restated Employment
Agreement between Mr. Karatz and KB Home dated as of July 12, 2001.

                                   ARTICLE II
                                   DEFINITIONS

        2.1 DEFINITIONS

        Whenever capitalized in this document, the following terms shall have
the meanings set forth below unless otherwise expressly provided.

        (a)     "ACTUARIAL EQUIVALENT" shall mean a single sum value of a
                monthly benefit amount otherwise payable, calculated using an
                interest rate assumption of 5.85%.

        (b)     "BENEFICIARY" shall mean the person or persons designated by the
                Participant to receive benefits in the event of the death of the
                Participant. In the event that the Participant failed to
                designate a beneficiary; or if for any reason such designation
                shall be legally ineffective, or if all designated beneficiaries
                predecease him or die simultaneously with him, distribution to
                which the Participant would have been entitled shall be made to
                the Participant's surviving spouse or, if none, to the
                Participant's estate.

        (c)     "BOARD" shall mean the Board of Directors of KB Home.

        (d)     "CHANGE OF OWNERSHIP" shall mean a change in ownership of the
                Company, as described in Article VIII.

        (e)     "CODE" shall mean the Internal Revenue Code of 1986, as amended.

                                      -1-
<PAGE>   28

        (f)     "COMMITTEE" shall mean the Personnel, Compensation and Stock
                Plan Committee of the Board (or a designee of that Committee),
                which shall administer the Plan.

        (g)     "COMPANY" shall mean KB Home, and any successor thereto.

        (h)     "PARTICIPANT" shall mean Mr. Bruce Karatz, Chairman and Chief
                Executive Officer of the Company.

        (i)     "PLAN" shall mean the KB Home Supplemental Executive Retirement
                Plan.

        (j)     "TERMINATION OF EMPLOYMENT" shall mean termination of employment
                with the Company, whether voluntary or involuntary. The
                Participant's termination of employment will be deemed to occur
                when the Participant ceases to be a full-time employee of the
                Company, even though the Participant may continue to serve as
                Chairman of the Board or as a consultant to the Company.

        (k)     "TRUST" shall mean the legal entity organized pursuant to the
                Trust Agreement between the Company and the Trustee to hold and
                administer the Trust Fund in which any contributions made by the
                Company are to be held, invested, and disbursed to, or for the
                benefit of, the Participant or his Beneficiary.

        (l)     "TRUST AGREEMENT" shall mean the agreement in the nature of a
                trust entered into between the Company and Trustee.

        (m)     "TRUST FUND" shall mean the assets of every kind and description
                held in the Trust pursuant to the Trust Agreement.

        (n)     "TRUSTEE" shall mean the entity, not affiliated with the
                Company, acting as the trustee under the Trust Agreement at the
                time of reference.

        2.2 GENDER AND NUMBER

        Unless the context clearly requires otherwise, the masculine pronoun
whenever used shall include the feminine pronoun, and the singular shall include
the plural.

                                   ARTICLE III
                                  PARTICIPATION

        3.1 ELIGIBILITY FOR PARTICIPATION

        Mr. Bruce Karatz shall be the only employee of the Company eligible to
participate in this Plan.

        3.2 DATE OF PARTICIPATION

        Participation commenced December 1, 1995.

                                       2
<PAGE>   29

        3.3 DURATION OF PARTICIPATION

        Subject to the provisions of section 10.5, participation in this Plan
shall continue while the Participant is an employee of the Company, whether or
not there is in effect an employment agreement between the Participant and the
Company, and thereafter for so long as he is entitled to receive any benefits
hereunder.

                                   ARTICLE IV
                        SUPPLEMENTAL RETIREMENT BENEFITS

        4.1 SUPPLEMENTAL RETIREMENT BENEFITS

        Upon Termination of Employment with the Company for reasons other than
death, the Participant shall be entitled to a retirement benefit under this
Plan. The monthly amount of the Participant's retirement benefit shall be
one-twelfth of the Participant's "Average Annual Base Pay" at the time of
Termination of Employment. "Average Annual Base Pay" equals the average of the
Participant's (1) annual base pay rate at the time of Termination of Employment,
(2) the Participant's annual base pay rate in effect 12 months before the
Termination of Employment, and (3) the Participant's annual base pay rate in
effect 24 months before the Termination of Employment.

        4.2 COMMENCEMENT, FORM, AND DURATION

        Retirement benefit payments under this Plan shall commence upon the
first of the month following the Termination of Employment. Benefit payments
shall be made monthly for a period of 25 years (300 monthly payments). In the
event of the Participant's death while receiving monthly payments, the remaining
payments shall be made monthly to the Participant's Beneficiary.

