<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
                            ------------------------
  (MARK ONE)

     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

     [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
        THE SECURITIES EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER 0-18001

                               WILLIAM LYON HOMES
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      33-0864902
       (STATE OR OTHER JURISDICTION OF            (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
        INCORPORATION OR ORGANIZATION)
</TABLE>

                             4490 VON KARMAN AVENUE
                        NEWPORT BEACH, CALIFORNIA 92660
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 833-3600

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
                                                           NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                            ON WHICH REGISTERED
             -------------------                           ---------------------
<S>                                            <C>
    COMMON STOCK, PAR VALUE $.01 PER SHARE                NEW YORK STOCK EXCHANGE
</TABLE>

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

     Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  YES [X]  NO [ ].

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K.  [X]

     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 16, 2001 was $45,755,208. (This calculation
assumes that all officers and directors of the Company are affiliates.)

     The number of shares of Common Stock outstanding as of February 16, 2001
was 10,570,223.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of registrant's Proxy Statement for the Annual Meeting of Holders
of Common Stock to be held on May 14, 2001 are incorporated herein by reference
into Part III.

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<PAGE>   2

                               WILLIAM LYON HOMES

                                     INDEX

<TABLE>
<CAPTION>
                                                                      PAGE NO.
                                                                      --------
<S>      <C>                                                          <C>
                                    PART I
Item 1.  Business....................................................     1
Item 2.  Properties..................................................    14
Item 3.  Legal Proceedings...........................................    15
Item 4.  Submission of Matters to a Vote of Security Holders.........    15
                                   PART II

Item 5.  Market for the Registrant's Common Equity and Related
         Stockholder Matters.........................................    16
Item 6.  Selected Financial Data.....................................    17
Item 7.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................    18
Item 7A. Quantitative and Qualitative Disclosures About Market
         Risk........................................................    28
Item 8.  Financial Statements and Supplementary Data.................    28
Item 9.  Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosure....................................    29
                                   PART III

Item 10. Directors and Executive Officers of the Registrant..........    29
Item 11. Executive Compensation......................................    29
Item 12. Security Ownership of Certain Beneficial Owners and
         Management..................................................    29
Item 13. Certain Relationships and Related Transactions..............    29
                                   PART IV

Item 14. Exhibits, Consolidated Financial Statement Schedules and
         Reports on Form 8-K.........................................    29
         Index to Consolidated Financial Statements..................    33
</TABLE>

                                        i
<PAGE>   3

                                     PART I
ITEM 1. BUSINESS

GENERAL

     William Lyon Homes, a Delaware corporation (formerly named The Presley
Companies), and subsidiaries (the "Company") are primarily engaged in designing,
constructing and selling single family detached and attached homes in
California, Arizona and Nevada. Since its founding in 1956, the Company has sold
over 51,000 homes. The Company conducts its homebuilding operations through five
geographic divisions (Southern California, San Diego, Northern California,
Arizona and Nevada) including both wholly-owned projects and projects being
developed in unconsolidated joint ventures. The Company believes that it is one
of the largest homebuilders in California in terms of both sales and homes
delivered in 2000. Approximately 78% of the Company's home closings were derived
from its California operations. In 2000, the Company and its unconsolidated
joint ventures had combined revenues of $779.9 million and delivered 2,666
homes.

     The Company designs, constructs and sells a wide range of homes designed to
meet the specific needs of each of its markets, although it primarily emphasizes
sales to the entry-level and move-up home buyer markets. The Company currently
markets its homes through 42 sales locations in both its wholly-owned projects
and projects being developed in unconsolidated joint ventures. In 2000, the
average sales price for homes delivered was $289,400, with homes priced from
$96,000 to $1,074,000.

     The Company and its unconsolidated joint ventures currently own
approximately 4,888 lots (including 2,301 in unconsolidated joint ventures) and
control an additional 3,402 lots, substantially all of which are entitled. As
used in this Annual Report on Form 10-K, "entitled" land has a Development
Agreement and/or Vesting Tentative Map, or a final recorded plat or map from the
appropriate county or city government. Development Agreements and Vesting
Tentative Maps generally provide for the right to develop the land in accordance
with the provisions of the Development Agreement or Vesting Tentative Map unless
an issue arises concerning health, safety or general welfare. The Company's
sources of developed lots for its homebuilding operations are (1) development of
master-planned communities, primarily through unconsolidated joint ventures at
the current time, and (2) purchase of smaller projects with shorter life cycles
(merchant homebuilding). The Company estimates that its current inventory of
land is adequate to supply its homebuilding operations at current operating
levels for approximately 2 years.

     Prior to 1994, the Company had focused on the development of master-planned
communities as a primary source of developed lots for its homebuilding
operations. Beginning in 1994, the Company's land acquisition strategy, to the
extent permitted by the Company's financing arrangements, has been to undertake
projects with shorter life-cycles in order to reduce development and market risk
while maintaining an inventory of lots sufficient for construction of homes over
a two or three year period. As part of this strategy, the Company's current
plans are to: (i) acquire and develop parcels of land with up to approximately
300 lots, (ii) expand its homebuilding operations in the Southwest, particularly
in its long established markets in California and Arizona, and in Nevada, where
the Company entered the market in 1995 and (iii) continue to evaluate
opportunities in land development and master-planned communities with the
intention that any such projects would be funded in significant part by sources
other than the Company.

     On November 5, 1999, The Presley Companies ("Presley"), which subsequently
changed its name to William Lyon Homes on December 31, 1999 (the "Company") as
described below, acquired substantially all of the assets and assumed
substantially all of the related liabilities of William Lyon Homes, Inc. ("Old
William Lyon Homes"), in accordance with a Purchase Agreement executed as of
October 7, 1999 with Old William Lyon Homes, William Lyon and William H. Lyon.
William Lyon is Chairman of the Board of Old William Lyon Homes and also
Chairman of the Board and Chief Executive Officer of the Company. William H.
Lyon is the son of William Lyon and a director and an employee of the Company.

     The total purchase price consisted of approximately $42,598,000 in cash and
the assumption of approximately $101,058,000 of liabilities of Old William Lyon
Homes. The acquisition has been accounted for as a purchase and, accordingly,
the purchase price has been allocated based on the fair value of the assets and
liabilities acquired. The excess of the purchase price over the net assets
acquired amounting to approximately

                                        1
<PAGE>   4

$8,689,000 has been reflected as goodwill and is being amortized on a
straight-line basis over an estimated useful life of seven years.

     After the acquisition described above and prior to the effectiveness of the
merger as described below, William Lyon and a trust of which William H. Lyon is
the beneficiary acquired (1) 5,741,454 shares of the Company's Series A Common
Stock for $0.655 per share in a tender offer for the purchase of up to
10,678,792 shares of the Company's Series A Common Stock which closed on
November 5, 1999 and (2) 14,372,150 shares of the Company's Series B Common
Stock for $0.655 per share under agreements with certain holders of the
Company's Series B Common Stock which closed on November 8, 1999. On November 5,
1999 William Lyon and the Company cancelled all of William Lyon's outstanding
options to purchase 750,000 shares of the Company's Series A Common Stock. The
completion of these transactions, together with the previous disposition on
August 12, 1999 of 3,000,000 shares by William Lyon and a trust of which William
H. Lyon is the beneficiary, resulted in William Lyon and a trust of which
William H. Lyon is a beneficiary owning approximately 49.9% of the Company's
outstanding Common Stock. The foregoing number of shares does not reflect the
subsequent merger and the conversion of each share of Series A and Series B
Common Stock into 0.2 share of common stock as described below.

     On November 5, 1999 at a Special Meeting of Holders of Common Stock, the
Holders of Common Stock approved a proposal to adopt a certificate of ownership
and merger pursuant to which The Presley Companies would merge with and into
Presley Merger Sub, Inc., a newly-formed Delaware corporation and wholly owned
subsidiary of The Presley Companies, with Presley Merger Sub, Inc. being the
surviving corporation. In the merger, each outstanding share of common stock of
The Presley Companies became exchangeable for 0.2 share of common stock of
Presley Merger Sub, Inc. In the merger, the surviving corporation was renamed
The Presley Companies, which in turn was renamed William Lyon Homes on December
31, 1999. On November 11, 1999, the certificate of ownership and merger was
filed in the State of Delaware and the merger became effective. Beginning on
November 12, 1999, the shares of the surviving company (then named The Presley
Companies) commenced trading on the New York Stock Exchange under the symbol
"PDC."

     The principal purpose of the merger is to help preserve the Company's
substantial net operating loss carryforwards and other tax benefits for use in
offsetting future taxable income by decreasing, but not eliminating, the risk of
an "ownership change" for federal income tax purposes. The Company's future use
of tax carryforwards could be severely limited if there is an "ownership change"
as defined in applicable tax laws and regulations, over any three year period.
The imposition of transfer restrictions in connection with the merger was
intended to reduce the risk of an ownership change. In general, the transfer
restrictions prohibit, without prior approval of the board of directors of the
Company, the direct or indirect disposition or acquisition of any stock of the
Company by or to any holder who owns or would so own upon the acquisition
(either directly or through the tax attribution rules) 5% or more of the
Company's stock.

     The Company after the consummation of the merger had substantially the same
financial position as that of The Presley Companies immediately before the
merger (the merger took effect after consummation of the transactions
contemplated in the Purchase Agreement with Old William Lyon Homes as described
above). Except for the transfer restrictions and the elimination of provisions
dividing the common stock into two series, the new shares of common stock issued
by the surviving company in the merger have terms substantially similar to the
old shares of common stock.

     Effective on November 5, 1999, Old William Lyon Homes changed its name to
Corporate Enterprises, Inc. Effective after the close of business on December
31, 1999, The Presley Companies changed its name to William Lyon Homes.
Effective on January 3, 2000, the Company's stock ticker symbol changed from PDC
to WLS. The Company's common stock continues to trade on the New York Stock
Exchange under the stock symbol WLS.

     In accordance with the bond indenture agreement governing the Company's
Senior Notes which are due on July 1, 2001, if the Company's Consolidated
Tangible Net Worth is less than $60,000,000 for two consecutive fiscal quarters,
the Company is required to offer to purchase $20,000,000 in principal amount of
the Senior Notes. Because the Company's Consolidated Tangible Net Worth had been
less than $60,000,000

                                        2
<PAGE>   5

beginning with the quarter ended June 30, 1997 and continuing through the
quarter ended March 31, 2000, the Company would, effective on December 4, 1997,
June 4, 1998, December 4, 1998, June 4, 1999, December 4, 1999 and June 4, 2000
have been required to make offers to purchase $20,000,000 of the Senior Notes at
par plus accrued interest, less the face amount of Senior Notes acquired by the
Company after September 30, 1997, March 31, 1998, September 30, 1998, March 31,
1999, September 30, 1999 and March 31, 2000, respectively. The Company acquired
Senior Notes with a face amount equal to or greater than $20,000,000 after
September 30, 1997 and prior to December 4, 1997, again after March 31, 1998 and
prior to June 4, 1998, again after September 30, 1998 and prior to December 4,
1998, again after March 31, 1999 and prior to June 4, 1999 and again after
September 30, 1999 and prior to December 4, 1999, and again after March 31, 2000
and prior to June 4, 2000, and therefore was not required to make offers to
purchase Senior Notes. As a result of these transactions, the Company recognized
as an extraordinary item net gains from retirement of debt totaling $496,000,
$4,200,000 and $2,741,000 during the years ended December 31, 2000, 1999 and
1998, after giving effect to income taxes and amortization of related loan
costs.

     At December 31, 2000, the Company's Consolidated Tangible Net Worth was
$94,620,000. As long as the Company's Consolidated Tangible Net Worth is not
less than $60,000,000 on the last day of each of any two consecutive fiscal
quarters, the Company will not be required to make similar offers to purchase
$20,000,000 in principal amount of the Senior Notes.

     Because of the Company's obligation to offer to purchase $20,000,000 in
principal amount of the Senior Notes every six months so long as the Company's
Consolidated Tangible Net Worth was less than $60,000,000, the Company has been
restricted in its ability to acquire, hold and develop real estate projects. The
Company changed its operating strategy during 1997 to finance certain projects
by forming joint ventures with venture partners that would provide a substantial
portion of the capital necessary to develop these projects. The Company believes
that the use of joint venture partnerships better enables it to reduce its
capital investments and risks in the highly capital intensive California
markets, as well as to repurchase the Company's Senior Notes as described above.
The Company generally receives, after priority returns and capital distributions
to its partners, approximately 50% of the profits and losses, and cash flows
from joint ventures.

     As of December 31, 2000, the Company and certain of its subsidiaries are
general partners or members in twenty-eight joint ventures involved in the
development and sale of residential projects. Such joint ventures are 50% or
less owned and, accordingly, the financial statements of such joint ventures are
not consolidated with the Company's financial statements. The Company's
investments in unconsolidated joint ventures are accounted for using the equity
method. See Note 7 of "Notes to Consolidated Financial Statements" for condensed
combined financial information for these joint ventures. Based upon current
estimates, substantially all future development and construction costs will be
funded by the Company's joint venture partners or from the proceeds of
construction financing obtained by the joint ventures.

     The Company will continue to utilize its current inventory of lots and
future land acquisitions to conduct its operating strategy which consists of:
(i) offering a diverse product line at a variety of prices to suit a wide range
of consumer tastes, (ii) limiting completed housing inventory exposure, (iii)
emphasizing well-designed cost-effective products, (iv) utilizing market
research to allow for a quick response to local market conditions, (v)
maintaining budget and control systems to facilitate effective cost controls and
(vi) using extensive marketing and sales efforts.

     The Company had total consolidated revenues from operations of $417.3
million, $444.8 million and $370.5 million for the years ended December 31,
2000, 1999 and 1998, respectively. Homes closed by the Company, including
unconsolidated joint ventures, were 2,666, 2,618, and 1,925 for the years ended
December 31, 2000, 1999 and 1998, respectively.

     The Company's operations are dependent to a significant extent on debt
financing and, beginning in the fourth quarter of 1997, on joint venture
financing. The Company's principal credit sources are the 12 1/2% Senior Notes,
Revolving Credit Facilities, project construction loans, and seller-provided
financing. The Company filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 for the sale of $200.0 million of 12 1/2%
Senior Notes which became effective on June 23, 1994. The offering closed on

                                        3
<PAGE>   6

June 29, 1994 and was fully subscribed and issued. At December 31, 2000, the
outstanding principal amount of the 12 1/2% Senior Notes was $77.2 million. The
Revolving Credit Facilities are revolving lines of credit with a maximum
commitment of $170.0 million. However, the credit facilities have limitations on
the amounts that can be borrowed at any time based on assets which are included
in the credit facilities and the specified borrowings permitted under borrowing
base calculations. The Revolving Credit Facilities are secured by substantially
all of the Company's assets. At December 31, 2000, the outstanding principal
amount under the Revolving Credit Facilities was $66.3 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition and Liquidity" and Note 8 of "Notes to
Consolidated Financial Statements."

     The ability of the Company to meet its obligations on its indebtedness will
depend to a large degree on its future performance which in turn will be
subject, in part, to factors beyond its control, such as prevailing economic
conditions, mortgage and other interest rates, weather, the occurrence of events
such as landslides, soil subsidence and earthquakes that are uninsurable, not
economically insurable or not subject to effective indemnification agreements,
availability of labor and homebuilding materials, changes in governmental laws
and regulations, and the availability and cost of land for future development.
At this time, the Company's degree of leverage may limit its ability to meet its
obligations, withstand adverse business or other conditions and capitalize on
business opportunities.

     The Company's principal executive offices are located at 4490 Von Karman
Avenue, Newport Beach, California 92660 and its telephone number is (949)
833-3600. The Company was incorporated in the State of Delaware on July 15,
1999.

THE COMPANY'S MARKETS

     The Company is currently operating through five geographic divisions:
Southern California, San Diego, Northern California, Arizona, and Nevada. Each
of the divisions has responsibility for the management of the Company's
homebuilding and development operations within the geographic boundaries of the
division. The New Mexico Division ceased operating in mid-2000.

                                        4
<PAGE>   7

     The following table sets forth sales from real estate operations
attributable to each of the Company's homebuilding divisions during the
preceding three fiscal years:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                          ---------------------------------------------------------
                                                2000               1999(7)               1998
                                          -----------------    ----------------    ----------------
                                           DOLLAR     % OF      DOLLAR    % OF      DOLLAR    % OF
                                           AMOUNT     TOTAL     AMOUNT    TOTAL     AMOUNT    TOTAL
                                          --------    -----    --------   -----    --------   -----
                                                       (DOLLARS IN THOUSANDS)
<S>                                       <C>         <C>      <C>        <C>      <C>        <C>
WHOLLY-OWNED
  Southern California(1)................  $107,249      14%    $169,394     26%    $ 80,868     20%
  San Diego(2)..........................    90,137      12%      40,168      6%      70,390     17%
  Northern California(3)................   111,026      14%     110,920     17%      76,117     19%
  Arizona(4)............................    26,309       3%      32,014      5%      68,803     17%
  New Mexico(5).........................     6,011       1%      23,989      4%      27,067      7%
  Nevada(6).............................    66,134       8%      63,496     10%      44,487     11%
  Other.................................        --       0%          --      0%         550      0%
                                          --------     ---     --------    ---     --------    ---
                                           406,866      52%     439,981     68%     368,282     91%
                                          --------     ---     --------    ---     --------    ---
UNCONSOLIDATED JOINT VENTURES
  Southern California(1)................   112,233      14%      39,054      6%         871      0%
  San Diego(2)..........................   116,048      15%     121,226     19%      26,725      6%
  Northern California(3)................   146,571      19%      43,056      7%      13,485      3%
                                          --------     ---     --------    ---     --------    ---
                                           374,852      48%     203,336     32%      41,081      9%
                                          --------     ---     --------    ---     --------    ---
COMBINED
  Southern California(1)................   219,482      28%     208,448     32%      81,739     20%
  San Diego(2)..........................   206,185      27%     161,394     25%      97,115     23%
  Northern California(3)................   257,597      33%     153,976     24%      89,602     22%
  Arizona(4)............................    26,309       3%      32,014      5%      68,803     17%
  New Mexico(5).........................     6,011       1%      23,989      4%      27,067      7%
  Nevada(6).............................    66,134       8%      63,496     10%      44,487     11%
  Other.................................        --       0%          --      0%         550      0%
                                          --------     ---     --------    ---     --------    ---
                                          $781,718     100%    $643,317    100%    $409,363    100%
                                          ========     ===     ========    ===     ========    ===
</TABLE>

---------------
(1) The Southern California Division consists of operations in Los Angeles,
    Orange, Riverside, San Bernardino and Ventura Counties.

(2) The San Diego Division consists of operations in San Diego and Riverside
    Counties.

(3) The Northern California Division consists of operations in Alameda, Contra
    Costa, El Dorado, Sacramento, Solano, Yolo and Santa Clara Counties.

(4) The Arizona Division consists of operations in the Phoenix area and, until
    January 1999, Tucson, Arizona.

(5) The New Mexico Division consisted of operations in Albuquerque and Santa Fe,
    New Mexico.

(6) The Nevada Division consists of operations in the Las Vegas area.

(7) In November 1999, the Company acquired substantially all of the assets of
    Old William Lyon Homes, all of which are located in California.

     For financial information concerning segments, see the "Consolidated
Financial Statements" and Note 1 of "Notes to Consolidated Financial
Statements."

HOMEBUILDING

     The Company currently has a wide variety of product lines which enables it
to meet the specific needs of each of its markets. The Company's products
include entry-level, move-up and luxury homes, although it primarily emphasizes
sales to the entry-level and move-up home markets. The Company believes that
this diversified product strategy enables it to mitigate some of the risks
inherent in the homebuilding industry and

                                        5
<PAGE>   8

to meet a variety of market conditions. In order to reduce exposure to local
market conditions, the Company's sales locations are geographically dispersed.
The Company currently has 42 sales locations.

     Because the decision as to which product to develop is based on the
Company's assessment of market conditions and the restrictions imposed by
government regulations, homestyles and sizes vary from project to project. The
Company's attached housing ranges in size from 868 to 2,143 square feet, and the
Company's detached housing ranges from 1,231 to 4,655 square feet.

     Due to the Company's product and geographic diversification strategy, the
prices of the Company's homes also vary substantially. Prices for the Company's
attached housing range from approximately $144,000 to $251,000 and prices for
detached housing range from approximately $96,000 to $1,074,000. The average
sales price of the Company's homes for the year ended December 31, 2000 was
$289,400.

     The Company generally standardizes and limits the number of home designs
within any given product line. This standardization permits on-site mass
production techniques and bulk purchasing of materials and components, thus
enabling the Company to better control and sometimes reduce construction costs.

     The Company contracts with a number of architects and other consultants who
are involved in the design process of the Company's homes. Designs are
constrained by zoning requirements, building codes, energy efficiency laws and
local architectural guidelines, among other factors. Engineering, landscaping,
master-planning and environmental impact analysis work are subcontracted to
independent firms which are familiar with local requirements.

     Substantially all construction work is done by subcontractors with the
Company acting as the general contractor. The Company manages subcontractor
activities with on-site supervisory employees and management control systems.
The Company does not have long-term contractual commitments with its
subcontractors or suppliers. However, the Company generally has been able to
obtain sufficient materials and subcontractors during times of material
shortages. The Company believes its relationships with its suppliers and
subcontractors are good.

                                        6
<PAGE>   9

DESCRIPTION OF PROJECTS

     The Company's homebuilding projects usually take two to five years to
develop. The following table presents project information relating to each of
the Company's homebuilding divisions.
<TABLE>
<CAPTION>
                                                        UNITS           LOTS       HOMES CLOSED
                                       ESTIMATED        CLOSED         OWNED         FOR YEAR       BACKLOG
                          YEAR OF      NUMBER OF        AS OF          AS OF          ENDED            AT
                           FIRST       HOMES AT      DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
PROJECT (COUNTY) PRODUCT  DELIVERY   COMPLETION(1)       2000           2000           2000        2000(2)(4)
------------------------  --------   -------------   ------------   ------------   ------------   ------------
<S>                       <C>        <C>             <C>            <C>            <C>            <C>
                                             SOUTHERN CALIFORNIA

WHOLLY-OWNED:

Oak Park -- Irvine
  (Orange County).......    1998           210             210             0             30             0
                                        ------          ------         -----          -----           ---
Oak Park II -- Irvine
  (Orange County).......    2000           102              72            30             72            27
                                        ------          ------         -----          -----           ---
Lyon Harvest
  (Orange County).......    1999            23              23             0              2             0
                                        ------          ------         -----          -----           ---
Lyon Parkside
  (Orange County).......    1999            30              30             0              4             0
                                        ------          ------         -----          -----           ---
Solana at Talega
  (Orange County).......    1999           120              91            29             91            13
                                        ------          ------         -----          -----           ---
Talega 2R
  (Orange County).......    2002            63               0            63              0             0
                                        ------          ------         -----          -----           ---
Fontana
  (San Bernardino
  County)...............    1998           275             275             0             49             0
                                        ------          ------         -----          -----           ---
Lyon Reflections
  (Riverside County)....    2000            39              39             0              2             0
                                        ------          ------         -----          -----           ---
Lyon Vineyard
  (San Bernardino
  County)...............    2000           100              89            11             89            11
                                        ------          ------         -----          -----           ---
Lyon Orchard
  (San Bernardino
  County)...............    2000            81              79             2             79             2
                                        ------          ------         -----          -----           ---
Archibald Ranch -- (San
  Bernardino County)....    2000           113              21            92             21             7
                                        ------          ------         -----          -----           ---
Cascade Estates
  (Los Angeles
  County)...............    1999            37              37             0              2             0
                                        ------          ------         -----          -----           ---
Crown Ridge -- Palmdale
  (Los Angeles
  County)...............    2000            71              26            45             26             7
                                        ------          ------         -----          -----           ---
Andover -- West Irvine
  (Orange County).......    2001           138               0            44              0             0
                                        ------          ------         -----          -----           ---
Vista del Verde -- Yorba
  Linda (Orange
  County)...............    2001           106               0            23              0             0
                                        ------          ------         -----          -----           ---
Beachside -- Huntington
  Beach (Orange
  County)...............    2001            86               0            86              0             0
                                        ------          ------         -----          -----           ---
Providence Ranch
  (Riverside County)....    2001            97               0            97              0             0
                                        ------          ------         -----          -----           ---
    Total
      wholly-owned......                 1,691             992           522            467            67
                                        ------          ------         -----          -----           ---
UNCONSOLIDATED JOINT VENTURES:
Twin Oaks
  (Ventura County)......    1998           110             110             0             33             0
                                        ------          ------         -----          -----           ---
White Cloud Estates
  (Ventura County)......    1999            78              77             1             63             0
                                        ------          ------         -----          -----           ---
Reston -- Ladera (Orange
  County)...............    2000           117              16           101             16            26
                                        ------          ------         -----          -----           ---
Hampton Road -- Ladera
  (Orange County).......    2000            82               0            82              0            18
                                        ------          ------         -----          -----           ---
Compass Pointe at
  Forster Ranch (Orange
  County)...............    2000            92              21            71             21            23
                                        ------          ------         -----          -----           ---
Avalon at Summerlane
  (Orange County).......    2000           113              28            85             28             4
                                        ------          ------         -----          -----           ---

<CAPTION>

                              SALES PRICE
PROJECT (COUNTY) PRODUCT        RANGE(3)
------------------------  --------------------
<S>                       <C>
                          SOUTHERN CALIFORNIA
WHOLLY-OWNED:
Oak Park -- Irvine
  (Orange County).......  $  144,000 - 250,000
Oak Park II -- Irvine
  (Orange County).......  $  165,000 - 251,000
Lyon Harvest
  (Orange County).......  $  270,000 - 280,000
Lyon Parkside
  (Orange County).......  $  440,000 - 480,000
Solana at Talega
  (Orange County).......  $  294,000 - 350,000
Talega 2R
  (Orange County).......  $  635,000 - 715,000
Fontana
  (San Bernardino
  County)...............  $  152,000 - 169,000
Lyon Reflections
  (Riverside County)....  $  150,000 - 180,000
Lyon Vineyard
  (San Bernardino
  County)...............  $  218,000 - 253,000
Lyon Orchard
  (San Bernardino
  County)...............  $  175,000 - 200,000
Archibald Ranch -- (San
  Bernardino County)....  $  203,000 - 243,000
Cascade Estates
  (Los Angeles
  County)...............  $  450,000 - 520,000
Crown Ridge -- Palmdale
  (Los Angeles
  County)...............  $  160,000 - 190,000
Andover -- West Irvine
  (Orange County).......  $  230,000 - 265,000
Vista del Verde -- Yorba
  Linda (Orange
  County)...............  $  455,000 - 505,000
Beachside -- Huntington
  Beach (Orange
  County)...............  $  480,000 - 555,000
Providence Ranch
  (Riverside County)....  $  198,000 - 238,000
    Total
      wholly-owned......
UNCONSOLIDATED JOINT VEN
Twin Oaks
  (Ventura County)......  $  299,000 - 323,000
White Cloud Estates
  (Ventura County)......  $  305,000 - 350,000
Reston -- Ladera (Orange
  County)...............  $  317,000 - 367,000
Hampton Road -- Ladera
  (Orange County).......  $  420,000 - 455,000
Compass Pointe at
  Forster Ranch (Orange
  County)...............  $  510,000 - 545,000
Avalon at Summerlane
  (Orange County).......  $  435,000 - 503,000
</TABLE>

