KB Home said Tuesday that it improperly accounted for stock option grants to Chief Executive Bruce Karatz and may need to restate previous earnings. It also said that this, combined with a weaker housing market, would likely lower its third quarter income.

The Los Angeles-based homebuilder’s audit committee started reviewing some options awarded in 1999 to Karatz, the highest-paid executive in the industry leading the fifth-largest homebuilder in the industry. The company said late last month that the U.S. Securities and Exchange Commission would begin an informal review.

“The committee has reached a preliminary conclusion that the actual measurement dates for financial accounting purposes of certain stock option grants likely differ from the recorded grant dates. As a result, additional non-cash charges for stock-based compensation relating to these grants may need to be recorded.”

Karatz, who earned $43.2 million last year, was granted options for 450,000 shares on Oct. 25, 1999, the very day KB Home’s shares reached their low for the year, according to the company’s filing.

The company said it hasn’t determined “the aggregate amount of additional non-cash charges for such expense to be recorded in any specific prior period or in any future period.” The filling also said that it expects this, combined with the slow market, to lower net income 32 percent. The company said it expects to file earnings by Dec. 24th.

According to preliminary calculations, net income for the third quarter is expected to be $155.3 million ($1.93 per share), instead of a projected $227.5 million ($2.55). The company also said that construction-operating income would probably decline 36 percent in the quarter to $239 million.

Karatz’s salary in 2005 was approximately 311 percent above a competitive level that takes account of differences in company size and performance and CEO pay risk, according to Bloomberg News.

Shares in KB Home rose $1.43 a share early Tuesday to $46.22.