        4.3 REDUCED BENEFIT IN THE CASE OF RETIREMENT BEFORE DECEMBER 1, 2005

        (a) Except as set forth in subsection (b) below, if the Participant
incurs a Termination of Employment before December 1, 2005, the amount of
retirement benefit described in Section 4.1 shall be reduced. The reduction
shall be calculated by first computing the difference (the "Difference") between
Average Annual Base Pay and $492,000, the benefit that would have been payable
to participant upon attainment of Normal Retirement Age under this Plan in
effect prior to December 1, 2001. The Average Annual Base Pay otherwise payable
under Section 4.1 shall be reduced by the following percentage of the
Difference:

                                       3
<PAGE>   30

<TABLE>
<CAPTION>
                      TERMINATION                                       PERCENTAGE
                      -----------                                       ----------
<S>                                                                     <C>
             From 7/12/01 through 11/30/02                                 20%
             From 12/1/02 through 11/30/03                                 15%
             From 12/1/03 through 11/30/04                                 10%
             From 12/1/04 through 11/30/05                                  5%
</TABLE>

        (b) The reduction in Average Annual Base Pay set forth in subsection (a)
above shall not apply if (1) the Company terminates Participant unless such
termination is for "Cause" or (2) Participant terminates employment because he
has determined in good faith that "Good Reason" exists. The terms "Cause" and
"Good Reason" shall have the same meanings as are set forth in Section 5(h) and
(i) of Participant's Amended and Restated Employment Agreement, dated as of July
12, 2001. Any good faith determination by Participant that "Good Reason" exists
shall be presumed correct and shall be binding on the Company.

                                    ARTICLE V
                          PRE-RETIREMENT DEATH BENEFITS

        5.1 ELIGIBILITY

        If the Participant dies while employed by the Company, his Beneficiary
shall be entitled to a death benefit from this Plan equal to the retirement
benefit that would have been paid the Participant if he had retired on his date
of death. The payment of benefits to his Beneficiary shall commence upon the
first of the month following the Participant's death and shall be made monthly
for a period of 25 years (300 monthly payments).

                                   ARTICLE VI
                            OPTIONAL FORMS OF BENEFIT

        6.1 LUMP SUM OPTION

        In lieu of the monthly benefits otherwise payable to the Participant or
his Beneficiary under section 4.1 or 5.1, the Participant or his Beneficiary, as
applicable, may elect to receive a lump sum payment. Such election may be made
prior to the commencement of monthly benefits or at any time during the period
of monthly payments. If the Participant has not incurred a Termination of
Employment at the time of the election, the election shall be effective as of
the first of the month following his Termination of Employment. This election
will result in a significant penalty to the Participant or his Beneficiary,
since the amount of the lump sum payment determined under this section 6.1 is
substantially less than the Actuarial Equivalent of the monthly benefits which
would otherwise be payable to the Participant or his Beneficiary. The lump sum
amount shall be determined by multiplying the Actuarial Equivalent of the

                                       4
<PAGE>   31

remaining payments by .94. The lump sum benefit shall be paid within 30 days of
the election by the Participant or Beneficiary.

        6.2 PAYMENT UPON FINANCIAL HARDSHIP

        In the event that the Participant incurs a financial hardship after the
commencement of monthly benefits under section 4.2 or section 5.1, he may
request that the Committee authorize payment of his remaining benefits in a lump
sum. The Committee shall not authorize such payment unless it determines that
there is an unforeseeable emergency that is caused by an event beyond the
control of the Participant, and such emergency would result in severe financial
hardship to the Participant if the lump sum payment is not authorized. If
authorized, the amount of the lump sum payment shall be the Actuarial Equivalent
value of the remaining monthly payments. Such lump sum payment shall be paid to
the Participant as soon as practicable following authorization by the Committee.

                                   ARTICLE VII
                               CHANGE OF OWNERSHIP

        7.1 LUMP SUM OPTION UPON CHANGE OF OWNERSHIP

        In the event of a Change of Ownership (as defined below) prior to the
commencement of payment of benefits under this Plan, the Participant may elect
to receive an immediate lump sum payment in lieu of all benefits otherwise
payable to the Participant or his Beneficiary under this Plan. Such election may
be made at any time prior to commencement of payment of benefits under this
Plan. This election will result in a significant penalty to the Participant,
since the amount of the lump sum benefit provided under section 7.2 is
substantially less than the Actuarial Equivalent of the monthly benefits which
may otherwise be payable to the Participant.