                                        7
<PAGE>   10
<TABLE>
<CAPTION>
                                                        UNITS           LOTS       HOMES CLOSED
                                       ESTIMATED        CLOSED         OWNED         FOR YEAR       BACKLOG
                          YEAR OF      NUMBER OF        AS OF          AS OF          ENDED            AT
                           FIRST       HOMES AT      DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
PROJECT (COUNTY) PRODUCT  DELIVERY   COMPLETION(1)       2000           2000           2000        2000(2)(4)
------------------------  --------   -------------   ------------   ------------   ------------   ------------
<S>                       <C>        <C>             <C>            <C>            <C>            <C>
Ladera Maplewood (Orange
  County)...............    2000           103             103             0             72             0
                                        ------          ------         -----          -----           ---
Lyon Monterrey
  (Orange County).......    1999            99              75            24             68            14
                                        ------          ------         -----          -----           ---
    Total unconsolidated
      joint ventures....                   794             430           364            301            85
                                        ------          ------         -----          -----           ---
SOUTHERN CALIFORNIA
  REGION TOTAL..........                 2,485           1,422           886            768           152
                                        ======          ======         =====          =====           ===
                                             NORTHERN CALIFORNIA

WHOLLY-OWNED:

Oakhurst Country Club
  (Contra Costa County)
  Previously Closed
    Products............    1989         1,208           1,208             0              0             0
  Peacock Creek.........    1996           142             142             0             22             0
  Diablo Village
    (Town Center).......    2000            33              33             0             33             0
                                        ------          ------         -----          -----           ---
                                         1,383           1,383             0             55             0
                                        ------          ------         -----          -----           ---
Eagle Ridge
  (Solano County).......    1997           364             364             0             17             0
                                        ------          ------         -----          -----           ---
St. Helena
  Westminster Estates
  (Napa County).........    1999            23              22             1             22             1
                                        ------          ------         -----          -----           ---
Lyon Fairways
  (Solano County).......    1999            91              91             0             58             0
                                        ------          ------         -----          -----           ---
Lyon Villas
  (San Joaquin
  County)...............    1999           135              72            63             53             9
                                        ------          ------         -----          -----           ---
Lyon Estates
  (San Joaquin
  County)...............    1997           120              67            53             45            14
                                        ------          ------         -----          -----           ---
Lyon Rosewood
  (San Joaquin
  County)...............    1999            74              74             0             38             0
                                        ------          ------         -----          -----           ---
Lyon Ironwood
  (San Joaquin
  County)...............    2000           116               0            24              0            26
                                        ------          ------         -----          -----           ---
Lyon Edgewood
  (San Joaquin
  County)...............    2000            87              77            10             43             7
                                        ------          ------         -----          -----           ---
Lyon Edgewood 2
  (San Joaquin
  County)...............    2000            65              21            44             21            43
                                        ------          ------         -----          -----           ---
Lyon Rhapsody
  (Contra Costa
  County)...............    2001            81               0            81              0             0
                                        ------          ------         -----          -----           ---
Lyon Palazzo
  (Sacramento County)...    2001           100               0           100              0             0
                                        ------          ------         -----          -----           ---
    Total
      wholly-owned......                 2,639           2,171           376            352           100
                                        ------          ------         -----          -----           ---
UNCONSOLIDATED JOINT VENTURES:
Cerro Plata
  (Santa Clara
  County)...............    2002           526               0           526              0             0
                                        ------          ------         -----          -----           ---
The Preserve
  (Alameda County)......    1997            87              87             0             27             0
                                        ------          ------         -----          -----           ---
Lyon Groves
  (Contra (Costa
  County)...............    1999           103              83            20             65            18
                                        ------          ------         -----          -----           ---
Lyon Ridge
  (Contra (Costa
  County)...............    1999           127              54            73             54            30
                                        ------          ------         -----          -----           ---
Manor at Thomas Ranch
  (Contra Costa
  County)...............    1999            63              62             1             62             0
                                        ------          ------         -----          -----           ---
Plantation at
  Thomas Ranch
  (Contra Costa
  County)...............    1999            77              55            22             55            22
                                        ------          ------         -----          -----           ---

<CAPTION>

                              SALES PRICE
PROJECT (COUNTY) PRODUCT        RANGE(3)
------------------------  --------------------
<S>                       <C>
Ladera Maplewood (Orange
  County)...............  $  282,000 - 325,000
Lyon Monterrey
  (Orange County).......  $  363,000 - 417,000
    Total unconsolidated
      joint ventures....
SOUTHERN CALIFORNIA
  REGION TOTAL..........
                          NORTHERN CALIFORNIA
WHOLLY-OWNED:
Oakhurst Country Club
  (Contra Costa County)
  Previously Closed
    Products............
  Peacock Creek.........  $  462,000 - 592,000
  Diablo Village
    (Town Center).......  $  337,000 - 420,000
Eagle Ridge
  (Solano County).......  $  231,000 - 311,000
St. Helena
  Westminster Estates
  (Napa County).........  $  495,000 - 555,000
Lyon Fairways
  (Solano County).......  $  272,000 - 344,000
Lyon Villas
  (San Joaquin
  County)...............  $  203,000 - 279,000
Lyon Estates
  (San Joaquin
  County)...............  $  276,000 - 327,000
Lyon Rosewood
  (San Joaquin
  County)...............  $  120,000 - 188,000
Lyon Ironwood
  (San Joaquin
  County)...............  $  200,000 - 264,000
Lyon Edgewood
  (San Joaquin
  County)...............  $  203,000 - 244,000
Lyon Edgewood 2
  (San Joaquin
  County)...............  $  233,000 - 279,000
Lyon Rhapsody
  (Contra Costa
  County)...............  $  218,000 - 277,000
Lyon Palazzo
  (Sacramento County)...  $  226,000 - 276,000
    Total
      wholly-owned......
UNCONSOLIDATED JOINT VEN
Cerro Plata
  (Santa Clara
  County)...............  $650,000 - 1,499,000
The Preserve
  (Alameda County)......  $897,000 - 1,074,000
Lyon Groves
  (Contra (Costa
  County)...............  $  269,000 - 353,000
Lyon Ridge
  (Contra (Costa
  County)...............  $  280,000 - 364,000
Manor at Thomas Ranch
  (Contra Costa
  County)...............  $  544,000 - 657,000
Plantation at
  Thomas Ranch
  (Contra Costa
  County)...............  $  603,000 - 799,000
</TABLE>

                                        8
<PAGE>   11
<TABLE>
<CAPTION>
                                                        UNITS           LOTS       HOMES CLOSED
                                       ESTIMATED        CLOSED         OWNED         FOR YEAR       BACKLOG
                          YEAR OF      NUMBER OF        AS OF          AS OF          ENDED            AT
                           FIRST       HOMES AT      DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
PROJECT (COUNTY) PRODUCT  DELIVERY   COMPLETION(1)       2000           2000           2000        2000(2)(4)
------------------------  --------   -------------   ------------   ------------   ------------   ------------
<S>                       <C>        <C>             <C>            <C>            <C>            <C>
Henry Ranch
  (Contra Costa County)
  Lyon Tierra...........    2001            46               0            46              0             0
  Lyon Dorado...........    2001            54               0            54              0             0
                                        ------          ------         -----          -----           ---
                                           100               0           100              0             0
                                        ------          ------         -----          -----           ---
Woodlake Estates
  (Solano County)
  Paradise Valley.......    2001             9               0             9              0             0
  Lyon Brook............    2001           121               0           121              0             0
  Lyon Falls............    2001           102               0           102              0             0
                                        ------          ------         -----          -----           ---
                                           232               0           232              0             0
                                        ------          ------         -----          -----           ---
Stonebriar
  (El Dorado County)
  Lyon Casina...........    2001           125               0           125              0             0
  Lyon Prima............    2001           135               0           135              0             0
                                        ------          ------         -----          -----           ---
                                           260               0           260              0             0
                                        ------          ------         -----          -----           ---
    Total unconsolidated
      joint ventures....                 1,575             341         1,234            263            70
                                        ------          ------         -----          -----           ---
NORTHERN CALIFORNIA
  REGION TOTAL..........                 4,214           2,512         1,610            615           170
                                        ======          ======         =====          =====           ===
                                                  SAN DIEGO
WHOLLY-OWNED:

Sun Lakes Country Club
  (Riverside County)
  Previously Closed
    Products............    1987         2,082           2,082             0              0             0
  Promenade.............    1996           108             108             0              8             0
  Atrium................    1996           102             102             0              6             0
  Terrace...............    1996           110             110             0             11             0
                                        ------          ------         -----          -----           ---
                                         2,402           2,402             0             25             0
                                        ------          ------         -----          -----           ---
Horsethief Canyon Ranch
  (Riverside County)
  Previously Closed
  Products..............    1989           847             847             0              0             0
  Series "300"..........    1998           116             116             0              1             0
  Series "400"..........    1995           554             351           199             98             5
  Series "500"..........    1995           445             332           117             79             1
                                        ------          ------         -----          -----           ---
                                         1,962           1,646           316            178             6
                                        ------          ------         -----          -----           ---
Sycamore Ranch
  (San Diego County)....    1997           195             102            93             39             1
                                        ------          ------         -----          -----           ---
Vail Creek
  (Riverside County)....    2000           152              67            85             67            11
                                        ------          ------         -----          -----           ---
Rancho Dorado
  (San Diego County)
  La Fuente.............    2000            56              36            20             36             9
  Loma Real.............    2000            89              19            23             19            12
  Los Reyes.............    2000            66               0            22              0             0
                                        ------          ------         -----          -----           ---
                                           211              55            65             55            21
                                        ------          ------         -----          -----           ---
    Total
      wholly-owned......                 4,922           4,272           559            364            39
                                        ------          ------         -----          -----           ---

<CAPTION>

                              SALES PRICE
PROJECT (COUNTY) PRODUCT        RANGE(3)
------------------------  --------------------
<S>                       <C>
Henry Ranch
  (Contra Costa County)
  Lyon Tierra...........  $  464,000 - 502,000
  Lyon Dorado...........  $  803,000 - 900,000
Woodlake Estates
  (Solano County)
  Paradise Valley.......  $  331,000 - 356,000
  Lyon Brook............  $  287,000 - 317,000
  Lyon Falls............  $  316,000 - 356,000
Stonebriar
  (El Dorado County)
  Lyon Casina...........  $  290,000 - 350,000
  Lyon Prima............  $  346,000 - 406,000
    Total unconsolidated
      joint ventures....
NORTHERN CALIFORNIA
  REGION TOTAL..........
                               SAN DIEGO
WHOLLY-OWNED:
Sun Lakes Country Club
  (Riverside County)
  Previously Closed
    Products............
  Promenade.............  $  120,000 - 131,000
  Atrium................  $  136,000 - 153,000
  Terrace...............  $  171,000 - 192,000
Horsethief Canyon Ranch
  (Riverside County)
  Previously Closed
  Products..............
  Series "300"..........  $  129,000 - 150,000
  Series "400"..........  $  169,000 - 209,000
  Series "500"..........  $  200,000 - 235,000
Sycamore Ranch
  (San Diego County)....  $  322,000 - 393,000
Vail Creek
  (Riverside County)....  $  180,000 - 201,000
Rancho Dorado
  (San Diego County)
  La Fuente.............  $  293,000 - 322,000
  Loma Real.............  $  375,000 - 426,000
  Los Reyes.............  $  419,000 - 450,000
    Total
      wholly-owned......
</TABLE>

                                        9
<PAGE>   12
<TABLE>
<CAPTION>
                                                        UNITS           LOTS       HOMES CLOSED
                                       ESTIMATED        CLOSED         OWNED         FOR YEAR       BACKLOG
                          YEAR OF      NUMBER OF        AS OF          AS OF          ENDED            AT
                           FIRST       HOMES AT      DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
PROJECT (COUNTY) PRODUCT  DELIVERY   COMPLETION(1)       2000           2000           2000        2000(2)(4)
------------------------  --------   -------------   ------------   ------------   ------------   ------------
<S>                       <C>        <C>             <C>            <C>            <C>            <C>
UNCONSOLIDATED JOINT VENTURES:

Torrey Unit 4 -- The
  Shores (San Diego
  County)...............    1998            59              59             0             10             0
                                        ------          ------         -----          -----           ---
Torrey Unit 6 --
  The Shores II
  (San Diego County)....    1999            52              52             0             36             0
                                        ------          ------         -----          -----           ---
Torrey Unit 14 --
  The Cove
  (San Diego County)....    1999           108             108             0             57             0
                                        ------          ------         -----          -----           ---
Knollwood at Castle
  Creek (San Diego
  County)...............    1999            77              77             0             30             0
                                        ------          ------         -----          -----           ---
Stonecrest
  (San Diego County)....    1999           110             110             0             16             0
                                        ------          ------         -----          -----           ---
Mercy Road -- Allegra
  (San Diego County)....    1999           113             113             0             19             0
                                        ------          ------         -----          -----           ---
Otay Ranch -- Saratoga
  Trails (San Diego
  County)...............    1999            74              67             7             60             4
                                        ------          ------         -----          -----           ---
Otay Ranch -- Mendocino
  (San Diego County)....    1999           139             106            33             97            15
                                        ------          ------         -----          -----           ---
Otay Ranch -- (Mendocino
  Trails) (San Diego
  County)...............    2001            83               0            83              0             0
                                        ------          ------         -----          -----           ---
Rancho Dorado
  (San Diego County)
  Monte Verde...........    2000            65              20            45             20            10
                                        ------          ------         -----          -----           ---
East Grove -- (San Diego
  County)...............    2001           291               0           291              0             0
                                        ------          ------         -----          -----           ---
4S Ranch -- (San Diego
  County)...............    2001           123               0            66              0             0
                                        ------          ------         -----          -----           ---
    Total unconsolidated
      joint ventures....                 1,294             712           525            345            29
                                        ------          ------         -----          -----           ---
SAN DIEGO REGION
  TOTAL.................                 6,216           4,984         1,084            709            68
                                        ======          ======         =====          =====           ===
                                                   ARIZONA
WHOLLY-OWNED:

Estrella
  (Maricopa County).....    1995           113             113             0              2             0
                                        ------          ------         -----          -----           ---
Legend Trail
  (Maricopa County).....    1996           102             102             0              1             0
                                        ------          ------         -----          -----           ---
Crystal Gardens
  (Maricopa County).....    1997           157             143            14             50             9
                                        ------          ------         -----          -----           ---
Sage Creek -- Encanto
  (Maricopa County).....    2000           176              53            46             53            24
                                        ------          ------         -----          -----           ---
Sage Creek -- Arcadia
  (Maricopa County).....    2000           167              33            36             33            12
                                        ------          ------         -----          -----           ---
Sage Creek -- Solano
  (Maricopa County).....    2000            82              15            28             15            13
                                        ------          ------         -----          -----           ---
Mesquite Grove -- Parada
  (Maricopa County).....    2001           110               0           110              0             0
                                        ------          ------         -----          -----           ---
Mesquite Grove --
  Estates (Maricopa
  County)...............    2000            95               0            95              0             0
                                        ------          ------         -----          -----           ---
Rio Del Verde
  (Maricopa County).....    1999            84              35            35             35            22
                                        ------          ------         -----          -----           ---
Power Ranch
  (Maricopa County).....    2001           103               0           103              0             0
                                        ------          ------         -----          -----           ---
Tramonto
  (Maricopa County).....    2001            76               0            76              0             0
                                        ------          ------         -----          -----           ---
    Total
      wholly-owned......                 1,265             494           543            189            80
                                        ------          ------         -----          -----           ---

<CAPTION>

                              SALES PRICE
PROJECT (COUNTY) PRODUCT        RANGE(3)
------------------------  --------------------
<S>                       <C>
UNCONSOLIDATED JOINT VEN
Torrey Unit 4 -- The
  Shores (San Diego
  County)...............  $  408,000 - 446,000
Torrey Unit 6 --
  The Shores II
  (San Diego County)....  $  409,000 - 442,000
Torrey Unit 14 --
  The Cove
  (San Diego County)....  $  394,000 - 422,000
Knollwood at Castle
  Creek (San Diego
  County)...............  $  203,000 - 221,000
Stonecrest
  (San Diego County)....  $  233,000 - 282,000
Mercy Road -- Allegra
  (San Diego County)....  $  238,000 - 293,000
Otay Ranch -- Saratoga
  Trails (San Diego
  County)...............  $  258,000 - 276,000
Otay Ranch -- Mendocino
  (San Diego County)....  $  214,000 - 242,000
Otay Ranch -- (Mendocino
  Trails) (San Diego
  County)...............  $  226,000 - 232,000
Rancho Dorado
  (San Diego County)
  Monte Verde...........  $  349,000 - 390,000
East Grove -- (San Diego
  County)...............  $  262,000 - 423,000
4S Ranch -- (San Diego
  County)...............  $  517,000 - 551,000
    Total unconsolidated
      joint ventures....
SAN DIEGO REGION
  TOTAL.................
                                ARIZONA
WHOLLY-OWNED:
Estrella
  (Maricopa County).....  $  121,000 - 151,000
Legend Trail
  (Maricopa County).....  $  150,000 - 186,000
Crystal Gardens
  (Maricopa County).....  $   97,000 - 124,000
Sage Creek -- Encanto
  (Maricopa County).....  $  100,000 - 116,000
Sage Creek -- Arcadia
  (Maricopa County).....  $  126,000 - 152,000
Sage Creek -- Solano
  (Maricopa County).....  $  157,000 - 181,000
Mesquite Grove -- Parada
  (Maricopa County).....  $  169,000 - 202,000
Mesquite Grove --
  Estates (Maricopa
  County)...............  $  289,000 - 299,000
Rio Del Verde
  (Maricopa County).....  $  164,000 - 201,000
Power Ranch
  (Maricopa County).....  $  160,000 - 227,000
Tramonto
  (Maricopa County).....  $  163,000 - 230,000
    Total
      wholly-owned......
</TABLE>

                                        10
<PAGE>   13
<TABLE>
<CAPTION>
                                                        UNITS           LOTS       HOMES CLOSED
                                       ESTIMATED        CLOSED         OWNED         FOR YEAR       BACKLOG
                          YEAR OF      NUMBER OF        AS OF          AS OF          ENDED            AT
                           FIRST       HOMES AT      DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
PROJECT (COUNTY) PRODUCT  DELIVERY   COMPLETION(1)       2000           2000           2000        2000(2)(4)
------------------------  --------   -------------   ------------   ------------   ------------   ------------
<S>                       <C>        <C>             <C>            <C>            <C>            <C>
UNCONSOLIDATED JOINT VENTURES:
Mountaingate
  (Maricopa County).....    2003         1,552               0           178              0             0
                                        ------          ------         -----          -----           ---
    Total unconsolidated
      joint ventures....                 1,552               0           178              0             0
                                        ------          ------         -----          -----           ---
ARIZONA REGION TOTAL....                 2,817             494           721            189            80
                                        ======          ======         =====          =====           ===
                                                  NEW MEXICO
WHOLLY-OWNED:

Summerfield
  (Bernalillo County)...    1995           195             195             0             14             0
                                        ------          ------         -----          -----           ---
Rancho del Sol
  (Santa Fe County).....    1996           195             195             0             22             0
                                        ------          ------         -----          -----           ---
NEW MEXICO REGION
  TOTAL.................                   390             390             0             36             0
                                        ======          ======         =====          =====           ===
                                                    NEVADA
WHOLLY-OWNED:
Monte Nero
  (Clark County)........    1997           170             170             0             46             0
                                        ------          ------         -----          -----           ---
Royal Woods
  (Clark County)........    1998           142             142             0             11             0
                                        ------          ------         -----          -----           ---
Deer Springs Ranch
  (Clark County)........    1998           117             117             0             18             0
                                        ------          ------         -----          -----           ---
Cambridge Court
  (Clark County)........    1998           177             177             0             47             0
                                        ------          ------         -----          -----           ---
Belvedere
  (Clark County)........    1999            78              78             0             65             0
                                        ------          ------         -----          -----           ---
La Terraza
  (Clark County)........    1999            23              23             0             23             0
                                        ------          ------         -----          -----           ---
Bella Veranda
  (Clark County)........    2000            79              40            39             40            18
                                        ------          ------         -----          -----           ---
Montecito Tesoro
  (Clark County)........    2000           121              22            38             22            23
                                        ------          ------         -----          -----           ---
Montecito Classico
  (Clark County)........    2000           100              13            31             13             7
                                        ------          ------         -----          -----           ---
Kingsway Ridge I
  (Clark County)........    2000            96              38            58             38            22
                                        ------          ------         -----          -----           ---
Kingsway Ridge II
  (Clark County)........    2000            61              17            44             17            10
                                        ------          ------         -----          -----           ---
Glenleigh Gardens
  (Clark County)........    2000            96               9            87              9            13
                                        ------          ------         -----          -----           ---
Springfield
  (Clark County)........    2000            85               0            85              0             0
                                        ------          ------         -----          -----           ---
Topaz Ridge (Clark
  County)...............    2001            89               0            89              0             0
                                        ------          ------         -----          -----           ---
Stallion Mountain
  (Clark County)........    2000           116               0           116              0             4
                                        ------          ------         -----          -----           ---
NEVADA REGION TOTAL.....                 1,550             846           587            349            97
                                        ======          ======         =====          =====           ===
GRAND TOTALS:
  Wholly-owned..........                12,457           9,165         2,587          1,757           383
  Unconsolidated joint
    ventures............                 5,215           1,483         2,301            909           184
                                        ------          ------         -----          -----           ---
                                        17,672          10,648         4,888          2,666           567
                                        ======          ======         =====          =====           ===

<CAPTION>

                              SALES PRICE
PROJECT (COUNTY) PRODUCT        RANGE(3)
------------------------  --------------------
<S>                       <C>
UNCONSOLIDATED JOINT VEN
Mountaingate
  (Maricopa County).....
    Total unconsolidated
      joint ventures....
ARIZONA REGION TOTAL....
                               NEW MEXICO
WHOLLY-OWNED:
Summerfield
  (Bernalillo County)...  $   96,000 - 140,000
Rancho del Sol
  (Santa Fe County).....  $  131,000 - 165,000
NEW MEXICO REGION
  TOTAL.................
                                 NEVADA
WHOLLY-OWNED:
Monte Nero
  (Clark County)........  $  135,000 - 170,000
Royal Woods
  (Clark County)........  $  153,000 - 186,000
Deer Springs Ranch
  (Clark County)........  $  119,000 - 147,000
Cambridge Court
  (Clark County)........  $  144,000 - 162,000
Belvedere
  (Clark County)........  $  173,000 - 203,000
La Terraza
  (Clark County)........  $  148,000 - 158,000
Bella Veranda
  (Clark County)........  $  244,000 - 275,000
Montecito Tesoro
  (Clark County)........  $  148,000 - 168,000
Montecito Classico
  (Clark County)........  $  176,000 - 213,000
Kingsway Ridge I
  (Clark County)........  $  163,000 - 177,000
Kingsway Ridge II
  (Clark County)........  $  178,000 - 208,000
Glenleigh Gardens
  (Clark County)........  $  228,000 - 260,000
Springfield
  (Clark County)........  $  190,000 - 210,000
Topaz Ridge (Clark
  County)...............  $  458,000 - 516,000
Stallion Mountain
  (Clark County)........  $  145,000 - 164,000
NEVADA REGION TOTAL.....
GRAND TOTALS:
  Wholly-owned..........
  Unconsolidated joint
    ventures............
</TABLE>

                                        11
<PAGE>   14

---------------
(1) The estimated number of homes to be built at completion is subject to
    change, and there can be no assurance that the Company will build these
    homes.

(2) Backlog consists of homes sold under sales contracts that have not yet
    closed, and there can be no assurance that closings of sold homes will
    occur.

(3) Sales price range reflects base price only and excludes any lot premium,
    buyer incentive and buyer selected options, which vary from project to
    project.

(4) Of the total homes subject to pending sales contracts as of December 31,
    2000, 497 represent homes completed or under construction and 70 represent
    homes not yet under construction.

SALES AND MARKETING

     The management team responsible for a specific project develops marketing
objectives, formulates pricing and sales strategies and develops advertising and
public relations programs for approval of senior management. The Company makes
extensive use of advertising and other promotional activities, including
newspaper advertisements, brochures, television and radio commercials, direct
mail and the placement of strategically located sign boards in the immediate
areas of its developments. In addition, the Company markets all of its products
through its website at www.lyonhomes.com. In general, the Company's advertising
emphasizes the Company's strengths with respect to the quality and value of its
products.

     The Company normally builds, decorates, furnishes and landscapes three to
five model homes for each product line and maintains on-site sales offices,
which typically are open seven days a week. Management believes that model homes
play a particularly important role in the Company's marketing efforts.
Consequently, the Company expends a significant amount of effort in creating an
attractive atmosphere at its model homes. Interior decorations vary among the
Company's models and are carefully selected based upon the lifestyles of
targeted buyers. Structural changes in design from the model homes are not
generally permitted, but home buyers may select various other optional
construction and design amenities.

     The Company employs in-house commissioned sales personnel or contracts with
a third-party firm to sell its homes. In some cases, outside brokers are also
involved in the selling of the Company's homes. The Company typically engages
its sales personnel on a long-term, rather than a project-by-project basis,
which it believes results in a more motivated sales force with an extensive
knowledge of the Company's operating policies and products. Sales personnel are
trained by the Company and attend weekly meetings to be updated on the
availability of financing, construction schedules and marketing and advertising
plans.

     The Company strives to provide a high level of customer service during the
sales process and after a home is sold. The participation of the sales
representatives, on-site construction supervisors and the post-closing customer
service personnel, working in a team effort, is intended to foster the Company's
reputation for quality and service, and ultimately lead to enhanced customer
retention and referrals.

     The Company's homes are typically sold before or during construction
through sales contracts which are usually accompanied by a small cash deposit.
Such sales contracts are usually subject to certain contingencies such as the
buyer's ability to qualify for financing. The cancellation rate of buyers who
contracted to buy a home but did not close escrow at the Company's projects was
approximately 20% during 2000. Cancellation rates are subject to a variety of
factors beyond the Company's control such as adverse economic conditions and
increases in mortgage interest rates.