        7.2 AMOUNT OF LUMP SUM BENEFIT

        The amount of the lump sum benefit payable to the Participant pursuant
to section 7.1 shall be the amount determined pursuant to section 6.1, assuming
that the Participant terminated as of the date of his election. The lump sum
benefit shall be paid to the Participant within 30 days of the election by the
Participant.

        7.3 DEFINITION

        For purposes of this Article VII, the following definition applies:

        (a)     CHANGE OF OWNERSHIP. A "Change of Ownership" shall mean any
                change in control of the Company of a nature that would be
                required to be reported in response to Item 1(a) of the Current
                Report on Form 10-K, as in effect on July 12, 2001, pursuant to
                section 13 or 15(d) of the Securities Exchange Act of 1934 (the
                "Act"); provided that, without limitation, such a "Change in
                Ownership" shall be deemed to have occurred if:

                                       5
<PAGE>   32

                (1)     a third person, including a "group" as such term is used
                        in section 13(d)(3) of the Act, becomes the beneficial
                        owner, directly or indirectly, of 20 percent or more of
                        the combined voting power of the Company's outstanding
                        voting securities ordinarily having the right to vote
                        for the election of directors of the Company unless such
                        acquisition of beneficial ownership is approved by a
                        majority of the Incumbent Board (as such term is defined
                        in paragraph (2) below); or

                (2)     individuals who, as of July 12, 2001, constitute the
                        Board (the "Incumbent Board") cease for any reason to
                        constitute at least a majority of the Board, provided
                        that any person becoming a director subsequent to July
                        12, 2001 whose election, or nomination for election by
                        the Company's shareholders, was approved by a vote of at
                        least three-quarters of the directors comprising the
                        Incumbent Board (other than an election or nomination of
                        an individual whose initial assumption of office is in
                        connection with an actual or threatened election contest
                        relating to the election of the Directors of the
                        Company, as such terms are used in Rule 14a-11 of
                        Regulation 14A promulgated under the Act) shall be, for
                        purposes of this Article, considered as though such
                        person were a member of the Incumbent Board.

        7.4 ADVANCE ELECTION

        In lieu of the lump sum payout described in section 7.2, a Participant
may receive a payout equal to the Actuarial Equivalent of his retirement benefit
if he has provided the Company an irrevocable election to receive a lump sum
election upon a Change of Ownership and such election is provided at least 12
months in advance of the Change of Ownership.

                                  ARTICLE VIII
                                      TRUST

        8.1 ESTABLISHMENT OF THE TRUST

        The Company shall establish a Trust as a part of the Plan in order to
implement and carry out the provisions of the Plan and to finance the benefits
under the Plan. The Company shall establish the Trust by entering into a Trust
Agreement with a Trustee selected by the Committee. The Trust shall be an
irrevocable grantor Trust within the meaning of Code sections 671 through 677,
and the Company shall be treated as the owner of the Trust. It is intended that
the Trust shall be in such form as may be necessary for the Plan to be deemed
unfunded for purposes of the Employee Retirement Income Security Act of 1974, as
amended.

        The Trust shall maintain a Trust Fund. The administration and management
of the Trust Fund shall be set forth in the Trust Agreement, the terms of which
shall be consistent with the provisions of this Plan. Nothing in the Trust
Agreement shall impair the rights of the Participant and his Beneficiary nor
shall the agreement limit the obligations of the Company under this Plan.

                                       6
<PAGE>   33

        8.2 CONTRIBUTIONS

        The Company shall make an annual contribution to the Trust Fund of
$250,000. The first contribution shall be made January 1, 1996 and thereafter a
contribution shall be made each January 1 (including, if necessary, years after
the Participant has a Termination of Employment) until the Trust Fund holds
assets sufficient to satisfy all obligations for benefits under this Plan.
Notwithstanding the foregoing, within 30 days of a Change of Ownership as
defined in section 7.3, the Company shall (1) make a contribution to the Trust
Fund that causes the assets of the Trust Fund to equal the then Actuarial
Equivalent of the monthly retirement benefits remaining due under the Plan (or,
if the Participant has not yet incurred a Termination of Employment, what would
be due if the Participant's retirement occurred on the first day of the month
after the Change of Ownership), and (2) by each following January 1, make any
additional contribution necessary to cause the assets of the Trust Fund to
equal, as of that January 1, the Actuarial Equivalent of the monthly retirement
benefits remaining due (or, if the Participant has not yet incurred a
Termination of Employment, what would be due if the Participant's retirement
occurred on that January 1).

        8.3 PAYMENT OF BENEFITS

        The benefits under this Plan shall be paid from the Trust Fund. To the
extent the Trust Fund is insufficient to pay all required benefits under the
Plan, payment of benefits shall be made from the general assets of the Company.

                                   ARTICLE IX
                                 ADMINISTRATION

        9.1 ADMINISTRATION

        The Plan shall be administered by the Committee. The Committee shall be
authorized to construe and interpret all of the provisions of the Plan, to adopt
procedures and practices concerning the administration of the Plan, and to make
any determinations necessary hereunder, which shall be binding and conclusive on
all parties. The Committee may appoint one or more individuals and delegate such
of its power and duties as it deems desirable to any such individual, in which
case every reference herein made to the Committee shall be deemed to mean or
include the individuals as to matters within their jurisdiction.

        9.2 DECISIONS AND ACTIONS OF COMMITTEE

        The Committee may act at a meeting or in writing without a meeting. All
decisions and actions of the Committee shall be made by vote of the majority,
including actions in writing taken without a meeting.

        9.3 RULES AND RECORDS OF THE COMMITTEE

        The Committee may make such rules and regulations in connection with its
administration of the Plan as are consistent with the terms and provisions
hereof. The

                                       7
<PAGE>   34

Committee shall keep a record of the Participant's name, address, social
security number, benefit commencement date, and the amount of benefit.

        9.4 EMPLOYMENT OF AGENTS

        The Committee may employ agents, including without limitation,
accountants, actuaries, consultants, or attorneys, to exercise and perform the
powers and duties of the Committee as the Committee delegates to them, and to
render such services to the Committee as the Committee may determine, and the
Committee may enter into agreements setting forth the terms and conditions of
such service.

        9.5 AGENT FOR SERVICE OF LEGAL PROCESS

        The Chairman of the Committee shall serve as agent for service of legal
process.

        9.6 PLAN EXPENSES

        The Company shall pay all expenses reasonably incurred in the
administration of the Plan and Trust; provided, however, that the Trustee may
pay such expenses from the assets of the Trust, to the extent such expenses have
not been paid by the Company. In such event the Company shall reimburse the
Trustee promptly for any such expenses paid by the Trustee from the Trust. The
members of the Committee shall serve without compensation for their services as
such, but all expenses of the Committee shall be paid by the Company. No
employee of the Company shall receive compensation from the Plan regardless of
the nature of his services to the Plan.

        9.7 INDEMNIFICATION

        To the extent permitted by law, the Committee and all agents and
representatives of the Committee shall be indemnified by the Company and saved
harmless against any claims, and the expenses of defending against such claims,
resulting from any action or conduct relating to the administration of the Plan
except claims arising from gross negligence, willful neglect, or willful
misconduct.

        9.8 TAX WITHHOLDING

        The Company or Trustee shall withhold from any payment to the
Participant or Beneficiary any federal, state, or local taxes required by law to
be withheld with respect to such payment.

        9.9 CLAIMS PROCEDURE

        (a)     SUBMISSION OF CLAIMS. Claims for benefits under the Plan shall
                be submitted in writing to the Committee or to an individual
                designated by the Committee for this purpose.

                                       8
<PAGE>   35

        (b)     DENIAL OF CLAIM. If any claim for benefits is wholly or
                partially denied, the claimant shall be given written notice
                within 60 days following the date on which the claim is filed,
                which notice shall set forth

                (1)     the specific reason or reasons for the denial;

                (2)     specific reference to pertinent Plan and Trust
                        provisions on which the denial is based;

                (3)     a description of any additional material or information
                        necessary for the claimant to perfect the claim and an
                        explanation of why such material or information is
                        necessary; and

                (4)     an explanation of the Plan's claim review procedure.

                If the claim has not been granted, and if written notice of the
                denial of the claim is not furnished within 60 days following
                the date on which the claim is filed, the claim shall be deemed
                denied for the purpose of proceeding to the claim review
                procedure.

        (c)     CLAIM REVIEW PROCEDURE. The claimant or his authorized
                representative shall have 60 days after receipt of written
                notification of denial of a claim to request a review of the
                denial by making written request to the Committee (or its
                delegate), and may review pertinent documents and submit issues
                and comments in writing within such 60-day period. Not later
                than 60 days after receipt of the request for review, the
                Committee shall render and furnish to the claimant a written
                decision which shall include specific reasons for the decision,
                and shall make specific references to pertinent Plan and Trust
                provisions on which it is based. The Committee decision shall
                only be subject to further review as described in section 10.7.
                If a decision on review is not furnished to a claimant within
                the specified time period, the claim shall be deemed to have
                been denied on review.