     The Company generally provides a one-year limited warranty of workmanship
and materials with each of its homes. From January 1, 1992 through March 31,
1995, the Company provided a five-year limited warranty for certain homes in the
Company's Southern California Region. This five-year warranty exceeded the
warranty offered by competitors and served as a marketing tool for the Company.
The Company normally reserves one percent of the sales price of its homes
against the possibility of future charges relating to its one-year limited
warranty and similar potential claims. The Company's historical experience is
that one-year warranty claims generally fall within the one percent reserve. In
addition, California law provides that consumers can seek redress for patent
defects in new homes within four years from when the defect is

                                        12
<PAGE>   15

discovered, or should have been discovered, provided that if the defect is
latent there is an outside limit for seeking redress which is ten years from the
completion of construction. In addition, because the Company generally
subcontracts its homebuilding work to qualified subcontractors who generally
provide the Company with an indemnity and a certificate of insurance prior to
receiving payment from the Company for their work, the Company generally has
recourse against the subcontractors or their insurance carriers for claims
relating to the subcontractors' workmanship or materials. However, there can be
no assurance that claims will not arise out of matters such as landslides, soil
subsidence or earthquakes that are uninsurable, not economically insurable or
not subject to effective indemnification agreements.

CUSTOMER FINANCING -- DUXFORD FINANCIAL, INC.

     The Company seeks to assist its home buyers in obtaining financing by
arranging with mortgage lenders to offer qualified buyers a variety of financing
options. Substantially all home buyers utilize long-term mortgage financing to
purchase a home and mortgage lenders will usually make loans only to qualified
borrowers.

     Duxford Financial, Inc., a wholly owned subsidiary, began operations
effective December 1, 1994 and is in operation to service the Company's
operating regions. The mortgage company operates as a mortgage broker/loan
correspondent and originates conventional, FHA and VA loans.

SALE OF LOTS AND LAND

     In the ordinary course of business, the Company continually evaluates land
sales and has sold, and expects that it will continue to sell, land as market
and business conditions warrant. The Company may also sell both multiple lots to
other builders (bulk sales) and improved individual lots for the construction of
custom homes where the presence of such homes adds to the quality of the
community. In addition, the Company may acquire sites with commercial,
industrial and multi-family parcels which will generally be sold to third-party
developers.

INFORMATION SYSTEMS AND CONTROLS

     The Company assigns a high priority to the development and maintenance of
its budget and cost control systems and procedures. The Company's divisional
offices are connected to corporate headquarters through a fully integrated
accounting, financial and operational management information system. Through
this system, management regularly evaluates the status of its projects in
relation to budgets to determine the cause of any variances and, where
appropriate, adjusts its operations to capitalize on favorable variances or to
limit adverse financial impacts.

COMPETITION

     The homebuilding industry is highly competitive, particularly in the low
and medium-price range where the Company currently concentrates its activities.
Although the Company is one of California's largest homebuilders, the Company
does not believe it has a significant market position in any geographic area
which it serves due to the fragmented nature of the market. A number of the
Company's competitors have larger staffs, larger marketing organizations, and
substantially greater financial resources than those of the Company. However,
the Company believes that it competes effectively in its existing markets as a
result of its product and geographic diversity, substantial development
expertise, and its reputation as a low-cost producer of quality homes. Further,
the Company sometimes gains a competitive advantage in locations where changing
regulations make it difficult for competitors to obtain entitlements and/or
government approvals which the Company has already obtained.

GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS

     The Company and its competitors are subject to various local, state and
Federal statutes, ordinances, rules and regulations concerning zoning, building
design, construction and similar matters, including local regulation which
imposes restrictive zoning and density requirements in order to limit the number
of homes

                                        13
<PAGE>   16

that can ultimately be built within the boundaries of a particular project. The
Company and its competitors may also be subject to periodic delays or may be
precluded entirely from developing in certain communities due to building
moratoriums or "slow-growth" or "no-growth" initiatives that could be
implemented in the future in the states in which it operates. Because the
Company usually purchases land with entitlements, the Company believes that the
moratoriums would adversely affect the Company only if they arose from
unforeseen health, safety and welfare issues such as insufficient water or
sewage facilities. Local and state governments also have broad discretion
regarding the imposition of development fees for projects in their jurisdiction.
However, these are normally locked-in when the Company receives entitlements.

     Duxford Financial, Inc. is subject to state licensing laws as a mortgage
broker as well as Federal and state laws concerning real estate loans.

     The Company and its competitors are also subject to a variety of local,
state and Federal statutes, ordinances, rules and regulations concerning
protection of health and the environment. The particular environmental laws
which apply to any given community vary greatly according to the community site,
the site's environmental conditions and the present and former uses of the site.
These environmental laws may result in delays, may cause the Company and its
competitors to incur substantial compliance and other costs, and may prohibit or
severely restrict development in certain environmentally sensitive regions or
areas. The Company's projects in California are especially susceptible to
restrictive government regulations and environmental laws. However,
environmental laws have not, to date, had a material adverse impact on the
Company's operations.

CORPORATE ORGANIZATION AND PERSONNEL

     Each of the Company's operating divisions has responsibility for the
Company's homebuilding and development operations within the geographical
boundaries of that division.

     The Company's seven executive officers at the corporate level average more
than 20 years of experience in the homebuilding and development industries
within California and the Southwest. The Company combines decentralized
management in those aspects of its business where detailed knowledge of local
market conditions is important (such as governmental processing, construction,
land development and sales and marketing), with centralized management in those
functions where the Company believes central control is required (such as
approval of land acquisitions and financial, personnel and legal matters).

     As of December 31, 2000, the Company's real estate development and
homebuilding operations employed approximately 497 full-time and 12 part-time
employees, including corporate staff, supervisory personnel of construction
projects, maintenance crews to service completed projects, as well as persons
engaged in administrative, finance and accounting, engineering, land
acquisition, sales and marketing activities.

     The Company believes that its relations with its employees have been good.
Some employees of the subcontractors which the Company utilizes are unionized,
but virtually none of the Company's employees are union members. Although there
have been temporary work stoppages in the building trades in the Company's areas
of operation, to date none has had any material impact upon the Company's
overall operations.

ITEM 2. PROPERTIES

  Headquarters

     On February 4, 2000, the Company relocated its corporate headquarters from
19 Corporate Plaza, Newport Beach, California to 4490 Von Karman Avenue, Newport
Beach, California. The Company leases its corporate headquarters from a trust of
which William H. Lyon is the sole beneficiary. The Company leases or owns
properties for its area offices, design centers and Duxford Financial, Inc., but
none of these properties is material to the operation of the Company's business.
For information about properties owned by the Company for use in its
homebuilding activities, see Item 1.

                                        14
<PAGE>   17

ITEM 3. LEGAL PROCEEDINGS

     The Company is involved in various legal proceedings, most of which relate
to routine litigation and some of which are covered by insurance. In the opinion
of the Company's management, none of the uninsured claims involve claims which
are material and unreserved or will have a material adverse effect on the
financial condition of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to the Company's stockholders during the fourth
quarter of 2000.

                                        15
<PAGE>   18

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

     Prior to November 12, 1999, the Series A Common Stock of The Presley
Companies traded on the New York Stock Exchange (the "NYSE") under the symbol
PDC. As a result of the merger of The Presley Companies with and into its wholly
owned subsidiary, Presley Merger Sub, Inc., effective on November 11, 1999, each
outstanding share of The Presley Companies common stock was converted into 0.2
share of the Common Stock of the Company which was listed on the NYSE under the
same symbol, PDC. On December 31, 1999, the Company changed its name to William
Lyon Homes and its stock ticker symbol changed from PDC to WLS effective on
January 3, 2000. The following table sets forth the high and low sales prices
for the Common Stock of the Company as reported on the NYSE for the periods
indicated after adjustment for the retroactive effect of the merger with a
wholly-owned subsidiary and the conversion of each share of Series A and Series
B common stock into 0.2 common share of the surviving Company as described in
Note 2 of "Notes to Consolidated Financial Statements."

<TABLE>
<CAPTION>
                                                    HIGH        LOW
                                                   -------    -------
<S>                                                <C>        <C>
1999
  First Quarter..................................   3.7500     1.8750
  Second Quarter.................................   5.0000     2.5000
  Third Quarter..................................   5.6250     3.1250
  Fourth Quarter.................................   6.4375     3.1250

2000
  First Quarter..................................   8.3750     4.0000
  Second Quarter.................................   9.8750     5.5000
  Third Quarter..................................   8.3750     5.3750
  Fourth Quarter.................................   9.3750     6.6250
</TABLE>

     As of February 16, 2001, the closing price for the Company's Common Stock
as reported on the NYSE was $9.00.

     As of February 16, 2001, there were approximately 2,157 beneficial owners
of the Company's Common Stock.

     The Company has not paid any cash dividends on its Common Stock during the
last three fiscal years and expects that for the foreseeable future it will
follow a policy of retaining earnings in order to help finance its business.
Payment of dividends is within the discretion of the Company's Board of
Directors and will depend upon the earnings, capital requirements, general
economic conditions and operating and financial condition of the Company, among
other factors. In addition, the effect of the Company's principal financing
agreements currently prohibits the payment of dividends by the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition and Liquidity" and Note 8 of "Notes to
Consolidated Financial Statements."

     Effective on May 12, 2000 and August 21, 2000, certain officers exercised
options to purchase 48,334 and 82,754 shares, respectively, of the Company's
common stock at a price of $5.00 per share in accordance with the Company's 1991
Stock Option Plan, as amended. The Company relied upon the exemption set forth
in Section 4(2) of the Securities Act of 1933.

                                        16
<PAGE>   19

ITEM 6. SELECTED FINANCIAL DATA

     The following selected consolidated financial data of the Company have been
derived from the Consolidated Financial Statements of the Company and other
available information. The summary should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto appearing elsewhere
herein.

<TABLE>
<CAPTION>
                                              2000      1999(1)       1998         1997         1996
                                            --------    --------    --------     --------     --------
                                                  (IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS
                                                               AND NUMBER OF HOMES)
<S>                                         <C>         <C>         <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
  Operating revenue
    Home sales............................  $403,850    $426,839    $348,352     $307,332     $317,366
    Lots, land and other sales............     3,016      13,142      19,930       22,610        1,631
    Management fee income(5)..............    10,456       4,825       2,217           --           --
                                            --------    --------    --------     --------     --------
         Total operating revenue..........   417,322     444,806     370,499      329,942      318,997
  Income from unconsolidated joint
    ventures..............................    24,416      17,859       3,499           --           --
  Operating income (loss).................    49,362      48,402      15,580      (84,534)         163
  Income (loss) before income taxes and
    extraordinary item....................    51,129      43,497       8,305      (89,894)         152
  Provision for income taxes..............   (12,357)       (220)     (1,191)          --           --
  Income (loss) before extraordinary
    item..................................    38,772      43,277       7,114      (89,894)         152
  Extraordinary item-gain from retirement
    of debt, net of applicable taxes......       496       4,200       2,741           --           --
  Net income (loss).......................  $ 39,268    $ 47,477    $  9,855     $(89,894)    $    152
  Basic and diluted earnings (loss) per
    common share(2):
    Before extraordinary item.............  $   3.69    $   4.15    $   0.68     $  (8.61)    $     --
    Extraordinary item....................      0.05        0.40        0.26           --           --
                                            --------    --------    --------     --------     --------
    After extraordinary item..............  $   3.74    $   4.55    $   0.94     $  (8.61)    $     --
  Ratio of earnings to fixed
    charges(3)(4).........................      2.92        2.59        1.31             (4)          (4)
BALANCE SHEET DATA:
  Real estate inventories.................  $214,418    $184,271    $174,502     $255,472     $306,381
  Total assets............................   330,280     278,483     246,404      285,244      331,615
  Notes payable...........................   166,910     176,630     195,393      254,935      208,524
  Stockholders' equity (deficit)..........   102,512      53,301       5,824       (5,681)      84,213
OPERATING DATA (including unconsolidated
  joint ventures):
  Number of homes sold....................     2,603       2,303       2,139        1,718        1,804
  Number of homes closed..................     2,666       2,618       1,925        1,597        1,838
  Number of homes in escrow at end of
    period................................       567         630         617          403          282
  Average sales prices of homes closed....  $    289    $    241    $    202     $    192     $    173
</TABLE>

---------------
(1) On November 5, 1999, the Company acquired substantially all of the assets
    and assumed substantially all of the related liabilities of Old William Lyon
    Homes. The total purchase price consisted of approximately $42,598,000 in
    cash and the assumption of approximately $101,058,000 of liabilities. The
    acquisition is being accounted for as a purchase, and accordingly, the
    purchase price has been allocated based on the fair value of the assets and
    liabilities acquired. The excess of the purchase price over the net assets
    being acquired amounting to approximately $8,689,000 has been reflected as
    goodwill and is being amortized on a straight line basis over an estimated
    useful life of seven years. See "Management's Discussion and Analysis of
    Financial Condition and Results of Operations" and Note 2 of "Notes to
    Consolidated Financial Statements."

(2) Reflects the conversion of each outstanding share of The Presley Companies
    Common Stock into 0.2 share of the Company's Common Stock as a result of the
    merger of The Presley Companies with and into the Company. See Notes 2 and 3
    of "Notes to Consolidated Financial Statements."

                                        17
<PAGE>   20

(3) Ratio of earnings to fixed charges is calculated by dividing income as
    adjusted by fixed charges. For this purpose, "income as adjusted" means
    income (loss) before (i) minority partners' interest in consolidated income
    (loss) and (ii) income taxes, plus (i) interest expense and (ii)
    amortization of capitalized interest included in cost of sales. For this
    purpose "fixed charges" means (i) interest expense and (ii) interest
    capitalized during the period.

(4) Earnings were not adequate to cover fixed charges by $25.4 million and $21.1
    million for the years ended December 31, 1997 and 1996, respectively. These
    deficits, as well as the operating income (loss), include the effect of an
    impairment loss on real estate assets of $74 million in 1997.

(5) Prior to January 1, 2000, management fee income had been reflected as a
    reduction of general and administrative expense. For the year ended December
    31, 2000, management fee income has been reported as a separate item and not
    reflected as a reduction of general and administrative expense. The
    corresponding amounts of management fee income for all prior years reported
    have been reclassified to conform to the presentation for the year ended
    December 31, 2000. This reclassification did not change the reported amount
    of operating income or net income for any periods presented.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion of results of operations and financial condition
should be read in conjunction with the Selected Financial Data and the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Annual Report on Form 10-K.

     General Overview. On November 5, 1999, The Presley Companies ("Presley"),
which subsequently changed its name to William Lyon Homes on December 31, 1999
(the "Company") as described below, acquired substantially all of the assets and
assumed substantially all of the related liabilities of William Lyon Homes, Inc.
("Old William Lyon Homes"), in accordance with a Purchase Agreement executed as
of October 7, 1999 with Old William Lyon Homes, William Lyon and William H.
Lyon. William Lyon is Chairman of the Board of Old William Lyon Homes and also
Chairman of the Board and Chief Executive Officer of the Company. William H.
Lyon is the son of William Lyon and a director and an employee of the Company.

     The total purchase price consisted of approximately $42,598,000 in cash and
the assumption of approximately $101,058,000 of liabilities of Old William Lyon
Homes. The acquisition has been accounted for as a purchase and, accordingly,
the purchase price has been allocated based on the fair value of the assets and
liabilities acquired. The excess of the purchase price over the net assets
acquired amounting to approximately $8,689,000 has been reflected as goodwill
and is being amortized on a straight-line basis over an estimated useful life of
seven years.

     After the acquisition described above and prior to the effectiveness of the
merger as described below, William Lyon and a trust of which William H. Lyon is
the beneficiary acquired (1) 5,741,454 shares of the Company's Series A Common
Stock for $0.655 per share in a tender offer for the purchase of up to
10,678,792 shares of the Company's Series A Common Stock which closed on
November 5, 1999 and (2) 14,372,150 shares of the Company's Series B Common
Stock for $0.655 per share under agreements with certain holders of the
Company's Series B Common Stock which closed on November 8, 1999. On November 5,
1999 William Lyon and the Company cancelled all of William Lyon's outstanding
options to purchase 750,000 shares of the Company's Series A Common Stock. The
completion of these transactions, together with the previous disposition on
August 12, 1999 of 3,000,000 shares by William Lyon and a trust of which William
H. Lyon is the beneficiary, resulted in William Lyon and a trust of which
William H. Lyon is a beneficiary owning approximately 49.9% of the Company's
outstanding Common Stock. The foregoing number of shares does not reflect the
subsequent merger and the conversion of each share of Series A and Series B
Common Stock into 0.2 share of common stock as described in Note 2 of "Notes to
Consolidated Financial Statements."

     In accordance with the bond indenture agreement governing the Company's
Senior Notes which are due on July 1, 2001, if the Company's Consolidated
Tangible Net Worth is less than $60 million for two consecutive fiscal quarters,
the Company is required to offer to purchase $20 million in principal amount of
the

                                        18
<PAGE>   21

Senior Notes. Because the Company's Consolidated Tangible Net Worth had been
less than $60 million beginning with the quarter ended June 30, 1997 and
continuing through the quarter ended March 31, 2000, the Company would,
effective on December 4, 1997, June 4, 1998, December 4, 1998, June 4, 1999,
December 4, 1999 and June 4, 2000, have been required to make offers to purchase
$20 million of the Senior Notes at par plus accrued interest, less the face
amount of Senior Notes acquired by the Company after September 30, 1997, March
31, 1998, September 30, 1998, March 31, 1999, September 30, 1999, and March 31,
2000, respectively. The Company acquired Senior Notes with a face amount equal
to or greater than $20 million after September 30, 1997 and prior to December 4,
1997, again after March 31, 1998 and prior to June 4, 1998, and again after
September 30, 1998 and prior to December 4, 1998, again after March 31, 1999 and
prior to June 4, 1999, again after September 30, 1999 and prior to December 4,
1999 and again after March 31, 2000 and prior to June 4, 2000 and therefore was
not required to make offers to purchase Senior Notes. As a result of these
transactions, the Company recognized as an extraordinary item net gains from
retirement of debt totaling $0.5 million, $4.2 million and $2.7 million during
the years ended December 31, 2000, 1999 and 1998, respectively, after giving
effect to income taxes and amortization of related loan costs.

     At December 31, 2000, the Company's Consolidated Tangible Net Worth was
$94.6 million. As long as the Company's Consolidated Tangible Net Worth is not
less than $60.0 million on the last day of each of any two consecutive fiscal
quarters, the Company will not be required to make similar offers to purchase
$20.0 million in principal amount of the Senior Notes.

     On February 27, 2001, the Company announced its intention to solicit
consents to extend for two years the maturity of its 12 1/2% Senior Notes due
July 1, 2001, and to make certain amendments to the note covenants. The Company
intends to offer a consent fee of 4% to the holders whose consents are accepted,
subject to receipt of consents from holders of at least 25% of the principal
amount of the Senior Notes outstanding as of February 15, 2001 and other
conditions. There can be no assurance that the minimum number of consents will
be received and accepted. The Company intends to accept consents from holders of
up to 50% of the principal amount of the Senior Notes outstanding as of February
15, 2001. The Company commenced the consent solicitation on February 28, 2001
and intends to terminate the consent solicitation on March 21, 2001. Holders who
do not consent or whose consents are not accepted will receive repayment of
their Senior Notes at scheduled maturity. The Company may waive any conditions
or extend any deadlines in its discretion.

     Management of the Company currently anticipates that the Company will
retire at the maturity date of July 1, 2001 the outstanding Senior Notes which
have not been extended by internally-generated cash flow, utilization of undrawn
availability under revolving credit facilities and/or proceeds from unsecured
financing. There can be no assurances, however, that the Company will be able to
secure additional unsecured financing and the failure to do so could have an
adverse effect on the Company.

     Because of the Company's obligation to offer to purchase $20 million in
principal amount of the Senior Notes every six months so long as the Company's
Consolidated Tangible Net Worth was less than $60 million, the Company has been
restricted in its ability to acquire, hold and develop real estate projects. The
Company changed its operating strategy during 1997 to finance certain projects
by forming joint ventures with venture partners that would provide a substantial
portion of the capital necessary to develop these projects. The Company believes
that the use of joint venture partnerships better enables it to reduce its
capital investments and risks in the highly capital intensive California
markets, as well as to repurchase the Company's Senior Notes as described above.
The Company generally receives, after priority returns and capital distributions
to its partners, approximately 50% of the profits and losses, and cash flows
from joint ventures.

     As of December 31, 2000, the Company and certain of its subsidiaries are
general partners or members in twenty-eight joint ventures involved in the
development and sale of residential projects. Such joint ventures are 50% or
less owned and, accordingly, the financial statements of such joint ventures are
not consolidated in the preparation of the Company's financial statements. The
Company's investments in unconsolidated joint ventures are accounted for using
the equity method. See Note 7 of "Notes to Consolidated Financial Statements"
for condensed combined financial information for these joint ventures. Based
upon current

                                        19
<PAGE>   22

estimates, substantially all future development and construction costs will be
funded by the Company's joint venture partners or from the proceeds of
construction financing obtained by the joint ventures.

     At December 31, 2000 the Company had net operating loss carryforwards for
Federal tax purposes of approximately $56.0 million, of which $1.3 million
expires in 2008, $10.5 million expires in 2009, $14.1 million expires in 2010,
$13.7 million expires in 2011, $16.4 million expires in 2012 and $28,000 expires
in 2018. In addition, unused recognized built-in losses in the amount of $23.9
million are available to offset future income and expire between 2009 and 2011.
The Company's ability to utilize the foregoing tax benefits will depend upon the
amount of its otherwise taxable income and may be limited in the event of an
"ownership change" under federal tax laws and regulations. In addition, the
Company's federal income tax returns for 1997, 1998 and 1999 are currently under
examination by the Internal Revenue Service and there can be no assurance that
the Service will not challenge the amount of tax benefits calculated by the
Company.

     The ability of the Company to meet its obligations on its indebtedness will
depend to a large degree on its future performance which in turn will be
subject, in part, to factors beyond its control, such as prevailing economic
conditions, mortgage and other interest rates, weather, the occurrence of events
such as landslides, soil subsidence and earthquakes that are uninsurable, not
economically insurable or not subject to effective indemnification agreements,
availability of labor and homebuilding materials, changes in governmental laws
and regulations, and the availability and cost of lands for future development.
At this time, the Company's degree of leverage may limit its ability to meet its
obligations, withstand adverse business or other conditions and capitalize on
business opportunities.

RESULTS OF OPERATIONS

     Homes sold, closed and in backlog as of and for the periods presented are
as follows:

<TABLE>
<CAPTION>
                                                   AS OF AND FOR YEARS ENDED
                                                          DECEMBER 31,
                                                   --------------------------
                                                    2000      1999      1998
                                                   ------    ------    ------
<S>                                                <C>       <C>       <C>
Number of homes sold
  Company........................................   1,697     1,689     1,937
  Unconsolidated joint ventures..................     906       614       202
                                                   ------    ------    ------
                                                    2,603     2,303     2,139
                                                   ======    ======    ======
Number of homes closed
  Company........................................   1,757     2,031     1,834
  Unconsolidated joint ventures..................     909       587        91
                                                   ------    ------    ------
                                                    2,666     2,618     1,925
                                                   ======    ======    ======
Backlog of homes sold but not closed at end of
  period
  Company........................................     383       443       499
  Unconsolidated joint ventures..................     184       187       118
                                                   ------    ------    ------
                                                      567       630       617
                                                   ======    ======    ======
Dollar amount of backlog of homes sold but not
  closed at end of period (in millions)
  Company........................................  $ 89.2    $109.6    $111.8
  Unconsolidated joint ventures..................    82.1      83.6      53.3
                                                   ------    ------    ------
                                                   $171.3    $193.2    $165.1
                                                   ======    ======    ======
</TABLE>

     Homes in backlog are generally closed within three to six months. The
dollar amount of backlog of homes sold but not closed as of December 31, 2000
was $171.3 million as compared to $193.2 million as of December 31, 1999. The
cancellation rate of buyers who contracted to buy a home but did not close
escrow at the Company's projects was approximately 20% during 2000.

     The number of homes closed in 2000 increased 1.8 percent to 2,666 from
2,618 in 1999. Net new home orders for the year ended December 31, 2000
increased 13.0 percent to 2,603 units from 2,303 for the year ended December 31,
1999. The backlog of homes sold as of December 31, 2000 was 567, down 10.0% from

                                        20
<PAGE>   23

630 units as of December 31, 1999. The Company's inventory of completed and
unsold homes as of December 31, 2000 decreased to 52 units from 71 units as of
December 31, 1999.

     The improvement in net new home orders and closings for 2000 as compared
with 1999 is primarily the result of improved market conditions in substantially
all of the Company's markets. At December 31, 2000, the Company had 42 sales
locations as compared to 50 sales locations at December 31, 1999.

     Financial Accounting Standards Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
("Statement No. 121") requires impairment losses to be recorded on assets to be
held and used by the Company when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets (excluding
interest) are less than the carrying amount of the assets. Under the new
pronouncement, when an impairment loss is required for assets to be held and
used by the Company, the related assets are adjusted to their estimated fair
value.

     The net loss for the year ended December 31, 1997 included a non-cash
charge of $74,000,000 during the second quarter of 1997 to record impairment
losses on certain real estate assets held and used by the Company. The
impairment losses related to three of the Company's master-planned communities.
The impairment losses related to two communities, which are located in the
Inland Empire area of Southern California, arose primarily from declines in home
sales prices due to continued weak economic conditions and competitive pressures
in that area of Southern California. The impairment loss relating to the other
community, which is located in Contra Costa County in the East San Francisco Bay
area of Northern California, was primarily attributable to lower than expected
cash flow relating to one of the high end residential products in this community
and to a deterioration in the value of the non-residential portion of the
project. The significant deteriorations in the market conditions associated with
these communities resulted in the undiscounted cash flows (excluding interest)
estimated to be generated by these communities being less than their historical
book values. Accordingly, the master-planned communities were written-down to
their estimated fair value.

     The following represents the home sales and excess of revenue from sales
over related cost of sales (i.e., gross profit) of the three master-planned
communities since the recordation of impairment losses on June 30, 1997:

<TABLE>
<CAPTION>
                              FOR THE             FOR THE             FOR THE             FOR THE
                            YEAR ENDED          YEAR ENDED          YEAR ENDED       SIX MONTHS ENDED
                         DECEMBER 31, 2000   DECEMBER 31, 1999   DECEMBER 31, 1998   DECEMBER 31, 1997
                         -----------------   -----------------   -----------------   -----------------
<S>                      <C>                 <C>                 <C>                 <C>
Sales..................     $51,917,000         $79,584,000         $54,828,000         $17,662,000
Gross profit...........      13,884,000          13,012,000         $ 5,850,000         $ 1,202,000
Gross profit %.........            26.7%               16.4%               10.7%                6.8%
</TABLE>

     The gross profits recognized on the three master-planned communities
subsequent to the recordation of the impairment losses has increased due to
better than projected sales price increases beginning in 1998.