                                    ARTICLE X
                                  MISCELLANEOUS

        10.1 RIGHTS AGAINST THE COMPANY

        Neither the establishment of the Plan, nor any modification thereof, nor
any payments hereunder, shall be construed to give the Participant the right to
be retained in the employ of the Company or to interfere with the right of the
Company to discharge the Participant at any time, subject to the terms of any
employment agreement between the Participant and the Company.

        10.2 RIGHTS UNDER THE COMPANY'S OTHER RETIREMENT PLANS

        Nothing in this Plan shall be construed to limit, broaden, restrict,
grant, or otherwise affect any rights of the Participant or a Beneficiary under
the Company's other retirement plans,

                                       9
<PAGE>   36

nor grant any additional rights or benefits to the Participant or a Beneficiary
under the Company's other retirement plans, nor in any way to limit, modify,
repeal, or otherwise affect the Company's or its Board's right to amend or
modify any such retirement plan.

        10.3 PAYMENT OF BENEFITS TO INCOMPETENT

        If the Committee receives evidence that --

        (a)     a person entitled to receive any benefit under the Plan is
                legally, physically, or mentally incompetent to receive such
                benefit and to give a valid release therefore, and

        (b)     another person or an institution is then maintaining or has
                custody of such person and no guardian, committee, or other
                representative of the estate of such person has been duly
                appointed by a court of competent jurisdiction,

the payment of such benefit may be made to such other person or institution as
the Committee may determine. Any such payment shall be a payment on behalf of
such person and shall, to the extent thereof, be a complete discharge of any
liability under the Plan to such person, and neither the Company, the Trustee,
nor any member of the Board or the Committee shall be liable to any person or
individual by reason of such payment.

        10.4 MISSING PERSON

        In the event any benefit shall become payable to any person or upon his
death to his legal representative and, if after written notice from the
Committee mailed to such person's last-known address as shown in the Company's
records, such person or his legal representative shall not have presented
himself to the Committee within six years after the mailing of such notice, then
the Committee may, in its sole discretion, distribute such amount, including any
benefit thereafter becoming due to such person or legal representative, among
the spouse and blood relatives of such person. Payments made in good faith to
any person, to a person's legal representative, or to any individual(s) who
have, on the presentation of reasonable proof, established to the satisfaction
of the Committee that he is the spouse or blood relative of such person, shall,
to the extent of such payments, be a complete discharge of all obligations
arising pursuant to the Plan, and neither the Company, the Trustee, nor any
member of the Board or the Committee shall be liable to any person or individual
by reasons of such payments.

        10.5 AMENDMENT OR TERMINATION

        The Plan may be amended or terminated, in whole or in part, at any time
by written action of the Board and with the prior written consent of the
Participant (or his Beneficiary or Beneficiaries following the Participant's
death). No such amendment or termination shall reduce or diminish the right of
the Participant or Beneficiary to receive any benefit accrued hereunder prior to
the date of such amendment or termination.

                                       10
<PAGE>   37

        10.6 MERGER OR CONSOLIDATION OF PLAN AND TRUST

        Neither the Plan nor the Trust may be merged or consolidated with, nor
may its assets or liabilities be transferred to, any other plan or trust without
the prior written consent of the Participant (or his Beneficiary or
Beneficiaries following the Participant's death).

        10.7 ARBITRATION/INTEREST ON UNPAID AMOUNTS/CONTROLLING LAW

        (a)     The Participant may further appeal pursuant to this section a
                Committee decision under section 9.9(b) on his appeal. The
                Participant may submit the controversy to final and binding
                arbitration pursuant to the then most applicable Rules of the
                American Arbitration Association; provided, however, that unless
                the parties otherwise agree, the arbitration shall be before a
                single arbitrator selected either by mutual agreement or,
                failing agreement, from a list of seven arbitrators provided by
                AAA, (1) four of whom shall be retired judges of the Superior or
                Appellate Courts of California who are residents of Los Angeles
                or Orange County and, if such list exists at the time of the
                dispute, who are members of the Independent List of Retired
                Judges, and (2) three of whom shall be members of the National
                Academy of Arbitrators, resident in Los Angeles or Orange
                Counties. In the event the parties are unable to agree upon such
                an arbitrator from such list of seven, each party shall strike
                one name in turn with the first to strike being chosen by lot.
                When only one name remains, that person shall be the parties'
                arbitrator. The parties hereto expressly waive their rights, if
                any, to have such matters heard by a jury or a judge, whether in
                state or federal court. The cost of the arbitration, including,
                but not limited to, any reasonable legal fees or other expenses
                incident thereto incurred in connection with such arbitration,
                shall be borne by the Company unless the arbitrators(s)
                determines that the Participant's claim is frivolous, in which
                case the Participant shall bear his own legal fees. In the
                arbitration the Committee's decision on appeal shall not be
                entitled to a presumption of correctness; rather, the dispute
                shall be decided de novo.