     The Company periodically evaluates its real estate assets to determine
whether such assets have been impaired and therefore would be required to be
adjusted to fair value. Fair value represents the amount at which an asset could
be bought or sold in a current transaction between willing parties, that is,
other than in a forced or liquidation sale. The estimation process involved in
determining if assets have been impaired and in the determination of fair value
is inherently uncertain since it requires estimates of current market yields as
well as future events and conditions. Such future events and conditions include
economic and market conditions, as well as the availability of suitable
financing to fund development and construction activities. The realization of
the Company's real estate projects is dependent upon future uncertain events and
conditions and, accordingly, the actual timing and amounts realized by the
Company may be materially different from their estimated fair values.

     Interest incurred during the period in which real estate projects are not
under development or during the period subsequent to the completion of product
available for sale is expensed in the period incurred. Economic conditions in
the real estate industry can cause a delay in the development of certain real
estate projects and, as a result, can lengthen the periods when such projects
are not under development and, accordingly, have a

                                        21
<PAGE>   24

significant impact on profitability as a result of expensed interest. Interest
expense during 2000, 1999, and 1998 was approximately $5.6 million, $6.2 million
and $9.2 million, respectively.

     In general, housing demand is adversely affected by increases in interest
rates and housing prices. Interest rates, the length of time that assets remain
in inventory, and the proportion of inventory that is financed affect the
Company's interest cost. If the Company is unable to raise sales prices
sufficiently to compensate for higher costs or if mortgage interest rates
increase significantly, affecting prospective buyers' ability to adequately
finance home purchases, the Company's sales, gross margins and net results may
be adversely impacted. To a limited extent, the Company hedges against increases
in interest costs by acquiring interest rate protection that locks in or caps
interest rates for limited periods of time for mortgage financing for
prospective homebuyers.

     Comparison of Years Ended December 31, 2000 and 1999. Operating revenue for
the year ended December 31, 2000 was $417.3 million, a decrease of $27.5 million
(6.2%), from operating revenue of $444.8 million for the year ended December 31,
1999. Revenue from sales of homes decreased $22.9 million (5.4%) to $403.9
million in 2000 from $426.8 million in 1999. This decrease was due primarily to
a decrease in the number of wholly-owned homes closed to 1,757 in 2000 from
2,031 in 1999, offset by an increase in the average sales prices of wholly-owned
homes to $229,900 in 2000 from $210,200 in 1999. Management fee income increased
by $5.7 million to $10.5 million in 2000 from $4.8 million in 1999 as a direct
result of the Company's strategy of financing an increased number of projects
through unconsolidated joint ventures. Equity in income of unconsolidated joint
ventures amounting to $24.4 million was recognized in 2000, compared to $17.9
million in 1999 also as a direct result of the Company's strategy of financing
an increased number of projects through unconsolidated joint ventures. The
number of homes closed in unconsolidated joint ventures increased to 909 in 2000
from 587 in 1999. The average sales price of homes sold by joint ventures has
been higher than the average sales price of wholly-owned units. The Company
generally receives, after priority returns and a return of capital,
approximately 50% of the profits and losses and cash flows from joint ventures.

     Total operating income increased from $48.4 million in 1999 to $49.4
million in 2000. The excess of revenue from sales of homes over the related cost
of sales decreased by $1.7 million, to $68.0 million in 2000 from $69.7 million
in 1999. This decrease was primarily due to a decrease of 13.5% in the number of
wholly-owned units closed to 1,757 units in 2000 from 2,031 units in 1999,
offset by an increase in the average sales prices to $229,900 in 2000 from
$210,200 in 1999 (a 9.4% increase). Gross margins increased by 0.5% to 16.8% in
2000 from 16.3% in 1999. Sales and marketing expenses decreased by $2.9 million
(14.9%) to $16.5 million in 2000 from $19.4 million in 1999 primarily due to a
decrease in the number of wholly-owned homes closed to 1,757 in 2000 from 2,031
in 1999. General and administrative expenses increased by $11.1 million to $35.3
million in 2000 from $24.2 million in 1999, primarily as a result of higher
employment levels to support the increased level of operations and additional
employee bonuses based upon improved operating results of the Company, partially
offset by reimbursement of overhead expenses from joint ventures.

     Total interest incurred during 2000 increased $1.5 million to $26.0 million
from $24.5 million in 1999 as a result of an increase in the average amount of
outstanding debt and increases in interest rates. Net interest expense decreased
to $5.6 million in 2000 from $6.2 million for 1999 as a result of an increase in
the amount of real estate inventories available for capitalization of interest.

     As a result of the transactions as described previously in "General
Overview", the Company incurred financial advisory expenses of approximately
$2.2 million for the year ended December 31, 1999, with no corresponding amounts
for the year ended December 31, 2000.

     Other income (expense), net increased to $7.3 million in 2000 from $3.4
million in 1999 primarily as a result of the gain of $1.7 million on the sale of
an office building in 2000, increased income from the Company's mortgage company
operations and increased income from the Company's design center operations.

                                        22
<PAGE>   25

     As a result of the retirement of certain debt as described previously in
"General Overview", the Company has recognized net gains of $0.5 million and
$4.2 million during the years ended December 31, 2000 and 1999, respectively,
after giving effect to income taxes and amortization of related loan costs.

     For the year ended December 31, 2000, income tax benefits of $9.3 million
related to temporary differences resulting from the quasi-reorganization were
excluded from the results of operations and not reflected as a reduction to the
Company's provision for income taxes but credited directly to additional paid-in
capital. For the years ended December 31, 2000 and 1999, post
quasi-reorganization temporary differences, partially offset by temporary
differences that existed prior to the quasi-reorganization, along with pre
quasi-reorganization net operating loss carryforwards resulted in income tax
expense, at Alternative Minimum Tax rates, of $3.1 million and $245,000,
respectively.

     The $9.3 million included in the Company's provision for income taxes for
the year ended December 31, 2000 represents income taxes which the Company will
not be required to pay. As described in Note 4 of Notes to Consolidated
Financial Statements, the pre-quasi-reorganization income tax benefits which
would otherwise reduce the provision for income taxes are credited directly to
paid-in capital.

     Stockholders' equity per common share increased by $4.62 during the year
ended December 31, 2000 as a result of the net income for the period and the
income tax benefits credited directly to paid-in capital for the period,
compared with an increase of $4.55 for the comparable period a year ago.

     Comparison of Years Ended December 31, 1999 and 1998. Operating revenue for
the year ended December 31, 1999 was $444.8 million, an increase of $74.3
million (20.1%), from operating revenue of $370.5 million for the year ended
December 31, 1998. Revenue from sales of homes increased $78.4 million to $426.8
million in 1999 from $348.4 million in 1998. This increase was due primarily to
an increase in the number of homes closed to 2,031 in 1999 from 1,834 in 1998,
and an increase in the average sales prices of homes to $210,200 in 1999 from
$189,900 in 1998. Management fee income increased by $2.6 million to $4.8
million in 1999 from $2.2 million in 1998 as a direct result of the Company's
strategy of financing an increased number of projects through unconsolidated
joint ventures. Equity in income of unconsolidated joint ventures amounting to
$17.9 million was recognized in 1999, compared to $3.5 million in 1998 also as a
direct result of the Company's strategy of financing an increased number of
projects through unconsolidated joint ventures. The Company did not begin
investing in unconsolidated joint ventures until the fourth quarter of 1997 and
limited operating results were realized in the first nine months of 1998.

     Total operating income increased from $15.6 million in 1998 to $48.4
million in 1999. The excess of revenue from sales of homes over the related cost
of sales increased by $19.1 million, to $69.7 million in 1999 from $50.6 million
in 1998. This increase was primarily due to (1) an increase of 10.7% in the
number of units closed to 2,031 units in 1999 from 1,834 units in 1998, and (2)
an increase in the average sales prices to $210,200 from $189,900 (a 10.7%
increase). Sales and marketing expenses decreased by $2.1 million (9.8%) to
$19.4 million in 1999 from $21.5 million in 1998 primarily as a result of
reductions in advertising and sales office/model operation expenses, offset by
increased direct sales expenses related to the increased sales volume. General
and administrative expenses increased by $6.0 million to $24.2 million in 1999
from $18.2 million in 1998, primarily as a result of higher employment levels to
support the increased level of operations and additional accruals for increased
employee bonuses based upon improved operating results of the Company, partially
offset by reimbursement of overhead expenses from joint ventures.

     Total interest incurred during 1999 decreased $7.0 million to $24.5 million
from $31.5 million in 1998 as a result of a decrease in the average amount of
outstanding debt. Net interest expense decreased to $6.2 million in 1999 from
$9.2 million for 1998 as a result of the decrease in the average amount of
outstanding debt.

     As a result of the transactions as described previously in "General
Overview", the Company incurred financial advisory expense of approximately $2.2
million for the year ended December 31, 1999.

     As a result of the retirement of certain debt as described previously in
"General Overview", the Company recognized a net gain of $4.2 million during the
year ended December 31, 1999, after giving effect to income taxes and
amortization of related loan costs.

                                        23
<PAGE>   26

     For the year ended December 31, 1999, post quasi-reorganization temporary
differences, partially offset by temporary differences that existed prior to the
quasi-reorganization, along with pre quasi-reorganization net operating loss
carryforwards resulted in income tax expense, at Alternative Minimum Tax rates,
of $245,000. For the year ended December 31, 1998, income tax benefits of
$1,650,000 related to temporary differences resulting from the
quasi-reorganization were excluded from the results of operations and not
reflected as a reduction to the Company's provision for income taxes but
credited to additional paid-in capital.

FINANCIAL CONDITION AND LIQUIDITY

     The Company provides for its ongoing cash requirements principally from
internally generated funds from the sales of real estate and from outside
borrowings and, beginning in the fourth quarter of 1997, by joint venture
financing from newly formed joint ventures with venture partners that provide a
substantial portion of the capital required for certain projects. The Company
currently maintains the following major credit facilities: 12 1/2% Senior Notes
(the "Senior Notes") and secured revolving lending facilities ("Revolving Credit
Facilities"). The Company also finances certain projects with construction loans
secured by real estate inventories and finances certain land acquisitions with
seller-provided financing.

     The ability of the Company to meet its obligations on the Senior Notes and
its other indebtedness will depend to a large degree on its future performance,
which in turn will be subject, in part, to factors beyond its control, such as
prevailing economic conditions. The Company's degree of leverage may limit its
ability to meet its obligations, withstand adverse business conditions and
capitalize on business opportunities.

     The Company will in all likelihood be required to refinance the Senior
Notes and the Revolving Credit Facilities when they mature, and no assurances
can be given that the Company will be successful in that regard.

  QUASI-REORGANIZATION

     In 1994, the Company's Board of Directors approved a Plan for
Quasi-Reorganization retroactive to January 1, 1994. The Company implemented a
quasi-reorganization at that time because it was implementing a substantial
change in its capital structure in accordance with a plan for capital
restructuring. A quasi-reorganization allows certain companies which are
undergoing a substantial change in capital structure to utilize "fresh start
accounting."

     Under the Plan for Quasi-Reorganization, the Company implemented an overall
accounting readjustment effective January 1, 1994, which resulted in the
adjustment of assets and liabilities to estimated fair values, and the
elimination of the accumulated deficit. The net amount of such revaluation
adjustments and costs related to the capital restructuring, together with the
accumulated deficit as of the date thereof, was transferred to paid-in capital
in accordance with the accounting principles applicable to
quasi-reorganizations.

     As a result of the quasi-reorganization, any income tax benefits resulting
from the utilization of net operating losses and other carryforwards existing at
January 1, 1994 and temporary differences resulting from the
quasi-reorganization, are excluded from the Company's results of operations and
credited to paid-in capital.

  SENIOR NOTES

     The 12 1/2% Senior Notes due July 1, 2001 are obligations of William Lyon
Homes (formerly The Presley Companies), a Delaware corporation ("Delaware
Lyon"), and are unconditionally guaranteed on a senior basis by William Lyon
Homes, Inc. (formerly Presley Homes), a California corporation and a wholly
owned subsidiary of Delaware Lyon. However, William Lyon Homes, Inc. has granted
liens on substantially all of its assets as security for its obligations under
the Revolving Credit Facilities and other loans. Because the William Lyon Homes,
Inc. guarantee is not secured, holders of the Senior Notes are effectively
junior to borrowings under the Revolving Credit Facilities with respect to such
assets. Delaware Lyon and its consolidated subsidiaries are referred to
collectively herein as the "Company." Interest on the Senior Notes is payable on
January 1 and July 1 of each year.

                                        24
<PAGE>   27

     Except as set forth in the Indenture Agreement (the "Indenture"), the
Senior Notes are redeemable at the option of Delaware Lyon, in whole or in part,
at the redemption prices set forth in the Indenture.

     The Senior Notes are senior obligations of Delaware Lyon and rank pari
passu in right of payment to all existing and future unsecured indebtedness of
Delaware Lyon, and senior in right of payment to all future indebtedness of the
Company which by its terms is subordinated to the Senior Notes.

     As described above in "General Overview", Delaware Lyon is required to
offer to repurchase certain Senior Notes at a price equal to 100% of the
principal amount plus any accrued and unpaid interest to the date of repurchase
if Delaware Lyon's Consolidated Tangible Net Worth is less than $60 million for
any two consecutive fiscal quarters, as well as from the proceeds of certain
asset sales.

     Upon certain changes of control as described in the Indenture, Delaware
Lyon must offer to repurchase Senior Notes at a price equal to 101% of the
principal amount plus accrued and unpaid interest, if any, to the date of
repurchase.

     The Indenture governing the Senior Notes restricts Delaware Lyon and
certain of its subsidiaries with respect to, among other things: (i) the payment
of dividends on and redemptions of capital stock, (ii) the incurrence of
indebtedness or the issuance of preferred stock, (iii) the creation of certain
liens, (iv) consolidations or mergers with or transfers of all or substantially
all of its assets and (v) transactions with affiliates. These restrictions are
subject to a number of important qualifications and exceptions.

     As of December 31, 2000, the outstanding 12 1/2% Senior Notes with a face
value of $77.2 million were valued at a range from $75.3 million to $77.2
million, based on quotes from industry sources.

     Management of the Company currently anticipates that the Company will
retire at the maturity date of July 1, 2001 the outstanding Senior Notes which
have not been extended by internally-generated cash flow, utilization of undrawn
availability under revolving credit facilities and/or proceeds from unsecured
financing. There can be no assurances, however, that the Company will be able to
secure additional unsecured financing and the failure to do so could have an
adverse effect on the liquidity of the Company.

  REVOLVING CREDIT FACILITIES

     On September 27, 2000 the Company completed agreements with various lenders
to provide financing to replace the Company's prior $100.0 million Working
Capital Facility which was scheduled to mature on May 20, 2001. Under these
agreements, project level financing was obtained in facilities provided by these
lenders which, collectively, provided for the repayment on September 27, 2000 of
all amounts then outstanding under the Company's prior Working Capital Facility.

     Three of the facilities described in the preceding paragraph are Revolving
Credit Facilities with an aggregate maximum loan commitment of $170.0 million,
with various maturities beginning in 2002 through September 2004. The collateral
for the loans provided by the Revolving Credit Facilities includes substantially
all real estate of the Company (excluding assets which are pledged as collateral
for construction notes payable described below and excluding assets of
partnerships and limited liability companies). Although the aggregate maximum
loan commitment for these loans is $170.0 million, the credit facilities have
limitations on the amounts which can be borrowed at any time based on assets
which are included in the credit facilities and the specified borrowings
permitted under borrowing base calculations. The undrawn availability at
December 31, 2000 was $29.2 million and the principal outstanding under the
Revolving Credit Facilities at December 31, 2000 was $66.3 million.

     Pursuant to the terms of the Revolving Credit Facilities, outstanding
advances bear interest at various rates which approximate the prime rate.

     The Revolving Credit Facilities include financial covenants which may limit
the amount which may be borrowed thereunder.

  CONSTRUCTION NOTES PAYABLE

     At December 31, 2000, the Company had construction notes payable amounting
to $9.6 million related to various real estate projects. The notes are due as
units close or at various dates on or before December 31, 2002 and bear interest
at rates of prime plus 0.25% to prime plus 0.50%.

                                        25
<PAGE>   28

  SELLER FINANCING

     Another source of financing available to the Company is seller-provided
financing for land acquired by the Company. At December 31, 2000, the Company
had various notes payable outstanding related to land acquisitions for which
seller financing was provided in the amount of $6.6 million.

  REVOLVING MORTGAGE WAREHOUSE CREDIT FACILITY

     The Company has a $15.0 million revolving mortgage warehouse credit
facility with a bank to fund its mortgage origination operations. Mortgage loans
are generally held for a short period of time and are typically sold to
investors within 7 to 15 days following funding. Borrowings are secured by the
related mortgage loans held for sale. At December 31, 2000 the outstanding
balance was $7.2 million. The facility, which has a current maturity date of May
31, 2001, also contains a financial covenant requiring that the Company
maintains cash and/or marketable securities on the books of account of its
subsidiary, Duxford Financial, Inc., a California corporation ("Duxford") in an
amount equal to no less than $1.0 million and a financial covenant requiring the
Company to maintain total assets net of total liabilities and net of amounts
receivable from the Company and/or affiliates on the books of account of Duxford
in an amount equal to no less than $1.0 million.

  JOINT VENTURE FINANCING

     As of December 31, 2000, the Company and certain of its subsidiaries are
general partners or members in twenty-eight joint ventures involved in the
development and sale of residential projects. Such joint ventures are 50% or
less owned and, accordingly, the financial statements of such joint ventures are
not consolidated with the Company's financial statements. The Company's
investments in unconsolidated joint ventures are accounted for using the equity
method. See Note 7 of "Notes to Consolidated Financial Statements" for condensed
combined financial information for these joint ventures. Based upon current
estimates, substantially all future development and construction costs will be
funded by the Company's venture partners or from the proceeds of construction
financing obtained by the joint ventures.

     As of December 31, 2000, the Company's investment in and advances to such
joint ventures was approximately $50.0 million and the Company's venture
partners' investment in such joint ventures was approximately $137.4 million. In
addition, certain joint ventures have obtained financing from land sellers or
construction lenders which amounted to approximately $45.2 million at December
31, 2000.

  ASSESSMENT DISTRICT BONDS AND SELLER FINANCING

     In some jurisdictions in which the Company develops and constructs
property, assessment district bonds are issued by municipalities to finance
major infrastructure improvements and fees. Such financing has been an important
part of financing master-planned communities due to the long-term nature of the
financing, favorable interest rates when compared to the Company's other sources
of funds and the fact that the bonds are sold, administered and collected by the
relevant government entity. As a landowner benefited by the improvements, the
Company is responsible for the assessments on its land. When the Company's homes
or other properties are sold, the assessments are either prepaid or the buyers
assume the responsibility for the related assessments.

  CASH FLOWS -- COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999

     Net cash provided by operating activities decreased from $65.9 million in
1999 to $9.3 million in 2000 primarily as a result of decreased income and
increases in real estate inventories.

     Net cash provided by investing activities increased from $13.8 million in
1999 to $19.2 million in 2000 primarily as a result of increased amounts
received from investments in and advances to unconsolidated joint ventures.

     Net cash used in financing activities decreased from $101.5 million in 1999
to $16.0 million in 2000. The change was primarily due to borrowings on notes
payable.

                                        26
<PAGE>   29

  CASH FLOWS -- COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998

     Net cash provided by operating activities increased from $55.1 million in
1998 to $65.9 million in 1999 primarily as a result of increased income and
reductions in real estate inventories.

     Net cash provided by investing activities decreased from $5.8 million in
1998 to $13.8 million in 1999 primarily as a result of decreased amounts
received from investments in and advances to unconsolidated joint ventures
offset by net increases in investments in notes receivable.

     Net cash used in financing activities increased from $41.5 million in 1998
to $101.5 million in 1999. The change was primarily due to repayment of debt,
offset by borrowings on notes payable.

NEW YORK STOCK EXCHANGE LISTING

     The Company has previously announced that it had received notification from
the New York Stock Exchange on July 28, 1999 that the Securities and Exchange
Commission has approved amendments to the NYSE's continued listing standards.
Under these new standards, the Company would be considered "below criteria" if
it has:

     - Total market capitalization of less than $50 million;

     - Total stockholders' equity of less than $50 million;

     - Average market capitalization of less than $15 million over a consecutive
       30-day trading period; or

     - Average closing price of less than $1.00 over a consecutive 30-day
       trading period.

     The NYSE notified the Company that it was below these new criteria on the
date of the notification. The NYSE further informed the Company that failure to
raise its stock price above $1.00 per share within six months would result in
immediate suspension of trading and application to the SEC for delisting. In
addition, the Company would have 45 days from the date of the NYSE's
notification to present a business plan to the NYSE that would demonstrate
compliance with all aspects of the other two criteria within 12 months of the
date of the NYSE's notification. The Company submitted a business plan to the
NYSE within the 45 day period. On September 30, 1999, the NYSE notified the
Company that it had accepted the Company's business plan and would continue the
listing of the Company at that time. The NYSE notification further stated that
the NYSE would continue to monitor the Company quarterly during the twelve
months from the date of the notification. If the Company failed to achieve the
quarterly milestones or if at the completion of the 12 months it was not in
compliance with the new continued listing criteria, the Company would be
suspended from trading on the NYSE and application would be made to the SEC for
delisting.

     On August 29, 2000 the Company announced that it had received a letter from
the NYSE dated as of August 14, 2000 notifying the Company that the plan period
under the NYSE's Continued Listing Program for the Company was completed as of
August 5, 2000. According to the NYSE letter, the Company completed the plan
period and is now considered a "company in good standing" by achieving both
market capitalization and shareholders' equity in excess of $50 million. As a
result of the Company's good standing, the Company has formally been removed
from the NYSE's "Watch List". However, the Company is subject to a 12-month
follow-up period within which the Company will be reviewed to ensure that the
Company does not once again fall below any of the NYSE's continued listing
standards. Although no quarterly updates are required during the follow-up
period, the Company is still obligated to be proactive in its discussions with
the NYSE, especially involving events that might effect triggering any of the
continued listing requirements. As of and through December 31, 2000, the Company
was in compliance with all NYSE listing criteria.

INFLATION

     The Company's revenues and profitability may be affected by increased
inflation rates and other general economic conditions. In periods of high
inflation, demand for the Company's homes may be reduced by increases in
mortgage interest rates. Further, the Company's profits will be affected by its
ability to recover through higher sales prices increases in the costs of land,
construction, labor and administrative expenses. The Company's ability to raise
prices at such times will depend upon demand and other competitive factors.

                                        27
<PAGE>   30

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended
by Statement No. 137 and Statement No. 138, which is required to be adopted for
fiscal years beginning after June 15, 2000. Statement No. 133 will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, a change in
the fair value of the derivative will either be offset against the change in the
fair value of the hedged asset, liability, or firm commitment through earnings
or recognized in other comprehensive income until the hedged item is recognized
in earnings. Management does not currently believe that the implementation of
Statement No. 133 will have a material impact on the Company's results of
operations or financial position.

FORWARD LOOKING STATEMENTS

     Investors are cautioned that certain statements contained in this Annual
Report on Form 10-K, as well as some statements by the Company in periodic press
releases and some oral statements by Company officials to securities analysts
and stockholders during presentations about the Company are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Act"). Statements which are predictive in nature, which depend
upon or refer to future events or conditions, or which include words such as
"expects", "anticipates", "intends", "plans", "believes", "estimates", "hopes",
and similar expressions constitute forward-looking statements. In addition, any
statements concerning future financial performance (including future revenues,
earnings or growth rates), ongoing business strategies or prospects, and
possible future Company actions, which may be provided by management are also
forward-looking statements as defined in the Act. Forward-looking statements are
based upon expectations and projections about future events and are subject to
assumptions, risks and uncertainties about, among other things, the Company,
economic and market factors and the homebuilding industry.

     Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements due to a number of factors. The
principal factors that could cause the Company's actual performance and future
events and actions to differ materially from such forward-looking statements
include, but are not limited to, changes in general economic conditions either
nationally or in regions in which the Company operates, whether an ownership
change occurs which results in the limitation of the Company's ability to
utilize the tax benefits associated with its net operating loss carryforwards,
changes in home mortgage interest rates, changes in prices of homebuilding
materials, labor shortages, adverse weather conditions, the occurrence of events
such as landslides, soil subsidence and earthquakes that are uninsurable, not
economically insurable or not subject to effective indemnification agreements,
changes in governmental laws and regulations, whether the Company is able to
refinance the outstanding balances of Senior Notes at their maturity, the timing
of receipt of regulatory approvals and the opening of projects and the
availability and cost of land for future growth.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's revolving lines of credit with a total outstanding
balance at December 31, 2000 of $66.3 million where the interest rate is
variable based upon certain bank reference or prime rates. If interest rates
were to increase by 10%, the estimated impact on the Company's consolidated
financial statements would be to reduce income before taxes by approximately
$235,000 based on amounts outstanding and rates in effect at December 31, 2000,
as well as to increase capitalized interest by approximately $864,000 which
would be amortized to cost of sales as unit closings occur.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements of William Lyon Homes and the
financial statements of the Significant Subsidiaries of William Lyon Homes,
together with the reports of the independent auditors, listed under Item 14, are
submitted as a separate section of this report beginning on page 33 and are
incorporated herein by reference.

                                        28
<PAGE>   31

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
       DISCLOSURE

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

     The information required by this item is incorporated by reference from the
Company's Proxy Statement for the 2001 Annual Meeting of Holders of Common Stock
to be held on May 14, 2001.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item is incorporated by reference from the
Company's Proxy Statement for the 2001 Annual Meeting of Holders of Common Stock
to be held on May 14, 2001.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated by reference from the
Company's Proxy Statement for the 2001 Annual Meeting of Holders of Common Stock
to be held on May 14, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference from the
Company's Proxy Statement for the 2001 Annual Meeting of Holders of Common Stock
to be held on May 14, 2001.

                                    PART IV

ITEM 14.EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
        8-K

     (A)(1) FINANCIAL STATEMENTS

     The following financial statements of the Company are included in a
separate section of this Annual Report on Form 10-K commencing on the page
numbers specified below:

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
WILLIAM LYON HOMES
Report of Independent Auditors..............................   34
Consolidated Balance Sheets.................................   35
Consolidated Statements of Income...........................   36
Consolidated Statements of Stockholders' Equity.............   37
Consolidated Statements of Cash Flows.......................   38
Notes to Consolidated Financial Statements..................   39
SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES
Report of Independent Auditors..............................   63
Combined Balance Sheets.....................................   64
Combined Statements of Income...............................   65
Combined Statements of Members' Capital.....................   66
Combined Statements of Cash Flows...........................   67
Notes to Combined Financial Statements......................   68
</TABLE>

                                        29
<PAGE>   32

     (2) FINANCIAL STATEMENT SCHEDULES:

     Schedules are omitted as the required information is not present, is not
present in sufficient amounts, or is included in the Consolidated Financial
Statements or Notes thereto.

     (3) LISTING OF EXHIBITS:

<TABLE>
<CAPTION>
     EXHIBIT
      NUMBER                             DESCRIPTION
     -------                             -----------
    <S>          <C>
     2.1(1)      Certificate of Ownership and Merger
     3.1(2)      Certificate of Incorporation of the Company.
     3.3(2)      Bylaws of the Company.
     4.1(2)      Specimen certificate of Common Stock.
     4.2(3)      Indenture dated June 29, 1994, between American Bank & Trust
                 Company, as Trustee, and The Presley Companies and Presley
                 Homes.
    10.1(9)      Form of Indemnity Agreement, between the Company and the
                 Directors and Officers of the Company.
    10.2(2)      Purchase Agreement and Escrow Instructions dated October 7,
                 1999 among The Presley Companies, Presley Homes, William
                 Lyon Homes, Inc., William Lyon and William H. Lyon.
    10.3(4)      Amended and Restated 1991 Stock Option Plan of The Presley
                 Companies, a Delaware corporation.
    10.4(5)      Forms of Stock Option Agreements, dated as of May 20, 1994,
                 between the Company and Wade H. Cable.
    10.5(5)      Form of Stock Option Agreement, dated as of May 20, 1994,
                 between the Company and Nancy M. Harlan.
    10.6(5)      Form of Stock Option Agreement, dated as of May 20, 1994,
                 between the Company and Linda L. Foster.
    10.7(5)      Form of Stock Option Agreement, dated as of May 20, 1994,
                 between the Company and W. Douglass Harris.
    10.8(5)      Form of Stock Option Agreement, dated as of May 20, 1994,
                 between the Company and C. Dean Stewart.
    10.9(5)      Form of Stock Option Agreement, dated as of May 20, 1994,
                 between the Company and Alan Uman.
    10.10(9)     Property Management Agreement between Corporate Enterprises,
                 Inc., a California corporation (Owner) and William Lyon
                 Homes, Inc., a California corporation (Manager) dated and
                 effective November 5, 1999.
    10.11(9)     Mortgage Company Agreement between Presley Mortgage Company,
                 a California corporation and Duxford Financial Services,
                 Inc., executed as of November 5, 1999.
    10.12(9)     Warranty Service Agreement between Corporate Enterprises,
                 Inc., a California corporation and William Lyon Homes, Inc.,
                 a California corporation dated and effective November 5,
                 1999.
    10.13(10)    Loan Agreement dated as of September 25, 2000 between
                 William Lyon Homes, Inc., a California corporation, the
                 "Borrower," and Residential Funding Corporation, a Delaware
                 corporation, "Lender."
    10.14(10)    Master Loan Agreement dated as of August 31, 2000 by and
                 between William Lyon Homes, Inc., a California corporation
                 ("Borrower") and Guaranty Federal Bank, F.S.B., a federal
                 savings bank organized and existing under the laws of the
                 United States ("Lender").
</TABLE>

                                        30
<PAGE>   33

<TABLE>
<CAPTION>
     EXHIBIT
      NUMBER                             DESCRIPTION
     -------                             -----------
    <S>          <C>
    10.15(10)    Revolving Line of Credit Loan Agreement (Borrowing Base
                 Loan) by and between California Bank & Trust, a California
                 banking corporation, and William Lyon Homes, Inc., a
                 California corporation, dated as of September 21, 2000.
    10.16(10)    Option Agreement and Escrow Instructions between William
                 Lyon Homes, Inc., a California corporation and Lathrop
                 Investment, L.P., a California limited partnership dated as
                 of October 24, 2000.
    10.17(11)    William Lyon Homes 2000 Stock Incentive Plan.
    10.18        Form of Stock Option Agreements.
    10.19        William Lyon Homes, Inc. 2000 Cash Bonus Plan.
    10.20        Standard Industrial/Commercial Single-Tenant Lease -- Net
                 Between William Lyon Homes, Inc. and a trust of which
                 William H. Lyon is the sole beneficiary.
    10.21        Mortgage Warehouse Loan and Security Agreement.
    21.1         List of Subsidiaries of the Company.
    23.1         Consent of Independent Auditors.
</TABLE>

---------------
 (1) Previously filed as an exhibit to the Company's Current Report on Form 8-K
     filed January 5, 2000 and incorporated herein by this reference.

 (2) Previously filed in connection with the Company's Registration Statement on
     Form S-4, and amendments thereto, (S.E.C. Registration No. 333-88569) and
     incorporated herein by this reference.

 (3) Previously filed as an exhibit to the Company's Registration Statement on
     Form S-1 and amendments thereto (S.E.C. Registration No. 33-79088) and
     incorporated herein by this reference.

 (4) Previously filed as an exhibit to the Company's Proxy Statement for Annual
     Meeting of Stockholders held on May 20, 1994 and incorporated herein by
     this reference.

 (5) Previously filed in connection with the Company's Registration Statement on
     Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and
     incorporated herein by this reference.

 (6) Previously filed as an exhibit to the Company's Quarterly Report on Form
     10-Q for the quarterly period ended June 30, 1998 and incorporated herein
     by this reference.

 (7) Previously filed as an exhibit to the Company's Report on Form 8-K dated
     December 31, 1998 and incorporated herein by this reference.

 (8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
     for the year ended December 31, 1998 and incorporated herein by this
     reference.

 (9) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
     for the year ended December 31, 1999 and incorporated herein by this
     reference.

(10) Previously filed as an exhibit to the Company's Quarterly Report on Form
     10-Q for the quarterly period ended September 30, 2000 and incorporated
     herein by this reference.

(11) Previously filed as an exhibit to the Company's Registration Statement on
     Form S-8 (SEC Registration No. 333-50232) and incorporated herein by this
     reference.

     (B) REPORTS ON FORM 8-K

     No reports were filed on Form 8-K during the reporting period.

                                        31
<PAGE>   34

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          WILLIAM LYON HOMES

                                          By:     /s/ MICHAEL D. GRUBBS
                                            ------------------------------------
                                                     Michael D. Grubbs
                                                   Senior Vice President,
                                                Chief Financial Officer and
                                                          Treasurer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                      SIGNATURE                                    TITLE                    DATE
                      ---------                                    -----                    ----
<C>                                                    <S>                            <C>

                  /s/ WILLIAM LYON                     Chairman of the Board, Chief   February 21, 2001
-----------------------------------------------------  Executive Officer and
                    William Lyon                       Director (Principal Executive
                                                       Officer)

                  /s/ WADE H. CABLE                    Director and President         February 21, 2001
-----------------------------------------------------
                    Wade H. Cable

                 /s/ JAMES E. DALTON                   Director                       February 21, 2001
-----------------------------------------------------
                   James E. Dalton

               /s/ RICHARD E. FRANKEL                  Director                       February 21, 2001
-----------------------------------------------------
                 Richard E. Frankel

                 /s/ WILLIAM H. LYON                   Director                       February 21, 2001
-----------------------------------------------------
                   William H. Lyon

              /s/ WILLIAM H. MCFARLAND                 Director                       February 21, 2001
-----------------------------------------------------
                William H. McFarland

                                                       Director                       February   , 2001
-----------------------------------------------------
                  Michael L. Meyer

                   /s/ RAY A. WATT                     Director                       February 21, 2001
-----------------------------------------------------
                     Ray A. Watt

             /s/ RANDOLPH W. WESTERFIELD               Director                       February 21, 2001
-----------------------------------------------------
               Randolph W. Westerfield

                /s/ MICHAEL D. GRUBBS                  Senior Vice President, Chief   February 21, 2001
-----------------------------------------------------  Financial Officer and
                  Michael D. Grubbs                    Treasurer (Principal
                                                       Financial Officer)

               /s/ W. DOUGLASS HARRIS                  Vice President and Corporate   February 21, 2001
-----------------------------------------------------  Controller (Principal
                 W. Douglass Harris                    Accounting Officer)
</TABLE>

                                        32
<PAGE>   35

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
WILLIAM LYON HOMES
Report of Independent Auditors..............................   34
Consolidated Balance Sheets.................................   35
Consolidated Statements of Income...........................   36
Consolidated Statements of Stockholders' Equity (Deficit)...   37
Consolidated Statements of Cash Flows.......................   38
Notes to Consolidated Financial Statements..................   39
SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES
Report of Independent Auditors..............................   63
Combined Balance Sheets.....................................   64
Combined Statements of Income...............................   65
Combined Statements of Members' Capital.....................   66
Combined Statements of Cash Flows...........................   67
Notes to Combined Financial Statements......................   68
</TABLE>

REQUIRED SCHEDULES

     Schedules are omitted as the required information is not present, is not
present in sufficient amounts, or is included in the Consolidated Financial
Statements or Notes thereto.

                                        33
<PAGE>   36

                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
William Lyon Homes

     We have audited the accompanying consolidated balance sheets of William
Lyon Homes as of December 31, 2000 and 1999, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of William Lyon
Homes at December 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

                                                          /s/  ERNST & YOUNG LLP

Irvine, California
February 13, 2001

                                        34
<PAGE>   37

                               WILLIAM LYON HOMES

                          CONSOLIDATED BALANCE SHEETS
         (IN THOUSANDS EXCEPT NUMBER OF SHARES AND PAR VALUE PER SHARE)
                                (NOTES 2 AND 3)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
Cash and cash equivalents...................................  $ 14,711    $  2,154
Receivables -- Note 5.......................................    18,538      12,063
Real estate inventories -- Notes 1 and 6....................   214,418     184,271
Investments in and advances to unconsolidated joint
  ventures -- Note 7........................................    49,966      50,282
Property and equipment, less accumulated depreciation of
  $3,112 and $4,167 at December 31, 2000 and 1999,
  respectively..............................................     2,818       2,183
Deferred loan costs -- Note 1...............................       754       1,726
Goodwill -- Note 2..........................................     7,138       8,382
Other assets................................................    21,937      17,422
                                                              --------    --------
                                                              $330,280    $278,483
                                                              ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................  $ 25,762    $ 15,653
Accrued expenses............................................    35,096      32,899
Notes payable -- Note 8.....................................    89,709      76,630
12 1/2% Senior Notes Due 2001 -- Note 8.....................    77,201     100,000
                                                              --------    --------
                                                               227,768     225,182
                                                              --------    --------
Commitments and contingencies -- Note 13
Stockholders' equity -- Notes 3 and 10
  Common stock, par value $.01 per share; 30,000,000 shares
     authorized; 10,570,223 and 10,439,135 shares issued and
     outstanding at December 31, 2000 and 1999,
     respectively...........................................       106         104
  Additional paid-in capital................................   126,608     116,667
  Accumulated deficit from January 1, 1994..................   (24,202)    (63,470)
                                                              --------    --------
                                                               102,512      53,301
                                                              --------    --------
                                                              $330,280    $278,483
                                                              ========    ========
</TABLE>

                            See accompanying notes.

                                        35
<PAGE>   38

                               WILLIAM LYON HOMES

                       CONSOLIDATED STATEMENTS OF INCOME
                 (IN THOUSANDS EXCEPT PER COMMON SHARE AMOUNTS)
                                (NOTES 2 AND 3)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                          -----------------------------------
                                                            2000         1999         1998
                                                          ---------    ---------    ---------
<S>                                                       <C>          <C>          <C>
Operating revenue
  Home sales............................................  $ 403,850    $ 426,839    $ 348,352
  Lots, land and other sales -- Note 12.................      3,016       13,142       19,930
  Management fee income -- Note 1.......................     10,456        4,825        2,217
                                                          ---------    ---------    ---------
                                                            417,322      444,806      370,499
                                                          ---------    ---------    ---------
Operating costs
  Cost of sales -- homes................................   (335,891)    (357,153)    (297,781)
  Cost of sales -- lots, land and other.................     (3,378)     (13,223)     (20,992)
  Sales and marketing...................................    (16,515)     (19,387)     (21,463)
  General and administrative............................    (35,348)     (24,193)     (18,182)
  Amortization of goodwill -- Note 2....................     (1,244)        (307)          --
                                                          ---------    ---------    ---------
                                                           (392,376)    (414,263)    (358,418)
                                                          ---------    ---------    ---------
Equity in income of unconsolidated joint ventures --Note
  7.....................................................     24,416       17,859        3,499
                                                          ---------    ---------    ---------
Operating income........................................     49,362       48,402       15,580
Interest expense, net of amounts capitalized -- Note
  8.....................................................     (5,557)      (6,153)      (9,214)
Financial advisory expenses -- Note 2...................         --       (2,197)      (1,286)
Other income (expense), net -- Note 2...................      7,324        3,445        3,225
                                                          ---------    ---------    ---------
Income before income taxes and extraordinary item.......     51,129       43,497        8,305
Provision for income taxes -- Notes 4 and 10
  Income taxes -- benefit credited to paid-in capital...     (9,287)          --       (1,191)
  Income taxes -- alternative minimum tax...............     (3,070)        (220)          --
                                                          ---------    ---------    ---------
Income before extraordinary item........................     38,772       43,277        7,114
Extraordinary item -- gain from retirement of debt, net
  of applicable income taxes -- Notes 4, 10 and 11......        496        4,200        2,741
                                                          ---------    ---------    ---------
Net income..............................................  $  39,268    $  47,477    $   9,855
                                                          =========    =========    =========
Basic and diluted earnings per common share: -- Note 1
  Before extraordinary item.............................  $    3.69    $    4.15    $    0.68
  Extraordinary item....................................       0.05         0.40    $    0.26
                                                          ---------    ---------    ---------
  After extraordinary item..............................  $    3.74    $    4.55    $    0.94
                                                          =========    =========    =========
</TABLE>

                            See accompanying notes.

                                        36
<PAGE>   39

                               WILLIAM LYON HOMES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
                                (NOTES 3 AND 4)

<TABLE>
<CAPTION>
                                                                                   ACCUMULATED
                                                     COMMON STOCK     ADDITIONAL   DEFICIT FROM
                                                    ---------------    PAID-IN      JANUARY 1,
                                                    SHARES   AMOUNT    CAPITAL         1994         TOTAL
                                                    ------   ------   ----------   ------------   ---------
<S>                                                 <C>      <C>      <C>          <C>            <C>
Balance -- December 31, 1997......................  10,439    $104     $115,017     $(120,802)    $  (5,681)
Net income for the year...........................      --      --           --         9,855         9,855
Income tax benefits related to temporary
  differences existing prior to the
  quasi-reorganization -- Notes 4 and 10..........      --      --        1,650            --         1,650
                                                    ------    ----     --------     ---------     ---------
Balance -- December 31, 1998......................  10,439     104      116,667      (110,947)        5,824
Net income for the year...........................      --      --           --        47,477        47,477
                                                    ------    ----     --------     ---------     ---------
Balance -- December 31, 1999......................  10,439     104      116,667       (63,470)       53,301
Issuance of common stock upon exercise of stock
  options -- Note 9...............................     131       2          654            --           656
Net income for the year...........................      --      --           --        39,268        39,268
Income tax benefits related to temporary
  differences existing prior to the
  quasi-reorganization -- Notes 4 and 10..........      --      --        9,287            --         9,287
                                                    ------    ----     --------     ---------     ---------
Balance -- December 31, 2000......................  10,570    $106     $126,608     $ (24,202)    $ 102,512
                                                    ======    ====     ========     =========     =========
</TABLE>

                            See accompanying notes.

                                        37
<PAGE>   40

                               WILLIAM LYON HOMES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                (NOTES 2 AND 3)

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                              -------------------------------------
                                                                2000         1999           1998
                                                              ---------    ---------      ---------
<S>                                                           <C>          <C>            <C>
Operating activities
  Net income................................................  $  39,268    $  47,477      $   9,855
  Adjustments to reconcile net income to net cash (used in)
    provided by operating activities:
    Depreciation and amortization...........................      2,499        1,518          1,059
    Equity in income of unconsolidated joint ventures.......    (24,416)     (17,859)        (3,499)
    Extraordinary gain on repurchase of Senior Notes........       (561)      (4,225)        (3,200)
    Provision for income taxes..............................     12,383          245          1,650
    Net changes in operating assets and liabilities:
      Receivables...........................................       (113)      (6,531)          (556)
      Real estate inventories...............................    (25,255)      63,191         41,272
      Deferred loan costs...................................        841        1,280           (655)
      Other assets..........................................     (4,515)     (15,099)            17
      Accounts payable......................................     10,109       (6,847)         4,510
      Accrued expenses......................................       (899)       2,704          4,687
                                                              ---------    ---------      ---------
  Net cash provided by operating activities.................      9,341       65,854         55,140
                                                              ---------    ---------      ---------

Investing activities
  Investment in and advances to unconsolidated joint
    ventures................................................    (20,600)      (5,494)       (19,886)
  Distributions from unconsolidated joint ventures..........     45,018       11,680             --
  Proceeds from contribution of land to joint ventures......         --        3,700         25,431
  Mortgage notes receivable originations/issuances..........   (116,773)     (54,965)          (234)
  Mortgage notes receivable sales/repayments................    113,474       58,933            828
  Purchases of property and equipment.......................     (1,890)         (22)          (358)
                                                              ---------    ---------      ---------
  Net cash provided by investing activities.................     19,229       13,832          5,781
                                                              ---------    ---------      ---------

Financing activities
  Proceeds from borrowings on notes payable.................    467,446      198,052        132,953
  Principal payments on notes payable.......................   (462,008)    (264,139)      (138,228)
  Repurchase of 12 1/2% Senior Notes........................    (22,107)     (35,400)       (36,260)
  Common stock issued for exercised options.................        656           --             --
                                                              ---------    ---------      ---------
  Net cash used in financing activities.....................    (16,013)    (101,487)       (41,535)
                                                              ---------    ---------      ---------
Net increase (decrease) in cash and cash equivalents........     12,557      (21,801)        19,386
Cash and cash equivalents -- beginning of year..............      2,154       23,955          4,569
                                                              ---------    ---------      ---------
Cash and cash equivalents -- end of year....................  $  14,711    $   2,154      $  23,955
                                                              =========    =========      =========

Supplemental disclosures of cash flow and non-cash
  activities
  Cash paid during the period for interest, net of amounts
    capitalized.............................................  $   5,304    $   7,198      $  12,025
                                                              =========    =========      =========
  Issuance of notes payable for land acquisitions...........  $  10,042    $  22,181      $   2,748
                                                              =========    =========      =========
  Investment in joint venture in connection with
    contribution of land to joint venture...................  $   2,749    $   1,845      $      --
                                                              =========    =========      =========
  Debt assumed by joint venture in connection with
    contribution of land to joint venture...................  $   2,401    $  33,662      $      --
                                                              =========    =========      =========
  Assumption of liabilities related to purchase of
    substantially all of the assets of William Lyon Homes,
    Inc. ...................................................  $      --    $ 101,058      $      --
                                                              =========    =========      =========
</TABLE>

                            See accompanying notes.

                                        38
<PAGE>   41

                               WILLIAM LYON HOMES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Operations

     William Lyon Homes, a Delaware corporation (formerly named The Presley
Companies -- see Notes 2 and 3) and subsidiaries (the "Company") are primarily
engaged in designing, constructing and selling single family detached and
attached homes in California, Arizona and Nevada.

  Basis of Presentation

     The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries and joint ventures. Investments in joint
ventures in which the Company has a 50% or less ownership interest are accounted
for using the equity method. The accounting policies of the joint ventures are
substantially the same as those of the Company. All significant intercompany
accounts and transactions are eliminated in consolidation.

  Segment Information

     The Company designs, constructs and sells a wide range of homes designed to
meet the specific needs of each of its markets. For internal reporting purposes,
the Company is organized into five geographic home building regions and its
mortgage origination operation. Because each of the Company's geographic home
building regions has similar economic characteristics, housing products and
class of prospective buyers, the geographic home building regions have been
aggregated into a single home building segment. The Company's mortgage
origination operations did not meet the materiality thresholds which would
require disclosure for the years ended December 31, 2000, 1999 and 1998, and
accordingly, are not separately reported.

     The Company evaluates performance and allocates resources primarily based
on the operating income of individual home building projects. Operating income
is defined by the Company as sales of homes, lots and land; less cost of sales,
impairment losses on real estate, selling and marketing, and general and
administrative expenses. Accordingly, operating income excludes certain expenses
included in the determination of net income. Operating income from home building
operations totaled $49.4 million, $48.4 million and $15.6 million for the years
ended December 31, 2000, 1999 and 1998, respectively.

     All revenues are from external customers. There were no customers that
contributed 10% or more of the Company's total revenues during 2000, 1999 or
1998.

  Real Estate Inventories and Related Indebtedness

     Real estate inventories are carried at cost net of impairment losses, if
any. Real estate inventories consist primarily of raw land, lots under
development, houses under construction and completed houses. All direct and
indirect land costs, offsite and onsite improvements and applicable interest and
other carrying charges are capitalized to real estate projects during periods
when the project is under development. Land, offsite costs and all other common
costs are allocated to land parcels benefited based upon relative fair values
before construction. Onsite construction costs and related carrying charges
(principally interest and property taxes) are allocated to the individual homes
within a phase based upon the relative sales value of the homes. Selling
expenses and other marketing costs are expensed in the period incurred. A
provision for warranty costs relating to the Company's limited warranty plans is
included in cost of sales at the time the sale of a home is recorded. The
Company normally reserves one percent of the sales price of its homes against
the possibility of future charges relating to its one-year limited warranty and
similar potential claims.

     Interest incurred under the Revolving Credit Facilities, the Senior Notes
and other notes payable, as more fully discussed in Note 8, is capitalized to
qualifying real estate projects under development. Any

                                        39
<PAGE>   42
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

additional interest charges related to real estate projects not under
development are expensed in the period incurred.

     Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("Statement No. 121"), requires impairment losses to be recorded on assets to be
held and used by the Company when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets (excluding
interest) are less than the carrying amount of the assets. When an impairment
loss is required for assets to be held and used by the Company, the related
assets are adjusted to their estimated fair value.

     Fair value represents the amount at which an asset could be bought or sold
in a current transaction between willing parties, that is, other than a forced
or liquidation sale. The estimation process involved in determining if assets
have been impaired and in the determination of fair value is inherently
uncertain because it requires estimates of current market yields as well as
future events and conditions. Such future events and conditions include economic
and market conditions, as well as the availability of suitable financing to fund
development and construction activities. The realization of the Company's real
estate projects is dependent upon future uncertain events and conditions and,
accordingly, the actual timing and amounts realized by the Company may be
materially different from their estimated fair values.

     Interest incurred during the period in which real estate projects are not
under development or during the period subsequent to the completion of projects
are expensed in the period incurred. Economic conditions in the real estate
industry can cause a delay in the development of certain real estate projects
and, as a result, can lengthen the periods when such projects are not under
development and, accordingly, have a significant impact on profitability as a
result of expensed interest. Interest expensed during 2000, 1999 and 1998 was
approximately $5,557,000, $6,153,000 and $9,214,000, respectively.

  Property and Equipment

     Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives ranging from three to
thirty-five years. Leasehold improvements are stated at cost and are amortized
using the straight-line method over the shorter of either their estimated useful
lives or term of the lease.

  Deferred Loan Costs

     Deferred loan costs are amortized over the term of the applicable loans
using a method which approximates the level yield interest method.

  Goodwill

     Goodwill, which represents the excess of the purchase price over net assets
acquired (Note 2), is amortized on a straight-line basis over an estimated
useful life of seven years.

  Sales and Profit Recognition

     A sale is recorded and profit recognized when a sale is consummated, the
buyer's initial and continuing investments are adequate, any receivables are not
subject to future subordination, and the usual risks and rewards of ownership
have been transferred to the buyer in accordance with the provisions of
Financial Accounting Standards Board Statement No. 66, "Accounting for Sales of
Real Estate." When it is determined that the earnings process is not complete,
profit is deferred for recognition in future periods. As of December 31, 2000
and 1999, there are no deferred profits.

                                        40
<PAGE>   43
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Income Taxes

     Income taxes are accounted for under the provisions of Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes."

  Financial Instruments

     Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash investments, receivables, and
deposits. The Company typically places its cash investments in investment grade
short-term instruments. Deposits, included in other assets, are due from
municipalities or utility companies and are generally collected from such
entities through fees assessed to other developers.

     For those instruments, as defined under Financial Accounting Standards
Board Statement No. 107, "Disclosures About Fair Value of Financial
Instruments," for which it is practical to estimate fair value, management has
determined that the carrying amounts of the Company's financial instruments
approximate their fair value at December 31, 2000, except for the 12 1/2% Senior
Notes as described in Note 8.

     The Company is an issuer of, or subject to, financial instruments with
off-balance sheet risk in the normal course of business which exposes it to
credit risks. These financial instruments include letters of credit and
obligations in connection with assessment district bonds. These off-balance
sheet financial instruments are described in the applicable Notes.

  Cash and Cash Equivalents

     Short-term investments with a maturity of three months or less when
purchased are considered cash equivalents.

  Management Fee Income

     Management fee income represents income earned in the current period from
unconsolidated joint ventures in accordance with joint venture and/or operating
agreements. Prior to January 1, 2000, management fee income had been reflected
as a reduction of general and administrative expense. For the year ended
December 31, 2000, management fee income has been reported as a separate item
and not reflected as a reduction of general and administrative expense. The
corresponding amounts of management fee income for the years ended December 31,
1999 and 1998 have been reclassified to conform to the presentation for the year
ended December 31, 2000. This reclassification did not change the reported
amount of operating income or net income for any periods presented.

  Basic and Diluted Earnings Per Common Share

     Earnings per share amounts for all periods presented conform to Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share." Basic and
diluted earnings per common share for the year ended December 31, 2000 is based
on 10,499,917 and 10,503,572 shares of common stock outstanding, respectively.
Basic and diluted earnings per common share for the years ended December 31,
1999 and 1998 are based on 10,439,135 shares of common stock outstanding, after
adjustment for the retroactive effect of the merger with a wholly-owned
subsidiary and the conversion of each share of previously outstanding Series A
and Series B common stock into 0.2 common share of the surviving company as
described in Note 3.

  Use of Estimates

     The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
the assets and liabilities as of December 31, 2000 and 1999 and revenues and
expenses for

                                        41
<PAGE>   44
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

each of the three years in the period ended December 31, 2000. Accordingly,
actual results could differ from those estimates in the near-term.