        (b)     The Company agrees to pay interest on any amounts payable to you
                under this Agreement which are not paid within 30 days after the
                date when due and on any money judgment which is awarded to you
                following a proceeding to enforce any portion of the Agreement
                from the date that payments should have been made under this
                Agreement. Such interest shall be calculated at the prime rate
                offered by Bank of America, or its successor, from the date that
                payments should have been made under this Agreement to the time
                of actual payment.

        (c)     The provisions of the Plan shall be construed, interpreted,
                administered, and enforced according to the laws of the State of
                California and all applicable Federal laws.

        10.8 RIGHTS TO TRUST FUND ASSETS

        The Participant shall not have any right to, or interest in, any assets
of the Trust Fund upon his Termination of Employment or otherwise, except as
provided in the Plan, and then only

                                       11
<PAGE>   38

to the extent of the benefits payable under the Plan that are payable out of the
assets of the Trust Fund.

        10.9 NONTRANSFERABILITY

        In no event shall the Company or Trustee make any payment under this
Plan to any assignee or creditor of the Participant or Beneficiary, except as
otherwise required by law. Prior to the time of a payment hereunder, the
Participant or Beneficiary shall have no rights by way of anticipation or
otherwise to assign or otherwise dispose of any interest under this Plan, nor
shall rights be assigned or transferred by operation of law.

        10.10 ILLEGALITY OF PARTICULAR PROVISION

        The illegality of any particular provision of this document shall not
affect the other provisions, and the document shall be construed in all respects
as if such invalid provision were omitted.

                                       12<PAGE>   1

                                                                     Exhibit 4.7

                           CERTIFICATE OF DESIGNATION
                                       OF
                            SERIES DD PREFERRED STOCK
                            PAR VALUE $.01 PER SHARE
                                       OF
                              CROWN NORTHCORP, INC.

         A. DESIGNATION. There shall be a series of Preferred Stock to be known
as Series DD Non-Voting, Convertible Preferred Stock, par value $0.01 per share
(hereinafter referred to as "Series DD Convertible Preferred Stock") consisting
of one authorized share. After the issuance of the Series DD Convertible
Preferred Stock and until the redemption of the outstanding share thereof, the
Corporation shall not authorize or issue any shares of common or preferred stock
having rights or preferences with respect to payment of dividends, liquidation
or redemption that are senior to the rights and preferences of the Series DD
Convertible Preferred Stock with respect to such matters without having obtained
the prior written consent of two-thirds of the holders.

         B. LIQUIDATION IN GENERAL. In the event of a Liquidation (defined
below), the holders of record of Series DD Convertible Preferred Stock (to the
extent that such stock has not been redeemed or converted) shall be entitled to
be paid in full the sum of $200,000 per share, plus an interest amount,
expressed in dollars, equal to a six percent (6%) cumulative dividend on the sum
of $200,000 from the date that the Series DD Preferred Stock is issued until the
date on which the Liquidation occurs (the "Liquidation Preference") before
assets of the Corporation shall be distributed among or paid over to the holders
of Common Stock or other shares ranking junior to Series DD Convertible
Preferred Stock (the "Junior Securities") in the distribution of assets or upon
the Liquidation of the Corporation. Written notice of a Liquidation, stating a
payment date and the place where such payments shall be made, shall be given to
the holders of record of Series DD Convertible Preferred Stock, such notice to
be addressed to each such holder at such holder's address as shown on the
records of the Corporation. The liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the Corporation's consolidation
or merger with any other entity or group of entities, in which the stockholders
of the Corporation prior to such transaction do not own at least a majority of
the voting capital stock of the surviving entity after the merger or
consolidation, or the Corporation's sale or transfer of all or substantially all
of the Corporation's assets, shall be deemed a "Liquidation" within the meaning
of the provisions of this Section B.