  Impact of New Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended
by Statement No. 137 and Statement No. 138, which is required to be adopted for
fiscal years beginning after June 15, 2000. Statement No. 133 will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, a change in
the fair value of the derivative will either be offset against the change in the
fair value of the hedged asset, liability, or firm commitment through earnings
or recognized in other comprehensive income until the hedged item is recognized
in earnings. Management does not currently believe that the implementation of
Statement No. 133 will have a material impact on the Company's results of
operations or financial position.

NOTE 2 -- ACQUISITION OF SUBSTANTIALLY ALL OF THE ASSETS OF WILLIAM LYON HOMES,
INC.

     On November 5, 1999, The Presley Companies ("Presley"), which subsequently
changed its name to William Lyon Homes on December 31, 1999 as described below,
acquired substantially all of the assets and assumed substantially all of the
related liabilities of William Lyon Homes, Inc. ("Old William Lyon Homes"), in
accordance with a Purchase Agreement executed as of October 7, 1999 with Old
William Lyon Homes, William Lyon and William H. Lyon. William Lyon is Chairman
of the Board of Old William Lyon Homes and also Chairman of the Board and Chief
Executive Officer of the Company. William H. Lyon is the son of William Lyon and
a director and an employee of the Company.

     The total purchase price consisted of approximately $42,598,000 in cash and
the assumption of approximately $101,058,000 of liabilities of Old William Lyon
Homes. The acquisition has been accounted for as a purchase and, accordingly,
the purchase price has been allocated based on the fair value of the assets and
liabilities acquired. The excess of the purchase price over the net assets
acquired amounting to approximately $8,689,000 has been reflected as goodwill
and is being amortized on a straight-line basis over an estimated useful life of
seven years.

     After the acquisition described above and prior to the effectiveness of the
merger as described below, William Lyon and a trust of which William H. Lyon is
the beneficiary acquired (1) 5,741,454 shares of the Company's Series A Common
Stock for $0.655 per share in a tender offer for the purchase of up to
10,678,792 shares of the Company's Series A Common Stock which closed on
November 5, 1999 and (2) 14,372,150 shares of the Company's Series B Common
Stock for $0.655 per share under agreements with certain holders of the
Company's Series B Common Stock which closed on November 8, 1999. On November 5,
1999 William Lyon and the Company cancelled all of William Lyon's outstanding
options to purchase 750,000 shares of the Company's Series A Common Stock. The
completion of these transactions, together with the previous disposition on
August 12, 1999 of 3,000,000 shares by William Lyon and a trust of which William
H. Lyon is the beneficiary, resulted in William Lyon and a trust of which
William H. Lyon is a beneficiary owning approximately 49.9% of the Company's
outstanding Common Stock. The foregoing number of shares does not reflect the
subsequent merger and conversion of each share of Series A and Series B Common
Stock into 0.2 shares of common stock as described in Note 3 below.

     In March 2000, the Company completed the sale of an office building where
its prior executive offices were located in Newport Beach, California which was
no longer needed after the consolidation of certain of the Company's operations.
The sales price was $2,120,000 which the Company received in cash at closing.
The net gain from the sale of approximately $1,747,000 is reflected in Other
income (expense), net on the Consolidated Statement of Income for the year ended
December 31, 2000.

                                        42
<PAGE>   45
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 -- COMPANY MERGES WITH AND INTO WHOLLY-OWNED SUBSIDIARY

     On November 5, 1999 at a Special Meeting of Holders of Common Stock, the
Holders of Common Stock approved a proposal to adopt a certificate of ownership
and merger pursuant to which The Presley Companies would merge with and into
Presley Merger Sub, Inc., a newly-formed Delaware corporation and wholly-owned
subsidiary of The Presley Companies, with Presley Merger Sub, Inc. being the
surviving corporation. In the merger, each outstanding share of common stock of
The Presley Companies became exchangeable for 0.2 share of common stock of
Presley Merger Sub, Inc. In the merger, the surviving corporation was renamed
The Presley Companies, which in turn was renamed William Lyon Homes on December
31, 1999. On November 11, 1999, the certificate of ownership and merger was
filed in the State of Delaware and the merger became effective. Beginning on
November 12, 1999, the shares of the surviving company (then named "The Presley
Companies") commenced trading on the New York Stock Exchange under the symbol
"PDC."

     The principal purpose of the merger is to help preserve the Company's
substantial net operating loss carryforwards and other tax benefits for use in
offsetting future taxable income by decreasing, but not eliminating, the risk of
an "ownership change" for federal income tax purposes.

     In general, the transfer restrictions prohibit, without prior approval of
the board of directors of the Company, the direct or indirect disposition or
acquisition of any stock of the Company by or to any holder who owns or would so
own upon the acquisition (either directly or through the tax attribution rules)
5% or more of the Company's stock.

     The Company after the consummation of the merger had substantially the same
financial position as that of The Presley Companies immediately before the
merger (the merger took effect after consummation of the transactions
contemplated in the Purchase Agreement with Old William Lyon Homes -- see Note
2). Except for the transfer restrictions and the elimination of provisions
dividing the common stock into two series, the new shares of common stock issued
by the surviving company in the merger have terms substantially similar to the
old shares of common stock.

     In connection with the acquisition and merger, the Company has incurred
costs of approximately $2,197,000 and $1,286,000 for the years ended December
31, 1999 and 1998, respectively, which are reflected in the Consolidated
Statement of Income as financial advisory expenses.

     Effective on November 5, 1999, Old William Lyon Homes changed its name to
Corporate Enterprises, Inc. Effective after the close of business on December
31, 1999, The Presley Companies changed its name to William Lyon Homes.
Effective on January 3, 2000, the Company's stock ticker symbol changed from PDC
to WLS. The Company's common stock continues to trade on the New York Stock
Exchange under the stock symbol WLS.

NOTE 4 -- QUASI-REORGANIZATION

     Effective as of January 1, 1994, the Company completed a capital
restructuring and quasi-reorganization. The quasi-reorganization resulted in the
adjustment of assets and liabilities to estimated fair values and the
elimination of an accumulated deficit effective January 1, 1994. Income tax
benefits resulting from the utilization of net operating loss and other
carryforwards existing at January 1, 1994 and temporary differences existing
prior to or resulting from the quasi-reorganization, are excluded from the
results of operations and credited to paid-in capital. During the year ended
December 31, 2000 income tax benefits of $9,287,000, were excluded from results
of operations and not reflected as a reduction to the Company's provision for
income taxes but credited directly to paid-in capital. During the year ended
December 31, 1998 income tax benefits of $1,650,000 were excluded from results
of operations and not reflected as a reduction to the Company's provision for
income taxes but credited directly to paid-in capital.

                                        43
<PAGE>   46
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The $9,287,000 and $1,650,000 included in the Company's provision for
income taxes for the 2000 and 1998 periods, respectively, represents income
taxes which the Company will not be required to pay. As described above, the
pre-quasi-reorganization income tax benefits which would otherwise reduce the
provision for income taxes are credited directly to paid-in capital.

     Stockholders' equity per common share increased by $4.62 per share during
the year ended December 31, 2000 as a result of the net income for the period
and the income tax benefits credited directly to paid-in capital for the period,
compared with an increase of $4.55 for the year ended December 31, 1999 and
$1.06 for the year ended December 31, 1998.

NOTE 5 -- RECEIVABLES

     Receivables consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           ------------------
                                                            2000       1999
                                                           -------    -------
<S>                                                        <C>        <C>
First trust deed mortgage notes receivable, pledged as
  collateral for revolving mortgage warehouse credit
  facility...............................................  $ 7,163    $ 3,222
First trust deed notes secured by real estate sold,
  interest rates generally ranging from 8.00% to
  12.00%.................................................       --        637
Other notes receivable...................................       --        786
                                                           -------    -------
                                                             7,163      4,645
Receivables from affiliates for management overhead fees,
  cost reimbursements and other..........................    6,859      2,010
Other receivables -- primarily escrow proceeds...........    4,516      5,408
                                                           -------    -------
                                                           $18,538    $12,063
                                                           =======    =======
</TABLE>

NOTE 6 -- REAL ESTATE INVENTORIES

     Real estate inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                               DECEMBER 31, 2000
                                                 ---------------------------------------------
                                                                     COMPLETED
                                                                    INVENTORY,
                                                   LAND AND      INCLUDING MODELS
                                                 CONSTRUCTION      AND COMPLETED
                   DIVISION                      IN PROGRESS    LOTS HELD FOR SALE     TOTAL
                   --------                      ------------   -------------------   --------
<S>                                              <C>            <C>                   <C>
Southern California............................    $ 48,889           $ 5,747         $ 54,636
San Diego......................................      51,753             6,066           57,819
Northern California............................      30,609             2,862           33,471
Arizona........................................      23,325             5,336           28,661
Nevada.........................................      32,252             7,195           39,447
Other..........................................         384                --              384
                                                   --------           -------         --------
                                                   $187,212           $27,206         $214,418
                                                   ========           =======         ========
</TABLE>

                                        44
<PAGE>   47
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                               DECEMBER 31, 1999
                                                 ---------------------------------------------
                                                                     COMPLETED
                                                                    INVENTORY,
                                                   LAND AND      INCLUDING MODELS
                                                 CONSTRUCTION      AND COMPLETED
                   DIVISION                      IN PROGRESS    LOTS HELD FOR SALE     TOTAL
                   --------                      ------------   -------------------   --------
<S>                                              <C>            <C>                   <C>
Southern California............................    $ 58,925           $ 6,547         $ 65,472
San Diego......................................      30,147             2,501           32,648
Northern California............................      43,312             4,116           47,428
Arizona........................................      11,139             1,628           12,767
New Mexico.....................................       1,443             1,266            2,709
Nevada.........................................      21,783             1,076           22,859
Other..........................................         388                --              388
                                                   --------           -------         --------
                                                   $167,137           $17,134         $184,271
                                                   ========           =======         ========
</TABLE>

NOTE 7 -- INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES

     The Company and certain of its subsidiaries are general partners or members
in twenty-eight joint ventures involved in the development and sale of
residential projects. Such joint ventures are 50% or less owned and,
accordingly, such joint ventures are not consolidated with the Company's
financial statements. The Company's investments in unconsolidated joint ventures
are accounted for using the equity method. Condensed combined financial
information of these joint ventures as of December 31, 2000 and 1999 is
summarized as follows:

                       CONDENSED COMBINED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
                                      ASSETS
Cash and cash equivalents...................................  $ 10,693    $  7,197
Receivables.................................................     1,440       1,275
Real estate inventories.....................................   240,019     240,056
Other assets................................................       275         735
                                                              --------    --------
                                                              $252,427    $249,263
                                                              ========    ========
                         LIABILITIES AND OWNERS' CAPITAL
Accounts payable............................................  $ 15,921    $  8,558
Accrued expenses............................................     4,984       5,488
Notes payable...............................................    45,162      54,069
Advances from William Lyon Homes............................     1,959       1,055
                                                              --------    --------
                                                                68,026      69,170
                                                              --------    --------
Owners' Capital
  William Lyon Homes........................................    48,007      49,227
  Others....................................................   136,394     130,866
                                                              --------    --------
                                                               184,401     180,093
                                                              --------    --------
                                                              $252,427    $249,263
                                                              ========    ========
</TABLE>

                                        45
<PAGE>   48
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    CONDENSED COMBINED STATEMENTS OF INCOME
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                  -----------------------------------
                                                    2000         1999         1998
                                                  ---------    ---------    ---------
<S>                                               <C>          <C>          <C>
Sales...........................................  $ 374,852    $ 203,336    $  41,081
Operating costs
  Cost of sales.................................   (314,343)    (163,215)     (32,883)
  Sales and marketing...........................    (11,567)      (6,734)      (1,861)
                                                  ---------    ---------    ---------
Operating income................................     48,942       33,387        6,337
Other income, net...............................        581          588          213
                                                  ---------    ---------    ---------
Net income......................................  $  49,523    $  33,975    $   6,550
                                                  =========    =========    =========
Allocation to owners
  William Lyon Homes............................  $  24,416    $  17,859    $   3,499
  Others........................................     25,107       16,116        3,051
                                                  ---------    ---------    ---------
                                                  $  49,523    $  33,975    $   6,550
                                                  =========    =========    =========
</TABLE>

NOTE 8 -- NOTES PAYABLE AND 12 1/2% SENIOR NOTES

     Notes payable and 12 1/2% Senior Notes consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         --------------------
                                                           2000        1999
                                                         --------    --------
<S>                                                      <C>         <C>
Notes payable:
  Revolving Credit Facilities..........................  $ 66,322    $     --
  Working Capital Facility.............................        --      33,000
  Construction notes payable...........................     9,592      15,960
  Purchase money notes payable -- land acquisitions....     6,632      24,537
  Collateralized mortgage obligations under revolving
     mortgage warehouse credit facility, secured by
     first trust deed mortgage notes receivable........     7,163       3,133
                                                         --------    --------
                                                           89,709      76,630
12 1/2% Senior Notes due 2001..........................    77,201     100,000
                                                         --------    --------
                                                         $166,910    $176,630
                                                         ========    ========
</TABLE>

     Interest relating to the above debt consists of the following (in
thousands):

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                             --------------------------------
                                               2000        1999        1998
                                             --------    --------    --------
<S>                                          <C>         <C>         <C>
Interest incurred..........................  $ 26,012    $ 24,500    $ 31,475
Interest capitalized.......................   (20,455)    (18,347)    (22,261)
                                             --------    --------    --------
Interest expense...........................  $  5,557    $  6,153    $  9,214
                                             ========    ========    ========
</TABLE>

  Senior Notes

     In accordance with the bond indenture agreement governing the Company's
Senior Notes which are due on July 1, 2001, if the Company's Consolidated
Tangible Net Worth is less than $60,000,000 for two consecutive fiscal quarters,
the Company is required to offer to purchase $20,000,000 in principal amount of
the Senior Notes. Because the Company's Consolidated Tangible Net Worth had been
less than $60,000,000

                                        46
<PAGE>   49
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

beginning with the quarter ended June 30, 1997 and continuing through the
quarter ended March 31, 2000, the Company would, effective on December 4, 1997,
June 4, 1998, December 4, 1998, June 4, 1999, December 4, 1999 and June 4, 2000
have been required to make offers to purchase $20,000,000 of the Senior Notes at
par plus accrued interest, less the face amount of Senior Notes acquired by the
Company after September 30, 1997, March 31, 1998, September 30, 1998, March 31,
1999, September 30, 1999 and March 31, 2000, respectively. The Company acquired
Senior Notes with a face amount equal to or greater than $20,000,000 after
September 30, 1997 and prior to December 4, 1997, again after March 31, 1998 and
prior to June 4, 1998, again after September 30, 1998 and prior to December 4,
1998, again after March 31, 1999 and prior to June 4, 1999 and again after
September 30, 1999 and prior to December 4, 1999, and again after March 31, 2000
and prior to June 4, 2000, and therefore was not required to make offers to
purchase Senior Notes. As a result of these transactions, the Company recognized
as an extraordinary item net gains from retirement of debt totaling $496,000,
$4,200,000 and $2,741,000 during the years ended December 31, 2000, 1999 and
1998, after giving effect to income taxes and amortization of related loan
costs.

     At December 31, 2000, the Company's Consolidated Tangible Net Worth was
$94,620,000. As long as the Company's Consolidated Tangible Net Worth is not
less than $60,000,000 on the last day of each of any two consecutive fiscal
quarters, the Company will not be required to make similar offers to purchase
$20,000,000 in principal amount of the Senior Notes.

     Because of the Company's obligation to offer to purchase $20,000,000 in
principal amount of the Senior Notes every six months so long as the Company's
Consolidated Tangible Net Worth was less than $60,000,000, the Company has been
restricted in its ability to acquire, hold and develop real estate projects. The
Company changed its operating strategy during 1997 to finance certain projects
by forming joint ventures with venture partners that would provide a substantial
portion of the capital necessary to develop these projects.

     The 12 1/2% Senior Notes due July 1, 2001 are obligations of William Lyon
Homes (formerly The Presley Companies), a Delaware corporation ("Delaware
Lyon"), and are unconditionally guaranteed on a senior basis by William Lyon
Homes, Inc. (formerly Presley Homes), a California corporation and a
wholly-owned subsidiary of Delaware Lyon. However, William Lyon Homes, Inc. has
granted liens on substantially all of its assets as security for its obligations
under the Revolving Credit Facilities and other loans. Because the William Lyon
Homes, Inc. guarantee is not secured, holders of the Senior Notes are
effectively junior to borrowings under the Revolving Credit Facilities with
respect to such assets. Delaware Lyon and its consolidated subsidiaries are
referred to collectively herein as the "Company." Interest on the Senior Notes
is payable on January 1 and July 1 of each year.

     Except as set forth in the Indenture Agreement (the "Indenture"), the
Senior Notes are redeemable at the option of Delaware Lyon, in whole or in part,
at the redemption prices set forth in the Indenture.

     The Senior Notes are senior obligations of Delaware Lyon and rank pari
passu in right of payment to all existing and future unsecured indebtedness of
Delaware Lyon, and senior in right of payment to all future indebtedness of the
Company which by its terms is subordinated to the Senior Notes.

     Upon certain changes of control as described in the Indenture, Delaware
Lyon must offer to repurchase Senior Notes at a price equal to 101% of the
principal amount plus accrued and unpaid interest, if any, to the date of
repurchase.

     The Indenture governing the Senior Notes restricts Delaware Lyon and
certain of its subsidiaries with respect to, among other things: (i) the payment
of dividends on and redemptions of capital stock, (ii) the incurrence of
indebtedness or the issuance of preferred stock, (iii) the creation of certain
liens, (iv) consolidations or mergers with or transfer of all or substantially
all of its assets and (v) transactions with affiliates. These restrictions are
subject to a number of important qualifications and exceptions.

                                        47
<PAGE>   50
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     As of December 31, 2000, the outstanding 12 1/2% Senior Notes with a face
value of $77,201,000 have a fair value of approximately $75,300,000 to
$77,201,000, based on quotes from industry sources.

     Supplemental consolidating financial information of the Company,
specifically including information for William Lyon Homes, Inc., is presented
below. Investments in subsidiaries are presented using the equity method of
accounting. Separate financial statements of William Lyon Homes, Inc. are not
provided, as the consolidating financial information contained herein provides a
more meaningful disclosure to allow investors to determine the nature of assets
held and the operations of the combined groups.

                          CONSOLIDATING BALANCE SHEET

                               DECEMBER 31, 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                  UNCONSOLIDATED
                                    ------------------------------------------
                                     DELAWARE     WILLIAM LYON   NON-GUARANTOR   ELIMINATING   CONSOLIDATED
                                       LYON       HOMES, INC.    SUBSIDIARIES      ENTRIES       COMPANY
                                    -----------   ------------   -------------   -----------   ------------
<S>                                 <C>           <C>            <C>             <C>           <C>
ASSETS
Cash and cash equivalents.........   $     --       $ 12,746        $ 1,965       $      --      $ 14,711
Receivables.......................         --          7,541         10,997              --        18,538
Real estate inventories...........         --        213,921            497              --       214,418
Investments in and advances to
  unconsolidated joint ventures...         --         17,008         32,958              --        49,966
Property and equipment, net.......         --          2,564            254              --         2,818
Deferred loan costs...............        181            573             --              --           754
Goodwill..........................         --          7,138             --              --         7,138
Other assets......................         --         21,844             93              --        21,937
Investments in subsidiaries.......     98,558         34,662             --        (133,220)           --
Intercompany receivables..........     86,194          5,220             --         (91,414)           --
                                     --------       --------        -------       ---------      --------
                                     $184,933       $323,217        $46,764       $(224,634)     $330,280
                                     ========       ========        =======       =========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................   $     --       $ 25,515        $   247       $      --      $ 25,762
Accrued expenses..................         --         33,303          1,793              --        35,096
Notes payable.....................         --         82,546          7,163              --        89,709
12 1/2% Senior Notes..............     77,201             --             --              --        77,201
Intercompany payables.............      5,220         86,194             --         (91,414)           --
                                     --------       --------        -------       ---------      --------
     Total liabilities............     82,421        227,558          9,203         (91,414)      227,768
Stockholders' equity..............    102,512         95,659         37,561        (133,220)      102,512
                                     --------       --------        -------       ---------      --------
                                     $184,933       $323,217        $46,764       $(224,634)     $330,280
                                     ========       ========        =======       =========      ========
</TABLE>

                                        48
<PAGE>   51
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          CONSOLIDATING BALANCE SHEET

                               DECEMBER 31, 1999
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                  UNCONSOLIDATED
                                    ------------------------------------------
                                     DELAWARE     WILLIAM LYON   NON-GUARANTOR   ELIMINATING   CONSOLIDATED
                                       LYON       HOMES, INC.    SUBSIDIARIES      ENTRIES       COMPANY
                                    -----------   ------------   -------------   -----------   ------------
<S>                                 <C>           <C>            <C>             <C>           <C>
ASSETS
Cash and cash equivalents.........   $     --       $  1,344        $   810       $      --      $  2,154
Receivables.......................         --          6,792          5,271              --        12,063
Real estate inventories...........         --        178,280          5,991              --       184,271
Investments in and advances to
  unconsolidated joint ventures...         --         16,229         34,053              --        50,282
Property and equipment, net.......         --          2,115             68              --         2,183
Deferred loan costs...............        704          1,022             --              --         1,726
Goodwill..........................         --          8,382             --              --         8,382
Other assets......................         --         17,400             22              --        17,422
Investments in subsidiaries.......     49,843         39,819             --         (89,662)           --
Intercompany receivables..........    108,340          5,586             --        (113,926)           --
                                     --------       --------        -------       ---------      --------
                                     $158,887       $276,969        $46,215       $(203,588)     $278,483
                                     ========       ========        =======       =========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................   $     --       $ 15,215        $   438       $      --      $ 15,653
Accrued expenses..................         --         31,201          1,698              --        32,899
Notes payable.....................         --         73,497          3,133              --        76,630
12 1/2% Senior Notes..............    100,000             --             --              --       100,000
Intercompany payables.............      5,586        108,340             --        (113,926)           --
                                     --------       --------        -------       ---------      --------
     Total liabilities............    105,586        228,253          5,269        (113,926)      225,182
Stockholders' equity..............     53,301         48,716         40,946         (89,662)       53,301
                                     --------       --------        -------       ---------      --------
                                     $158,887       $276,969        $46,215       $(203,588)     $278,483
                                     ========       ========        =======       =========      ========
</TABLE>

                                        49
<PAGE>   52
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       CONSOLIDATING STATEMENT OF INCOME

                          YEAR ENDED DECEMBER 31, 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                    UNCONSOLIDATED
                                      ------------------------------------------
                                       DELAWARE     WILLIAM LYON   NON-GUARANTOR   ELIMINATING   CONSOLIDATED
                                         LYON       HOMES, INC.    SUBSIDIARIES      ENTRIES       COMPANY
                                      -----------   ------------   -------------   -----------   ------------
<S>                                   <C>           <C>            <C>             <C>           <C>
Operating revenue
  Sales.............................    $    --      $ 368,237       $ 38,629       $     --      $ 406,866
  Management fee income.............         --          1,906          8,550             --         10,456
                                        -------      ---------       --------       --------      ---------
                                             --        370,143         47,179             --        417,322
                                        -------      ---------       --------       --------      ---------

Operating costs
  Cost of sales.....................         --       (305,016)       (34,253)            --       (339,269)
  Sales and marketing...............         --        (14,618)        (1,897)            --        (16,515)
  General and administrative........         --        (35,107)          (241)            --        (35,348)
  Amortization of goodwill..........         --         (1,244)            --             --         (1,244)
                                        -------      ---------       --------       --------      ---------
                                             --       (355,985)       (36,391)            --       (392,376)
                                        -------      ---------       --------       --------      ---------
Equity in income of unconsolidated
  joint ventures....................         --          3,251         21,165             --         24,416
                                        -------      ---------       --------       --------      ---------
Income from subsidiaries............     38,772         32,826             --        (71,598)            --
                                        -------      ---------       --------       --------      ---------
Operating income....................     38,772         50,235         31,953        (71,598)        49,362
Interest expense, net of amounts
  capitalized.......................         --         (5,302)          (255)            --         (5,557)
Other income (expense), net.........         --          4,434          2,890             --          7,324
                                        -------      ---------       --------       --------      ---------
Income before income taxes and
  extraordinary item................     38,772         49,367         34,588        (71,598)        51,129
Provision for income taxes
  Income taxes -- benefit credited
     to paid-in capital.............         --         (9,287)            --             --         (9,287)
  Income taxes -- alternative
     minimum tax....................         --         (3,070)            --             --         (3,070)
                                        -------      ---------       --------       --------      ---------
Income before extraordinary item....     38,772         37,010         34,588        (71,598)        38,772
Extraordinary item -- gain from
  retirement of debt net of
  applicable income taxes...........        496             --             --             --            496
                                        -------      ---------       --------       --------      ---------
Net income..........................    $39,268      $  37,010       $ 34,588       $(71,598)     $  39,268
                                        =======      =========       ========       ========      =========
</TABLE>

                                        50
<PAGE>   53
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       CONSOLIDATING STATEMENT OF INCOME

                          YEAR ENDED DECEMBER 31, 1999
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                    UNCONSOLIDATED
                                      ------------------------------------------
                                       DELAWARE     WILLIAM LYON   NON-GUARANTOR   ELIMINATING   CONSOLIDATED
                                         LYON       HOMES, INC.    SUBSIDIARIES      ENTRIES       COMPANY
                                      -----------   ------------   -------------   -----------   ------------
<S>                                   <C>           <C>            <C>             <C>           <C>
Operating revenue
  Sales.............................    $    --      $ 380,160       $ 59,821       $     --      $ 439,981
  Management fee income.............         --            718          4,107             --          4,825
                                        -------      ---------       --------       --------      ---------
                                             --        380,878         63,928             --        444,806
                                        -------      ---------       --------       --------      ---------

Operating costs
  Cost of sales.....................         --       (322,929)       (47,447)            --       (370,376)
  Sales and marketing...............         --        (16,648)        (2,739)            --        (19,387)
  General and administrative........         --        (23,980)          (213)            --        (24,193)
  Amortization of goodwill..........         --           (307)            --             --           (307)
                                        -------      ---------       --------       --------      ---------
                                             --       (363,864)       (50,399)            --       (414,263)
                                        -------      ---------       --------       --------      ---------
Equity in income of unconsolidated
  joint ventures....................         --          3,137         14,722             --         17,859
                                        -------      ---------       --------       --------      ---------
Income from subsidiaries............     45,474         27,250             --        (72,724)            --
                                        -------      ---------       --------       --------      ---------
Operating income....................     45,474         47,401         28,251        (72,724)        48,402
Interest expense, net of amounts
  capitalized.......................         --         (3,759)        (2,394)            --         (6,153)
Financial advisory expenses.........     (2,197)            --             --             --         (2,197)
Other income (expense), net.........         --          2,131          1,314             --          3,445
                                        -------      ---------       --------       --------      ---------
Income before income taxes and
  extraordinary item................     43,277         45,773         27,171        (72,724)        43,497