         The Series DD Convertible Preferred Stock shall rank in respect of the
distribution of assets or upon the Liquidation of the Corporation, subject to
the last sentence of this paragraph, on a parity with any other Senior
Securities (as defined below). If upon any Liquidation, the net assets available
for distribution to the holders of shares of the Series DD Convertible Preferred
Stock and subsequent series of Preferred Stock issued with rights

                                       1
<PAGE>   2

equivalent to the Series DD Convertible Preferred Stock (collectively referred
to herein as the "Senior Securities") shall be insufficient to pay the holders
of all of the outstanding shares of the Senior Securities the full amounts to
which they respectively shall be entitled, the holders of such shares, without
regard to classes or series, shall share in any distribution of assets in
proportion to the amounts respectively due to them on payment in full. In the
event of a Liquidation resulting from the Corporation's consolidation or merger
with any other entity or group of entities in which the stockholders of the
Corporation prior to such transaction do not own at least a majority of the
voting capital stock of the surviving entity after the merger or consolidation
or the sale or transfer of all or substantially all of the Corporation's assets,
the Series DD Convertible Preferred Stock shall rank in respect of the
distribution of assets prior to any other Senior Securities whose terms do not
specifically include within the definition of "Liquidation" such consolidations,
mergers or asset transfers.

         C. CUMULATIVE DIVIDENDS. The holders of record of Series DD Convertible
Preferred Stock shall be entitled to quarterly cash dividends at the annual rate
of six percent (6%) per share of Series DD Convertible Preferred Stock on the
Liquidation Preference (the "Dividend Rate"). The dividends provided for in this
Section C shall begin to accrue and be cumulative on outstanding shares of
Series DD Convertible Preferred Stock from the date of original issuance of the
shares of Series DD Convertible Preferred Stock by the Corporation. Such
dividends shall accrue from day to day, whether or not earned or declared. Such
dividends shall be paid solely and only to the extent that corporate funds are
legally available for the payment thereof and only to the extent that such
dividends are declared payable by the Corporation's Board of Directors, which
declarations the Corporation shall not be obligated to make.

         In the event of a Liquidation, the holders of record of Series DD
Convertible Preferred Stock shall be entitled to be paid in full all dividends
declared payable by the Corporation's Board of Directors before assets of the
Corporation shall be distributed among or paid over to the holders of Junior
Securities. Before the Liquidation, the full amount of all unpaid dividends
declared payable by the Corporation's Board of Directors on Series DD
Convertible Preferred Stock shall be paid before the declaration or setting
apart for payment of any dividend or other distribution on Junior Securities. No
dividend shall be paid, declared or set apart for payment on any Junior
Securities unless the Corporation has paid all dividends on or in respect of all
outstanding shares of Series DD Convertible Preferred Stock which have been
declared and are unpaid.

         With respect to the payment of dividends, the Series DD Convertible
Preferred Stock shall rank on parity with other Senior Securities (to the extent
that dividends are due on such other Senior Securities), and senior in priority
to all shares of Junior Securities.

         D. CONVERSION RIGHTS.

            (i) VOLUNTARY CONVERSION. All, and not less than all, of the Series
DD Preferred Stock will be convertible at the option of the holders of record
thereof at any time on or before September 1, 2005 into 2,000,000 shares of
fully paid and nonassessable shares of Common Stock, reflecting a conversion
ration of one share of the Services DD Preferred Stock

                                       2
<PAGE>   3

for 2,000,000 shares of the Common Stock (the "Conversion Ratio"). Upon the
conversion of Series DD Convertible Preferred Stock, dividends relating to the
shares of Series DD Convertible Preferred Stock converted shall cease to
cumulate and all preferences upon Liquidation shall cease.

                  (ii) METHOD OF CONVERSION. To exercise the voluntary
conversion privilege provided in paragraph (i) above, each holder of Series DD
Convertible Preferred Stock, on or before May 23, 2006, shall surrender such
holder's certificates representing Series DD Convertible Preferred Stock at the
Corporation's office or at such other place as shall be designated by the
Corporation, duly endorsed to the Corporation. Upon the Corporation's receipt of
such certificates, the Corporation shall issue certificates representing the
appropriate number of shares of Common Stock in the respective names of the
holders of Series DD Convertible Preferred Stock or in the names of the holders'
designees.

                  (iii) ADJUSTMENT OF NUMBER OF SHARES OF COMMON STOCK.

                        (a) STOCK DIVIDENDS; STOCK SPLITS. If the number of
                  shares of Common Stock outstanding at any time after the date
                  of issuance of the shares of Series DD Convertible Preferred
                  Stock is increased by a stock dividend payable in shares of
                  Common Stock or by a subdivision or split-up of shares of
                  Common Stock, then immediately after the record date fixed for
                  the determination of holders of shares of Common Stock
                  entitled to receive such stock dividend or the effective date
                  of such subdivision or split-up, as the case may be, the
                  Conversion Ratio shall be appropriately reduced so that the
                  holder of any shares of Series DD Convertible Preferred Stock
                  thereafter converted shall be entitled to receive the number
                  of shares of Common Stock of the Corporation which such holder
                  would have owned immediately following such action had such
                  shares of Series DD Convertible Preferred Stock been converted
                  immediately prior thereto.