Provision for income taxes
  Income taxes -- alternative
     minimum tax....................         --           (220)            --             --           (220)
                                        -------      ---------       --------       --------      ---------
Income before extraordinary item....     43,277         45,553         27,171        (72,724)        43,277
Extraordinary item -- gain from
  retirement of debt net of
  applicable income taxes...........      4,200             --             --             --          4,200
                                        -------      ---------       --------       --------      ---------
Net income..........................    $47,477      $  45,553       $ 27,171       $(72,724)     $  47,477
                                        =======      =========       ========       ========      =========
</TABLE>

                                        51
<PAGE>   54
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       CONSOLIDATING STATEMENT OF INCOME

                          YEAR ENDED DECEMBER 31, 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                    UNCONSOLIDATED
                                      ------------------------------------------
                                       DELAWARE     WILLIAM LYON   NON-GUARANTOR   ELIMINATING   CONSOLIDATED
                                         LYON       HOMES, INC.    SUBSIDIARIES      ENTRIES       COMPANY
                                      -----------   ------------   -------------   -----------   ------------
<S>                                   <C>           <C>            <C>             <C>           <C>
Operating revenue
  Sales.............................    $    --      $ 261,394       $106,888       $     --      $ 368,282
  Management fee income.............         --            343          1,874             --          2,217
                                        -------      ---------       --------       --------      ---------
                                             --        261,737        108,762             --        370,499
                                        -------      ---------       --------       --------      ---------

Operating costs
  Cost of sales.....................         --       (228,629)       (90,144)            --       (318,773)
  Sales and marketing...............         --        (16,275)        (5,188)            --        (21,463)
  General and administrative........         --        (17,930)          (252)            --        (18,182)
                                        -------      ---------       --------       --------      ---------
                                             --       (262,834)       (95,584)            --       (358,418)
                                        -------      ---------       --------       --------      ---------
Equity in income of unconsolidated
  joint ventures....................         --              6          3,493             --          3,499
                                        -------      ---------       --------       --------      ---------
Income from subsidiaries............      8,400         17,955             --        (26,355)            --
                                        -------      ---------       --------       --------      ---------
Operating income....................      8,400         16,864         16,671        (26,355)        15,580
Interest expense, net of amounts
  capitalized.......................         --         (7,784)        (1,430)            --         (9,214)
Financial advisory expenses.........     (1,286)            --             --             --         (1,286)
Other income (expense), net.........         --           (392)         3,617             --          3,225
                                        -------      ---------       --------       --------      ---------
Income before income taxes and
  extraordinary item................      7,114          8,688         18,858        (26,355)         8,305
Provision for income taxes
  Income taxes -- benefit credited
     to paid-in capital.............         --         (1,191)            --             --         (1,191)
                                        -------      ---------       --------       --------      ---------
Income before extraordinary item....      7,114          7,497         18,858        (26,355)         7,114
Extraordinary item -- gain from
  retirement of debt net of
  applicable income taxes...........      2,741             --             --             --          2,741
                                        -------      ---------       --------       --------      ---------
Net income..........................    $ 9,855      $   7,497       $ 18,858       $(26,355)     $   9,855
                                        =======      =========       ========       ========      =========
</TABLE>

                                        52
<PAGE>   55
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     CONSOLIDATING STATEMENT OF CASH FLOWS

                          YEAR ENDED DECEMBER 31, 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              UNCONSOLIDATED
                                                ------------------------------------------
                                                 DELAWARE     WILLIAM LYON   NON-GUARANTOR   ELIMINATING   CONSOLIDATED
                                                   LYON       HOMES, INC.    SUBSIDIARIES      ENTRIES       COMPANY
                                                -----------   ------------   -------------   -----------   ------------
<S>                                             <C>           <C>            <C>             <C>           <C>
Operating activities:
  Net income..................................   $ 39,268      $  37,010       $  34,588      $(71,598)     $  39,268
  Adjustments to reconcile net income to net
     cash used in operating activities:
     Depreciation and amortization............         --          2,412              87            --          2,499
     Equity in income of unconsolidated joint
       ventures...............................         --         (3,251)        (21,165)           --        (24,416)
     Income from subsidiaries.................    (38,772)       (32,826)             --        71,598             --
     Extraordinary gain on repurchase of
       Senior Notes...........................       (561)            --              --            --           (561)
     Provision for income taxes...............         --         12,383              --            --         12,383
     Net changes in operating assets and
       liabilities:
       Receivables............................         --         (1,391)          1,278            --           (113)
       Intercompany receivables/payables......       (327)           327              --            --             --
       Real estate inventories................         --        (30,749)          5,494            --        (25,255)
       Deferred loan costs....................        392            449              --            --            841
       Other assets...........................         --         (4,444)            (71)           --         (4,515)
       Accounts payable.......................         --         10,300            (191)           --         10,109
       Accrued expenses.......................         --           (994)             95            --           (899)
                                                 --------      ---------       ---------      --------      ---------
Net cash provided by operating activities.....         --        (10,774)         20,115            --          9,341
                                                 --------      ---------       ---------      --------      ---------
Investing activities:
  Net change in investments in and advances to
     unconsolidated joint ventures............         --          5,221          19,197            --         24,418
  Proceeds from contribution of land to joint
     venture..................................         --             --              --            --             --
  Net change in mortgage notes receivable.....         --            642          (3,941)           --         (3,299)
  Purchases of property and equipment.........         --         (1,617)           (273)           --         (1,890)
  Investment in subsidiaries..................         --         37,983              --       (37,983)            --
  Advances to affiliates......................     21,451             --              --       (21,451)            --
                                                 --------      ---------       ---------      --------      ---------
Net cash provided by investing activities.....     21,451         42,229          14,983       (59,434)        19,229
                                                 --------      ---------       ---------      --------      ---------
Financing activities:
  Proceeds from borrowings on notes payable...         --        350,673         116,773            --        467,446
  Principal payments on notes payable.........         --       (349,265)       (112,743)           --       (462,008)
  Repurchase of 12 1/2% Senior Notes..........    (22,107)            --              --            --        (22,107)
  Distributions to/contributions from
     shareholders.............................         --            646         (37,973)       37,327             --
  Common stock issued for exercised options...        656             --              --            --            656
  Advances from affiliates....................         --        (22,107)             --        22,107             --
                                                 --------      ---------       ---------      --------      ---------
Net cash used in financing activities.........    (21,451)       (20,053)        (33,943)       59,434        (16,013)
                                                 --------      ---------       ---------      --------      ---------
Net increase in cash and cash equivalents.....         --         11,402           1,155            --         12,557
Cash and cash equivalents at beginning of
  year........................................         --          1,344             810            --          2,154
                                                 --------      ---------       ---------      --------      ---------
Cash and cash equivalents at end of year......   $     --      $  12,746       $   1,965      $     --      $  14,711
                                                 ========      =========       =========      ========      =========
</TABLE>

                                        53
<PAGE>   56
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     CONSOLIDATING STATEMENT OF CASH FLOWS

                          YEAR ENDED DECEMBER 31, 1999
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              UNCONSOLIDATED
                                                ------------------------------------------
                                                 DELAWARE     WILLIAM LYON   NON-GUARANTOR   ELIMINATING   CONSOLIDATED
                                                   LYON       HOMES, INC.    SUBSIDIARIES      ENTRIES       COMPANY
                                                -----------   ------------   -------------   -----------   ------------
<S>                                             <C>           <C>            <C>             <C>           <C>
Operating activities:
  Net income..................................   $ 47,477      $  45,553       $ 27,171       $(72,724)     $  47,477
  Adjustments to reconcile net income to net
     cash provided by operating activities:
     Depreciation and amortization............         --          1,490             28             --          1,518
     Equity in income of unconsolidated joint
       ventures...............................         --         (3,137)       (14,722)            --        (17,859)
     Income from subsidiaries.................    (45,474)       (27,250)            --         72,724             --
     Extraordinary gain on repurchase of
       Senior Notes...........................     (4,225)            --             --             --         (4,225)
     Provision for income taxes...............         --            245             --             --            245
     Net changes in operating assets and
       liabilities:
       Receivables............................         --         (5,938)          (593)            --         (6,531)
       Intercompany receivables/payables......      1,658         (1,658)            --             --             --
       Real estate inventories................         --         60,110          3,081             --         63,191
       Deferred loan costs....................        564            686             30             --          1,280
       Other assets...........................         --        (15,216)           117             --        (15,099)
       Accounts payable.......................         --         (5,788)        (1,059)            --         (6,847)
       Accrued expenses.......................         --          2,864           (160)            --          2,704
                                                 --------      ---------       --------       --------      ---------
Net cash provided by operating activities.....         --         51,961         13,893             --         65,854
                                                 --------      ---------       --------       --------      ---------
Investing activities:
  Net change in investments in and advances to
     unconsolidated joint ventures............         --         (1,783)         7,969             --          6,186
  Proceeds from contribution of land to joint
     venture..................................         --          3,700          3,700         (3,700)         3,700
  Net change in mortgage notes receivable.....         --          7,190         (3,222)            --          3,968
  Purchases of property and equipment.........         --           (224)           202             --            (22)
  Investment in subsidiaries..................         --         15,284             --        (15,284)            --
  Advances to affiliates......................     35,400             --             --        (35,400)            --
                                                 --------      ---------       --------       --------      ---------
Net cash provided by investing activities.....     35,400         24,167          8,649        (54,384)        13,832
                                                 --------      ---------       --------       --------      ---------
Financing activities:
  Proceeds from borrowings on notes payable...         --        140,498         57,554             --        198,052
  Principal payments on notes payable.........         --       (204,061)       (60,078)            --       (264,139)
  Repurchase of 12 1/2% Senior Notes..........    (35,400)            --             --             --        (35,400)
  Distributions to/contributions from
     shareholders.............................         --          1,574        (20,558)        18,984             --
  Advances from affiliates....................         --        (35,400)            --         35,400             --
                                                 --------      ---------       --------       --------      ---------
Net cash used in financing activities.........    (35,400)       (97,389)       (23,082)        54,384       (101,487)
                                                 --------      ---------       --------       --------      ---------
Net decrease in cash and cash equivalents.....         --        (21,261)          (540)            --        (21,801)
Cash and cash equivalents at beginning of
  year........................................         --         22,605          1,350             --         23,955
                                                 --------      ---------       --------       --------      ---------
Cash and cash equivalents at end of year......   $     --      $   1,344       $    810       $     --      $   2,154
                                                 ========      =========       ========       ========      =========
</TABLE>

                                        54
<PAGE>   57
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     CONSOLIDATING STATEMENT OF CASH FLOWS

                          YEAR ENDED DECEMBER 31, 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  UNCONSOLIDATED
                                                    ------------------------------------------
                                                     DELAWARE     WILLIAM LYON   NON-GUARANTOR   ELIMINATING   CONSOLIDATED
                                                       LYON       HOMES, INC.    SUBSIDIARIES      ENTRIES       COMPANY
                                                    -----------   ------------   -------------   -----------   ------------
<S>                                                 <C>           <C>            <C>             <C>           <C>
Operating activities:
  Net income......................................   $  9,855       $  7,497       $ 18,858       $(26,355)     $   9,855

  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation and amortization.................         --            988             71             --          1,059
    Equity in income of unconsolidated joint
      ventures....................................         --             (6)        (3,493)            --         (3,499)
    Income from subsidiaries......................     (8,400)       (17,955)            --         26,355             --
    Extraordinary gain on repurchase of Senior
      Notes.......................................     (3,200)            --             --             --         (3,200)
    Provision for income taxes....................         --          1,650             --             --          1,650

    Net changes in operating assets and
      liabilities:
      Receivables.................................         --           (846)           290             --           (556)
      Intercompany receivables/payables...........        970           (970)            --             --             --
      Real estate inventories.....................         --         34,218          7,054             --         41,272
      Deferred loan costs.........................        775         (1,418)           (12)            --           (655)
      Other assets................................         --             (1)            18             --             17
      Accounts payable............................         --          3,997            513             --          4,510
      Accrued expenses............................         --          3,296          1,391             --          4,687
                                                     --------       --------       --------       --------      ---------
Net cash provided by operating activities.........         --         30,450         24,690             --         55,140
                                                     --------       --------       --------       --------      ---------
Investing activities:
  Investment in unconsolidated joint ventures.....         --         (2,054)       (17,832)            --        (19,886)
  Proceeds from contribution of land to joint
    venture.......................................         --         25,431             --             --         25,431
  Issuance of/payments on notes receivable........         --            594             --             --            594
  Purchases of property and equipment.............         --           (195)          (163)            --           (358)
  Investment in subsidiaries......................         --          2,800             --         (2,800)            --
  Advances to affiliates..........................     36,260             --             --        (36,260)            --
                                                     --------       --------       --------       --------      ---------
Net cash provided by (used in) investing
  activities......................................     36,260         26,576        (17,995)       (39,060)         5,781
                                                     --------       --------       --------       --------      ---------
Financing activities:
  Proceeds from borrowings on notes payable.......         --         95,873         37,080             --        132,953
  Principal payments on notes payable.............         --        (97,365)       (40,863)            --       (138,228)
  Repurchase of 12 1/2% Senior Notes..............    (36,260)            --             --             --        (36,260)
  Distributions to/contributions from
    shareholders..................................         --         (1,046)        (1,754)         2,800             --
  Advances from affiliates........................         --        (36,260)            --         36,260             --
                                                     --------       --------       --------       --------      ---------
Net cash used in financing activities.............    (36,260)       (38,798)        (5,537)        39,060        (41,535)
                                                     --------       --------       --------       --------      ---------
Net increase in cash and cash equivalents.........         --         18,228          1,158             --         19,386
Cash and cash equivalents at beginning of year....         --          4,377            192             --          4,569
                                                     --------       --------       --------       --------      ---------
Cash and cash equivalents at end of year..........   $     --       $ 22,605       $  1,350       $     --      $  23,955
                                                     ========       ========       ========       ========      =========
</TABLE>

                                        55
<PAGE>   58
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Revolving Credit Facilities

     On September 27, 2000, the Company completed agreements with various
lenders to provide financing to replace the Company's prior $100,000,000 Working
Capital Facility which was scheduled to mature on May 20, 2001. Under these
agreements, project level financing was obtained in facilities provided by these
lenders which, collectively, provided for the repayment on September 27, 2000 of
all amounts then outstanding under the Company's prior Working Capital Facility.

     Three of the facilities described in the preceding paragraph are Revolving
Credit Facilities with an aggregate maximum loan commitment of $170,000,000,
with various maturities beginning in 2002 through September 2004. The collateral
for the loans provided by the Revolving Credit Facilities includes substantially
all real estate of the Company (excluding assets which are pledged as collateral
for construction notes payable described below and excluding assets of
partnerships and limited liability companies). Although the aggregate maximum
loan commitment for these loans is $170,000,000, the credit facilities have
limitations on the amounts which can be borrowed at any time based on assets
which are included in the credit facilities and the specified borrowings
permitted under borrowing base calculations. The undrawn availability at
December 31, 2000 was $29,238,000 and the principal outstanding under the
Revolving Credit Facilities at December 31, 2000 was $66,322,000.

     Pursuant to the terms of the Revolving Credit Facilities, outstanding
advances bear interest at various rates which approximate the prime rate.

     The Revolving Credit Facilities include financial covenants which may limit
the amount which may be borrowed thereunder.

  Construction Notes Payable

     At December 31, 2000, the Company had construction notes payable amounting
to $9,592,000 related to various real estate projects. The notes are due as
units close or at various dates on or before December 31, 2002 and bear interest
at rates of prime plus 0.25% to prime plus 0.50%.

  Seller Financing

     Another source of financing available to the Company is seller-provided
financing for land acquired by the Company. At December 31, 2000, the Company
had various notes payable outstanding related to land acquisitions for which
seller financing was provided in the amount of $6,632,000.

  Revolving Mortgage Warehouse Credit Facility

     The Company has a $15,000,000 revolving mortgage warehouse credit facility
with a bank to fund its mortgage origination operations. Mortgage loans are
generally held for a short period of time and are typically sold to investors
within 7 to 15 days following funding. Borrowings are secured by the related
mortgage loans held for sale. At December 31, 2000 the outstanding balance was
$7,163,000. The facility, which has a current maturity date of May 31, 2001,
also contains a financial covenant requiring that the Company maintains cash
and/or marketable securities on the books of account of its subsidiary, Duxford
Financial, Inc., a California corporation ("Duxford") in an amount equal to no
less than $1,000,000 and a financial covenant requiring the Company to maintain
total assets net of total liabilities and net of amounts receivable from the
Company and/or affiliates on the books of account of Duxford in an amount equal
to no less than $1,000,000.

                                        56
<PAGE>   59
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 -- STOCK OPTIONS AND INCENTIVE COMPENSATION PLANS

  Stock Option Plan

     Effective on May 12, 2000 and August 21, 2000, certain officers exercised
options to purchase 48,334 and 82,754 shares, respectively, of the Company's
common stock at a price of $5.00 per share in accordance with the Company's 1991
Stock Option Plan, as amended. As of December 31, 2000, outstanding options to
purchase common stock under the Company's 1991 Stock Option Plan are as follows:
13,912 options priced at $5.00 and 16,000 options priced at $14.375.

     Effective on May 9, 2000, the Company's Board of Directors approved the
William Lyon Homes 2000 Stock Incentive Plan (the "Plan") and authorized an
initial 1,000,000 shares of common stock to be reserved for issuance under the
Plan. Under the Plan, options may be granted from time to time to key employees,
officers, directors, consultants and advisors of the Company. The Plan is
administered by the Stock Option Committee of the Board of Directors (the
"Committee"). The Committee is generally empowered to interpret the Plan,
prescribe rules and regulations relating thereto, determine the terms of the
option agreements, amend them with the consent of the optionee, determine the
employees to whom options are to be granted, and determine the number of shares
subject to each option and the exercise price thereof. The per share exercise
price for options will not be less than 100% of the fair market value of a share
of common stock on the date the option is granted. The options will be
exercisable for a term determined by the Committee, not to exceed ten years from
the date of grant.

     Effective on May 9, 2000, the Company issued options under the William Lyon
Homes 2000 Stock Incentive Plan to purchase a total of 627,500 shares of common
stock at $8.6875 per share. The options vest as follows: one-third on May 9,
2001, one-third on May 9, 2002 and one-third on May 9, 2003. As of December 31,
2000, 20,000 options have been forfeited and 607,500 remain unexercised. All
unexercised options expire on May 9, 2010.

     Pursuant to the provisions of Financial Accounting Standards Board
Statement No. 123, "Accounting and Disclosure of Stock-Based Compensation,"
issued in October 1995, the Company has elected to continue applying the
methodology prescribed by APB Opinion 25 and related interpretations to account
for outstanding stock options. Accordingly, no compensation cost has been
recognized in the financial statements related to stock options awarded to
officers, directors and employees under the Plan. As required by Statement No.
123, for disclosure purposes only, the Company has measured the amount of
compensation cost which would have been recognized related to stock options had
the fair value of the options at the date of grant been used for accounting
purposes. Based on such calculations, pro forma net income and earnings per
share amounts for the year ended December 31, 2000 would be $38,692,000 and
$3.68 per share, respectively. The Company estimated the fair value of the stock
options issued in 2000 at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions: risk-free interest rate
of 4.83%; a dividend yield of 0.00%, a volatility factor for the market price of
the Company's common stock of 0.645; and a weighted average expected life of
seven years for the stock options.

  Incentive Compensation Plan

     Effective on April 6, 2000, the Company's Board of Directors approved the
2000 Cash Bonus Plan for all of the Company's full-time, salaried employees,
including the Chief Executive Officer ("CEO"), Chief Operating Officer ("COO"),
Division Presidents, Executives, Managers, Field Construction Staff, and certain
other employees. Under the terms of this plan, bonus targets for the CEO and COO
are based upon specified percentages of the Company's pretax, pre-bonus income.
Bonus targets for Division Presidents are based on Division performance, as
compared to the Division's 2000 Business Plan. For all other participants, the
plan stipulates annual setting of individual bonus targets, expressed as a
percent of each participant's salary, with awards based on performance against
goals pertaining to each participant's operating area.

                                        57
<PAGE>   60
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     All awards are prorated downward if the sum of all calculated awards for
the entire Company exceeds 20% of the Company's consolidated pre-tax income
before bonuses. Awards are paid out over two years, with 75% paid following the
determination of bonus awards, and 25% paid one year later. The deferred amounts
will be forfeited in the event of termination for any reason except retirement,
death or disability.

NOTE 10 -- INCOME TAXES

     The following summarizes the provision for income taxes (in thousands):

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                                  -------------------------------
                                                    2000        1999       1998
                                                  --------    --------    -------
<S>                                               <C>         <C>         <C>
Current
  Federal.......................................  $ (1,063)   $   (189)   $    --
  State.........................................    (2,033)        (56)        (7)
                                                  --------    --------    -------
                                                    (3,096)       (245)        (7)
                                                  --------    --------    -------
Deferred
  Federal.......................................        --          --         --
  State.........................................        --          --          7
                                                  --------    --------    -------
                                                        --          --          7
                                                  --------    --------    -------
Income tax benefits credited to additional
  paid-in capital...............................    (9,287)         --     (1,650)
                                                  --------    --------    -------
                                                  $(12,383)   $   (245)   $(1,650)
                                                  ========    ========    =======
Provision for income taxes before extraordinary
  item..........................................  $(12,357)   $   (220)   $(1,191)
Provision for income taxes on extraordinary
  item..........................................       (26)        (25)      (459)
                                                  --------    --------    -------
                                                  $(12,383)   $   (245)   $(1,650)
                                                  ========    ========    =======
</TABLE>

     Income taxes differ from the amounts computed by applying the applicable
Federal statutory rates due to the following (in thousands):

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                                  -------------------------------
                                                    2000        1999       1998
                                                  --------    --------    -------
<S>                                               <C>         <C>         <C>
Provision for Federal income taxes at the
  statutory rate................................  $(17,895)   $(13,516)   $(2,907)
(Provision) credit for state income taxes, net
  of Federal income tax benefits................    (1,321)      1,516       (661)
Extraordinary item -- gain from retirement of
  debt..........................................      (183)     (1,437)    (1,120)
Valuation allowance for deferred tax asset......     7,650      13,305      3,038
Other...........................................      (634)       (113)        --
                                                  --------    --------    -------
                                                  $(12,383)   $   (245)   $(1,650)
                                                  ========    ========    =======
</TABLE>

                                        58
<PAGE>   61
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Temporary differences giving rise to deferred income taxes consist of the
following (in thousands):

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2000        1999
                                                              --------    --------
<S>                                                           <C>         <C>
Deferred tax assets
  Reserves deducted for financial reporting purposes not
     allowable for tax purposes.............................  $  4,450    $  3,322
  Compensation deductible for tax purposes
     when paid..............................................     1,863       4,437
  Net operating loss and alternative minimum tax credit
     carryovers.............................................    19,056      28,147
  State income tax provisions deductible when paid for
     Federal tax purposes...................................     1,419       1,314
  Effect of book/tax differences for joint ventures.........      (644)       (943)
  Other.....................................................        (6)       (100)
  Valuation allowance.......................................   (25,990)    (33,640)
                                                              --------    --------
                                                                   148       2,537
                                                              --------    --------
Deferred tax liabilities
  Interest capitalized for financial reporting purposes and
     deducted currently for tax purposes....................      (148)     (2,537)
                                                              --------    --------
                                                                  (148)     (2,537)
                                                              --------    --------
                                                              $     --    $     --
                                                              ========    ========
</TABLE>

     As discussed in Note 4, the Company implemented a quasi-reorganization
effective January 1, 1994. Income tax benefits resulting from the utilization of
net operating loss and other carryforwards existing at January 1, 1994 and
temporary differences existing prior to the quasi-reorganization, are excluded
from results of operations and credited to additional paid-in capital. For the
years ended December 31, 2000 and 1998, income tax benefits of $9,287,000 and
$1,650,000, respectively, related to temporary differences resulting from the
quasi-reorganization were excluded from the results of operations and not
reflected as a reduction to the Company's provision for income taxes but
credited directly to additional paid-in capital. For the years ended December
31, 2000 and 1999, post quasi-reorganization temporary differences which reduce
taxable earnings, partially offset by temporary differences that existed prior
to the quasi-reorganization, along with pre quasi-reorganization net operating
loss carryforwards, resulted in income tax expense, at Alternative Minimum Tax
rates, of $3,096,000 and $245,000.

     At December 31, 2000 the Company has net operating loss carryforwards for
Federal tax purposes of approximately $56,048,000, of which $1,348,000 expires
in 2008, $10,501,000 expires in 2009, $14,100,000 expires in 2010, $13,668,000
expires in 2011, $16,403,000 expires in 2012 and $28,000 expires in 2018. In
addition, unused recognized built-in losses in the amount of $23,891,000 are
available to offset future income and expire between 2009 and 2011. Due to the
transactions discussed in Note 4, the future benefits associated with the
utilization of the net operating loss carryforwards may be substantially
limited.

     The Company's federal income tax returns for 1997, 1998 and 1999 are
currently under examination by the Internal Revenue Service. Although no
assurance can be given as to the adequacy of the amounts accrued, management
believes that any income taxes and related interest in excess of the amounts
accrued will not have a material effect on the Company's consolidated financial
position or results of operations.

NOTE 11 -- GAIN FROM RETIREMENT OF DEBT

     In April, May and November 2000, the Company purchased $22,799,000
principal amount of its outstanding Senior Notes at a cost of $22,107,000. The
net gain from the purchase was $496,000, after giving effect to income taxes and
amortization of related deferred loan costs.

                                        59
<PAGE>   62
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     In April, October and November 1999, the Company purchased $40,000,000
principal amount of its outstanding Senior Notes at a cost of $35,400,000. The
net gain from the purchase was $4,200,000, after giving effect to income taxes
and amortization of related deferred loan costs.

     In June and October 1998, the Company purchased $40,000,000 principal
amount of its outstanding Senior Notes at a cost of $36,260,000. The net gain
resulting from the purchase, after giving effect to income taxes and
amortization of related deferred loan costs, was $2,741,000.

NOTE 12 -- RELATED PARTY TRANSACTIONS

     The Company acquired substantially all of the assets and assumed
substantially all of the related liabilities of Old William Lyon Homes as
described in Note 2.