                        (b) COMBINATION OF SHARES. If the number of shares of
                  Common Stock outstanding at any time after the date of
                  issuance of the shares of Series DD Convertible Preferred
                  Stock is decreased by a combination of the outstanding shares
                  of Common Stock, then immediately after the effective date of
                  such combination, the Conversion Ratio shall be appropriately
                  increased so that the holder of any shares of Series DD
                  Convertible Preferred Stock thereafter converted shall be
                  entitled to receive the number of shares of Common Stock of
                  the Corporation which such holder would have owned immediately
                  following such action had such shares of Series DD Convertible
                  Preferred Stock been converted immediately prior thereto.

                  (iv) CANCELLATION. All shares of Series DD Convertible
Preferred Stock which shall have been surrendered for conversion as herein
provided in this Section D - Conversion Rights shall no longer be deemed to be
outstanding and all rights with respect to such shares of Series DD Convertible
Preferred Stock, shall forthwith cease and terminate, except only the rights of
the holders thereof to receive shares of Common Stock or other assets

                                       3
<PAGE>   4

or property in exchange therefor and to receive the payment of accrued unpaid
dividends thereon from the Corporation as funds become legally available for the
payment thereof.

                  (v) RESERVATION OF SHARES. The Corporation shall at all times
reserve and keep available, free from preemptive rights, out of its treasury
shares or its authorized but unissued shares of Common Stock, for the purpose of
effecting the conversion of the shares of Series DD Convertible Preferred Stock,
the full number of shares of Common Stock then deliverable upon the conversion
of all shares of Series DD Convertible Preferred Stock then outstanding.

         E. REDEMPTION RIGHTS.. The Corporation will have the right, but not the
obligation, to redeem the Series DD Convertible Preferred Stock, in compliance
with applicable law and all agreements and instruments by which it is bound, at
any time upon 30 days' (such 30 days being referred to herein as the "Redemption
Period") prior written notice to the holders of record of the Series DD
Convertible Preferred Stock (the date for which such redemption is so noticed
being referred to herein as the "Redemption Date") at their address on the
records of the Corporation, for a redemption price equal to the sum of (a)
$200,000, plus (b) an amount, expressed in dollars, equal to a six percent (6%)
cumulative dividend on the sum of $200,000 from the date that the Series DD
Convertible Preferred Stock is issued until the day that it is so redeemed (the
"Redemption Price"). Such holders will have the right, but not the obligation,
to convert all, but not less than all, of the Series DD Convertible Preferred
Stock during the Redemption Period pursuant to Section D above. On the
applicable redemption date, the holders of the Series DD Convertible Preferred
Stock will deliver certificates representing the shares of Series DD Convertible
Preferred Stock to be redeemed to the Corporation, duly endorsed for transfer in
blank, along with such other documents and instruments as the Corporation may
reasonably request, and the Corporation will pay to such holders the Redemption
Price. In the event that any Redemption Date is not a business day, then the
related redemption shall occur on the next following business day. The
Redemption Price shall be payable in cash, by certified check or by wire
transfer of immediately available funds to an account designated in writing by
the holders. No shares of Series DD Convertible Preferred Stock which have been
so redeemed after the original issuance thereof shall be outstanding or shall
ever again be reissued, sold or transferred.

         E. VOTING RIGHTS.

         Prior to conversion of the shares of Series DD Convertible Preferred
Stock to shares of Common Stock, the shares of the Series DD Convertible
Preferred Stock shall have no voting rights with respect to directors of the
Corporation or any other matter requiring stockholder approval except with
respect to those matters requiring separate class votes as mandated by the laws
of the State of Delaware.

         F. ISSUE TAX. The issuance of certificates representing shares of
Common Stock upon the conversion of Series DD Convertible Preferred Stock shall
be made without charge to the holders thereof for any issuance, stock transfer
or documentary stamp tax in respect thereof, PROVIDED that the Corporation shall
not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any certificate in the name

                                       4
<PAGE>   5

other than that of the record holder of the Series DD Convertible Preferred
Stock that is being converted.

         G. PREEMPTIVE RIGHTS. The holders of the shares of Series DD
Convertible Preferred Stock shall have no preemptive rights.

         IN WITNESS WHEREOF, this Certificate of Designation has been executed
as of May ___, 2001.

                                                  /s/ Douglas A. Payne
                                            ------------------------------------
                                            Douglas A. Payne, Vice President

   /s/ Stephen W. Brown
---------------------------
Stephen W. Brown, Secretary

                                       5

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