     The Company purchased real estate projects for a total purchase price of
$8,468,000 during the year ended December 31, 2000 from entities controlled by
William Lyon and William H. Lyon.

     On October 26, 2000, the Company's Board of Directors (with Messrs. William
Lyon and William H. Lyon abstaining) approved the purchase of 579 lots for a
total purchase price of $12,581,000 from an entity controlled by William Lyon
and William H. Lyon. The terms of the purchase agreement provide for an initial
option payment of $1,000,000 and a rolling option takedown of the lots. Phase
takedowns of approximately 20 lots each are anticipated to occur at two to three
month intervals for each of several product types through September 2004. In
addition, one-half of the net profits in excess of six percent from the
development are to be paid to the seller. This land acquisition qualifies as an
affiliate transaction under the Company's $200,000,000 12 1/2% Senior Notes due
July 1, 2001 Indenture dated as of June 29, 1994 ("Indenture"). Pursuant to the
terms of the Indenture, the Company has determined that the land acquisition is
on terms that are no less favorable to the Company than those that would have
been obtained in a comparable transaction by the Company with an unrelated
person. The Company has delivered to the Trustee under the Indenture a
resolution of the Board of Directors of the Company set forth in an Officers'
Certificate certifying that the land acquisition is on terms that are no less
favorable to the Company than those that would have been obtained in a
comparable transaction by the Company with an unrelated person and the land
acquisition has been approved by a majority of the disinterested members of the
Board of Directors of the Company. Further, the Company has delivered to the
Trustee under the Indenture a determination of value by a real estate appraisal
firm which is of regional standing in the region in which the subject property
is located and is MAI certified.

     The Company purchased land for a total purchase price of $7,128,000 during
the year ended December 31, 2000 from one of its unconsolidated joint ventures.

     The Company purchased real estate projects for a total purchase price of
$680,000 during the year ended December 31, 1999, from entities controlled by
William Lyon and William H. Lyon.

     Sales of lots, land and other for the year ended December 31, 1998 include
a bulk lot sale of $6,996,000 to Old William Lyon Homes. The Company received
the full purchase price in cash and recognized a gain of $265,000 on the sale.

     For the year ended December 31, 2000, the Company earned management fees
and accrued on-site labor costs of $330,000 and $593,000, respectively, for
managing and selling real estate owned by entities controlled by William Lyon
and William H. Lyon of which $39,000 was due the Company at December 31, 2000.

     For the year ended December 31, 1999, the Company earned management fees
and accrued on-site labor costs of $268,100 and $367,800, respectively, for
managing and selling real estate owned by entities controlled by William Lyon
and William H. Lyon. In addition, the Company earned fees of $50,100 for tax and
accounting services performed for entities controlled by William Lyon and
William H. Lyon.

                                        60
<PAGE>   63
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     For the years ended December 31, 2000 and 1999, the Company incurred
charges of $717,000 and $145,500, respectively, related to rent on its corporate
office, from a trust of which William H. Lyon is the sole beneficiary.

NOTE 13 -- COMMITMENTS AND CONTINGENCIES

     The Company's commitments and contingent liabilities include the usual
obligations incurred by real estate developers in the normal course of business.
In the opinion of management, these matters will not have a material effect on
the Company's consolidated financial position.

     The Company is a defendant in various lawsuits related to its normal
business activities. In the opinion of management, disposition of the various
lawsuits will have no material effect on the consolidated financial statements
of the Company.

     In some jurisdictions in which the Company develops and constructs
property, assessment district bonds are issued by municipalities to finance
major infrastructure improvements. As a land owner benefited by these
improvements, the Company is responsible for the assessments on its land. When
properties are sold, the assessments are either prepaid or the buyers assume the
responsibility for the related assessments. Assessment district bonds issued
after May 21, 1992 are accounted for under the provisions of 91-10, "Accounting
for Special Assessment and Tax Increment Financing Entities" issued by the
Emerging Issues Task Force of the Financial Accounting Standards Board on May
21, 1992, and recorded as liabilities in the Company's consolidated balance
sheet, if the amounts are fixed and determinable.

NOTE 14 -- UNAUDITED PRO FORMA FINANCIAL INFORMATION

     The following unaudited pro forma financial information is presented as if
the acquisition of substantially all of the assets of Old William Lyon Homes, as
described further in Note 2, had occurred at the beginning of the periods
presented.

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                               --------------------------
                                                                  1999            1998
                                                               ----------      ----------
                                                               (IN THOUSANDS, EXCEPT PER
                                                                 COMMON SHARE AMOUNTS)
<S>                                                            <C>             <C>
Sales......................................................     $533,952        $436,041
Operating income...........................................     $ 47,637        $ 15,413
Income before income taxes and extraordinary item..........     $ 43,098        $  9,519
Net income.................................................     $ 47,078        $ 10,899
Basic and diluted earnings per common share(1).............     $   4.51        $   1.04
</TABLE>

---------------
(1) After adjustment for the retroactive effect of the merger with a
    wholly-owned subsidiary and the conversion of each share of previously
    outstanding Series A and Series B common stock into 0.2 common share of the
    surviving company as described in Note 3.

                                        61
<PAGE>   64
                               WILLIAM LYON HOMES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15 -- UNAUDITED SUMMARIZED QUARTERLY FINANCIAL INFORMATION

     Summarized quarterly financial information for the years ended December 31,
2000 and 1999 is as follows (in thousands except per common share amounts):

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED
                                                 ---------------------------------------------------
                                                 MARCH 31,   JUNE 30,   SEPTEMBER 30,   DECEMBER 31,
                                                   2000        2000         2000            2000
                                                 ---------   --------   -------------   ------------
<S>                                              <C>         <C>        <C>             <C>
Sales.........................................   $ 65,373    $ 94,345     $ 88,716       $ 158,432
Other income, costs and expenses, net.........    (57,341)    (82,903)     (79,820)       (135,673)
                                                 --------    --------     --------       ---------
Income before income taxes and extraordinary
  item........................................      8,032      11,442        8,896          22,759
Provision for income taxes....................       (393)     (4,271)      (1,332)         (6,361)
                                                 --------    --------     --------       ---------
Income before extraordinary item..............      7,639       7,171        7,564          16,398
Extraordinary item -- gain from retirement of
  debt, net of applicable income taxes........         --         496           --              --
                                                 --------    --------     --------       ---------
Net income....................................   $  7,639    $  7,667     $  7,564       $  16,398
                                                 ========    ========     ========       =========
Basic and diluted earnings per
  common share -- Note 1
  Before extraordinary item...................   $   0.73    $   0.68     $   0.72       $    1.56
  Extraordinary item..........................         --        0.05           --              --
                                                 --------    --------     --------       ---------
  After extraordinary item....................   $   0.73    $   0.73     $   0.72       $    1.56
                                                 ========    ========     ========       =========
</TABLE>

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED
                                                ----------------------------------------------------
                                                MARCH 31,   JUNE 30,    SEPTEMBER 30,   DECEMBER 31,
                                                  1999        1999          1999          1999(1)
                                                ---------   ---------   -------------   ------------
<S>                                             <C>         <C>         <C>             <C>
Sales........................................   $ 82,297    $  95,715     $ 88,363       $ 173,606
Other income, costs and expenses, net........    (75,996)     (86,741)     (75,846)       (157,901)
                                                --------    ---------     --------       ---------
Income before income taxes and extraordinary
  item.......................................      6,301        8,974       12,517          15,705
Benefit (provision) for income taxes.........       (905)      (1,286)      (1,797)          3,768
                                                --------    ---------     --------       ---------
Income before extraordinary item.............      5,396        7,688       10,720          19,473
Extraordinary item -- gain from retirement of
  debt, net of applicable income taxes.......         --        1,789           --           2,411
                                                --------    ---------     --------       ---------
Net income...................................   $  5,396    $   9,477     $ 10,720       $  21,884
                                                ========    =========     ========       =========
Basic and diluted earnings per
  common share -- Note 1
  Before extraordinary item..................   $   0.51    $    0.74     $   1.03       $    1.87
  Extraordinary item.........................         --         0.17           --       $    0.23
                                                --------    ---------     --------       ---------
  After extraordinary item...................   $   0.51    $    0.91     $   1.03       $    2.10
                                                ========    =========     ========       =========
</TABLE>

---------------

(1) On November 5, 1999, the Company acquired substantially all of the assets of
    William Lyon Homes, Inc. -- see Note 2.

                                        62
<PAGE>   65

                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
William Lyon Homes

     We have audited the accompanying combined balance sheets of the Significant
Subsidiaries of William Lyon Homes, as defined in Note 1, as of December 31,
2000 and 1999, and the related combined statements of income, members' capital
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Significant Subsidiaries of William Lyon Homes at December 31, 2000 and 1999,
and the combined results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.

                                                           /s/ ERNST & YOUNG LLP

Irvine, California
February 13, 2001

                                        63
<PAGE>   66

                 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

                            COMBINED BALANCE SHEETS
                                 (IN THOUSANDS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000         1999
                                                              --------     --------
<S>                                                           <C>          <C>
Cash........................................................  $  6,097     $  4,249
Receivables.................................................       955        1,169
Real estate inventories -- Note 2...........................   142,189      165,421
Other assets................................................       250          150
                                                              --------     --------
                                                              $149,491     $170,989
                                                              ========     ========

                         LIABILITIES AND MEMBERS' CAPITAL

Accounts payable and accrued liabilities....................  $ 14,185     $  7,870
Amount due to member -- Note 4..............................     2,439          836
Notes payable -- Note 3.....................................     9,860       33,318
                                                              --------     --------
                                                                26,484       42,024
Commitments and contingencies -- Note 5

Members' capital............................................   123,007      128,965
                                                              --------     --------
                                                              $149,491     $170,989
                                                              ========     ========
</TABLE>

                            See accompanying notes.

                                        64
<PAGE>   67

                 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

                         COMBINED STATEMENTS OF INCOME
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                                2000        1999       1998
                                                              --------    --------    -------
<S>                                                           <C>         <C>         <C>
REVENUES
Sales of homes..............................................  $270,226    $114,109    $26,725
Interest and other income...................................       786         526        127
                                                              --------    --------    -------
                                                               271,012     114,635     26,852
                                                              --------    --------    -------
COSTS AND EXPENSES
Cost of homes sold..........................................   220,726      85,583     19,801
Sales, marketing and administrative expenses................     8,470       4,212      1,091
                                                              --------    --------    -------
                                                               229,196      89,795     20,892
                                                              --------    --------    -------
NET INCOME..................................................  $ 41,816    $ 24,840    $ 5,960
                                                              ========    ========    =======
</TABLE>

                            See accompanying notes.

                                        65
<PAGE>   68

                 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

                    COMBINED STATEMENTS OF MEMBERS' CAPITAL

              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                              COMMON         TOTAL
                                                              LYON         UNAFFILIATED    MEMBERS'
                                                             MEMBERS         MEMBERS        CAPITAL
                                                          -------------    ------------    ---------
<S>                                                       <C>              <C>             <C>
BALANCE -- January 1, 1998..............................    $  5,912        $  16,943      $  22,855
Contributions...........................................      10,396           70,099         80,495
Distributions...........................................        (506)         (25,622)       (26,128)
Net income..............................................       3,276            2,684          5,960
                                                            --------        ---------      ---------
BALANCE -- December 31, 1998............................      19,078           64,104         83,182
Contributions...........................................      10,737          115,471        126,208
Distributions...........................................      (8,242)         (97,023)      (105,265)
Net income..............................................      14,046           10,794         24,840
                                                            --------        ---------      ---------
BALANCE -- December 31, 1999............................      35,619           93,346        128,965
Contributions...........................................      11,472          145,489        156,961
Distributions...........................................     (36,815)        (167,920)      (204,735)
Net income..............................................      21,491           20,325         41,816
                                                            --------        ---------      ---------
BALANCE -- December 31, 2000............................    $ 31,767        $  91,240      $ 123,007
                                                            ========        =========      =========
</TABLE>

                            See accompanying notes.

                                        66
<PAGE>   69

                 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

                       COMBINED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                           ----------------------------------
                                                             2000         1999         1998
                                                           ---------    ---------    --------
<S>                                                        <C>          <C>          <C>
Operating activities
Net income...............................................  $  41,816    $  24,840    $  5,960
Adjustments to reconcile net income to net cash provided
  by (used in) operating activities:
  Net changes in operating assets and liabilities:
     Receivables.........................................        214         (385)        (34)
     Real estate inventories.............................     28,382      (32,319)    (74,726)
     Other assets........................................       (100)        (150)         --
     Accounts payable and accrued liabilities............      6,315        2,084       5,076
     Amount due member...................................      1,603          426         338
                                                           ---------    ---------    --------
Net cash provided by (used in) operating activities......     78,230       (5,504)    (63,386)
                                                           ---------    ---------    --------

Financing activities
Contributions from members...............................    154,212      124,363      80,495
Distributions to members.................................   (204,735)    (105,265)    (26,128)
Proceeds from notes payable..............................     23,977        4,122       9,375
Repayment of notes payable...............................    (49,836)     (13,841)
                                                           ---------    ---------    --------
Net cash (used in) provided by financing activities......    (76,382)       9,379      63,742
                                                           ---------    ---------    --------

Net increase in cash.....................................      1,848        3,875         356
Cash -- beginning of year................................      4,249          374          18
                                                           ---------    ---------    --------
Cash -- end of year......................................  $   6,097    $   4,249    $    374
                                                           =========    =========    ========

Supplemental disclosures of cash flow and non-cash
  activities
Cash paid for interest...................................  $     685    $   1,376    $  1,000
                                                           =========    =========    ========
Debt assumed by joint venture in connection with
  contribution of land to joint venture..................  $   2,401    $  33,662    $     --
                                                           =========    =========    ========
Contribution of land, net of assumed debt................  $   2,749    $   1,845    $     --
                                                           =========    =========    ========
</TABLE>

                            See accompanying notes.

                                        67
<PAGE>   70

                 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Basis of Presentation

     The combined financial statements are presented in accordance with Rule
3-09 of SEC Regulation S-X ("Rule 3-09") and represent the combined financial
position, results of operations and cash flows of the subsidiaries which are
accounted for using the equity method by William Lyon Homes ("Lyon", formerly
The Presley Companies) which have a common unaffiliated member and are deemed
"significant" when aggregated for purposes of Rule 3-09 (collectively, the
"Significant Subsidiaries of William Lyon Homes") as of December 31, 2000 and
1999.

  Organization

     The Significant Subsidiaries of William Lyon Homes are all Delaware limited
liability companies consisting of second-tier wholly-owned Lyon subsidiaries
(the "Lyon Member") as one member and an unaffiliated common member (the
"Unaffiliated Member") as the other member.

     The Significant Subsidiaries of William Lyon Homes were formed for the
purpose of acquiring, developing and selling single-family homes in the state of
California.

     Net income and losses are allocated to the members in accordance with the
respective Limited Liability Operating Agreements (the "Agreements").

     The Agreements provide among other things that the Unaffiliated Member is
entitled to receive a construction loan equivalent return consisting of a rate
that ranges from prime (9.50% and 8.50% as of December 31, 2000 and 1999,
respectively) plus 1% to prime plus 4.75% on between 100% and 70% of the
Unaffiliated Member's unrecovered capital which is payable by the companies in
all events in accordance with the Agreements. Additionally, the Unaffiliated
Member is entitled to receive a preferred return consisting of a rate that
ranges from prime plus 1% to prime plus 4.75% on between 0% and 30% of the
Unaffiliated Member's unrecovered capital. The Lyon Member is entitled to
receive a preferred return consisting of a rate of interest that ranges from
prime plus 1% to prime plus 4.75% on the Lyon Member's unrecovered capital.

     The following is a summary of the Unaffiliated Member's construction loan
equivalent returns and preferred returns and the Lyon Member's preferred returns
through December 31, 2000 (in thousands):

<TABLE>
<CAPTION>
                                    UNAFFILIATED MEMBER'S
                                      CONSTRUCTION LOAN     UNAFFILIATED MEMBER'S     LYON MEMBER'S
                                     EQUIVALENT RETURNS       PREFERRED RETURNS     PREFERRED RETURNS
                                    ---------------------   ---------------------   -----------------
<S>                                 <C>                     <C>                     <C>
Cumulative returns on unrecovered
  capital.........................         $14,575                $ 14,014               $ 6,672
Cumulative return distributions...          (8,933)                (11,738)               (2,604)
                                           -------                --------               -------
Remaining undistributed returns as
  of December 31, 2000............         $ 5,642                $  2,276               $ 4,068
                                           =======                ========               =======
</TABLE>

     Cash flow, as defined in the Agreements, is generally distributed first, to
the Unaffiliated Member to the extent of its unpaid preferred returns and to the
extent required to reduce the balance of the Unaffiliated Member's unrecovered
capital account to zero; second to Lyon Member to the extent of its unpaid
preferred returns and to the extent required to reduce the balance of the Lyon
Member's unrecovered capital account to zero; thereafter, between 25% to 80% to
the Lyon Member and between 20% to 75% to the Unaffiliated Member.

                                        68
<PAGE>   71
                 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

  Use of Estimates

     The preparation of the Significant Subsidiaries of William Lyon Homes'
combined financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
December 31, 2000 and 1999 and the revenues and expenses for each of the three
years in the period ended December 31, 2000. Actual results could materially
differ from these estimates in the near term.

  Real Estate Inventories

     Real estate inventories are carried at cost. Project costs include direct
and indirect land costs, offsite costs and onsite improvement costs, as well as
carrying charges which are capitalized to real estate inventories while under
active development. Selling costs are expensed as incurred. Land, offsite costs
and all other common costs are allocated to land parcels benefited based upon
relative fair values before construction. Onsite construction costs and related
carrying charges are allocated to individual homes within a phase based upon the
relative sales value of the homes.

     The Significant Subsidiaries of William Lyon Homes account for their real
estate inventories in accordance with Financial Accounting Standards Board
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of ("Statement No. 121"). Statement No. 121
requires impairment losses to be recorded on assets to be held and used by the
Significant Subsidiaries of William Lyon Homes when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets, excluding future interest, are less than the carrying amount of the
assets. Under Statement No. 121, when an asset to be held and used by the
Significant Subsidiaries of William Lyon Homes is determined to be impaired, the
related carrying amount of the asset is adjusted to its estimated fair value.

     Fair value represents the amount at which an asset could be bought or sold
in a current transaction between willing parties; that is, other than a forced
or liquidation sale. The estimation process involved in determining if assets
have been impaired and in the determination of fair value is inherently
uncertain since it requires estimates of current market yields as well as future
events and conditions. Such future events and conditions include economic and
market conditions, as well as the availability of suitable financing to fund
development and construction activities. The realization of the Significant
Subsidiaries of William Lyon Homes' projects is dependent upon future uncertain
events and conditions and, accordingly, the actual timing and amounts realized
by the Significant Subsidiaries of William Lyon Homes may be materially
different from their estimated fair values.

     Management has evaluated the projects and determined that no indicators of
impairment are present as of December 31, 2000 and 1999.

  Revenue and Profit Recognition

     A sale is recorded and profit recognized when a sale is consummated, the
buyer's initial and continuing investments are adequate, any receivables are not
subject to future subordination, and the usual risks and rewards of ownership
have been transferred to the buyer in accordance with the provisions of
Financial Accounting Standards Board Statement No. 66 "Accounting for Sales of
Real Estate." When it is determined that the earnings process is not complete,
profit is deferred for recognition in future periods. As of December 31, 2000
and 1999, there are no deferred profits.

  Warranty Costs

     The Significant Subsidiaries of William Lyon Homes account for warranty
costs under the reserve method. As homes are sold, an estimate of warranty costs
is charged to the cost of homes sold and an accrual for future warranty costs is
established. As actual costs are incurred, the warranty reserve is reduced.

                                        69
<PAGE>   72
                 SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

  Income Taxes

     The Significant Subsidiaries of William Lyon Homes are not taxable entities
and the results of operations are included in the tax returns of the members.
Accordingly, no provision for income taxes is reflected in the combined
financial statements.

2. REAL ESTATE INVENTORIES

     Real estate inventories consist of the following as of December 31 (in
thousands):

<TABLE>
<CAPTION>
                                                2000        1999       1998
                                              --------    --------    -------
<S>                                           <C>         <C>         <C>
Land under development......................  $ 85,275    $106,711    $75,784
Construction in process and completed
  homes.....................................    56,914      58,710     21,811
                                              --------    --------    -------
                                              $142,189    $165,421    $97,595
                                              ========    ========    =======
</TABLE>

3. NOTES PAYABLE

     The notes payable are collateralized by first deeds of trust on certain
real estate projects with an inventory balance of $7,664,000 and $65,670,000 as
of December 31, 2000 and 1999, respectively, and bear interest at 8% and prime
plus 0.5% per annum. The notes payable totaling $9,860,000 at December 31, 2000
mature in 2001.

     During the years ended December 31, 2000 and 1999, the Significant
Subsidiaries of William Lyon Homes incurred $645,000 and $1,377,000,
respectively, of interest cost, all of which was capitalized to the real estate
inventories.

4. RELATED PARTY TRANSACTIONS

     The Agreements provide for builder overhead fees to be paid to the Lyon
Member in monthly installments during construction of the projects and a project
commitment fee to the Unaffiliated Member, one-third to one-half of which is
paid upon the Unaffiliated Member's initial capital funding with the remaining
balance paid in equal monthly installments. Additionally, the Lyon member is
reimbursed for costs related to certain construction, customer service and sales
office activities.

     The following amounts were incurred and capitalized to real estate
inventories during the years ended December 31 (in thousands):

<TABLE>
<CAPTION>
                                                        2000       1999        1998
                                                       -------    ------    -----------
<S>                                                    <C>        <C>       <C>
Lyon Member fees.....................................  $ 7,421    $3,060      $1,885
Lyon Member cost reimbursements......................    4,569       867         267
Unaffiliated Member fees.............................    2,783     2,277         671
                                                       -------    ------      ------
                                                       $14,773    $6,204      $2,823
                                                       =======    ======      ======
</TABLE>

     As of December 31, 2000, 1999 and 1998, $2,439,000, $836,000 and $410,000,
respectively, is due Lyon Member for fees and cost reimbursements.

5. COMMITMENTS AND CONTINGENCIES

     The Significant Subsidiaries of William Lyon Homes' commitments and
contingencies include the usual obligations incurred by real estate developers
in the normal course of business. In the opinion of management, these matters
will not have a material effect on the Significant Subsidiaries of William Lyon
Homes' financial position or results of operations.

                                        70
<PAGE>   73

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                               SEQUENTIALLY
     EXHIBIT                                                                     NUMBERED
      NUMBER                             DESCRIPTION                               FILE
     -------                             -----------                           ------------
    <S>          <C>                                                           <C>
     2.1(1)      Certificate of Ownership and Merger
     3.1(2)      Certificate of Incorporation of the Company.
     3.3(2)      Bylaws of the Company.
     4.1(2)      Specimen certificate of Common Stock.
     4.2(3)      Indenture dated June 29, 1994, between American Bank & Trust
                 Company, as Trustee, and The Presley Companies and Presley
                 Homes.
    10.1(9)      Form of Indemnity Agreement between the Company and the
                 Directors and Officers of the Company.
    10.2(2)      Purchase Agreement and Escrow Instructions dated October 7,
                 1999 among The Presley Companies, Presley Homes, William
                 Lyon Homes, Inc., William Lyon and William H. Lyon.
    10.3(4)      Amended and Restated 1991 Stock Option Plan of The Presley
                 Companies, a Delaware corporation.
    10.4(5)      Forms of Stock Option Agreements, dated as of May 20, 1994,
                 between the Company and Wade H. Cable.
    10.5(5)      Form of Stock Option Agreement, dated as of May 20, 1994,
                 between the Company and Nancy M. Harlan.
    10.6(5)      Form of Stock Option Agreement, dated as of May 20, 1994,
                 between the Company and Linda L. Foster.
    10.7(5)      Form of Stock Option Agreement, dated as of May 20, 1994,
                 between the Company and W. Douglass Harris.
    10.8(5)      Form of Stock Option Agreement, dated as of May 20, 1994,
                 between the Company and C. Dean Stewart.
    10.9(5)      Form of Stock Option Agreement, dated as of May 20, 1994,
                 between the Company and Alan Uman.
    10.10(9)     Property Management Agreement between Corporate Enterprises,
                 Inc., a California corporation (Owner) and William Lyon
                 Homes, Inc., a California corporation (Manager) dated and
                 effective November 5, 1999.
    10.11(9)     Mortgage Company Agreement between Presley Mortgage Company,
                 a California corporation and Duxford Financial Services,
                 Inc., executed as of November 5, 1999.
    10.12(9)     Warranty Service Agreement between Corporate Enterprises,
                 Inc., a California corporation and William Lyon Homes, Inc.,
                 a California corporation dated and effective November 5,
                 1999.
    10.13(10)    Loan Agreement dated as of September 25, 2000 between
                 William Lyon Homes, Inc., a California corporation, the
                 "Borrower," and Residential Funding Corporation, a Delaware
                 corporation, "Lender."
    10.14(10)    Master Loan Agreement dated as of August 31, 2000 by and
                 between William Lyon Homes, Inc., a California corporation
                 ("Borrower") and Guaranty Federal Bank, F.S.B., a federal
                 savings bank organized and existing under the laws of the
                 United States ("Lender").
</TABLE>
<PAGE>   74

<TABLE>
<CAPTION>
                                                                               SEQUENTIALLY
     EXHIBIT                                                                     NUMBERED
      NUMBER                             DESCRIPTION                               FILE
     -------                             -----------                           ------------
    <S>          <C>                                                           <C>
    10.15(10)    Revolving Line of Credit Loan Agreement (Borrowing Base
                 Loan) by and between California Bank & Trust, a California
                 banking corporation, and William Lyon Homes, Inc., a
                 California corporation, dated as of September 21, 2000.
    10.16(10)    Option Agreement and Escrow Instructions between William
                 Lyon Homes, Inc., a California corporation and Lathrop
                 Investment, L.P., a California limited partnership dated as
                 of October 24, 2000.
    10.17(11)    William Lyon Homes 2000 Stock Incentive Plan.
    10.18        Form of Stock Option Agreements.
    10.19        William Lyon Homes, Inc. 2000 Cash Bonus Plan.
    10.20        Standard Industrial/Commercial Single-Tenant Lease -- Net
                 Between William Lyon Homes, Inc. and a trust of which
                 William H. Lyon is the sole beneficiary.
    10.21        Mortgage Warehouse Loan and Security Agreement.
    21.1         List of Subsidiaries of the Company.
    23.1         Consent of Independent Auditors.
</TABLE>

---------------
 (1) Previously filed as an exhibit to the Company's Current Report on Form 8-K
     filed January 5, 2000 and incorporated herein by this reference.

 (2) Previously filed in connection with the Company's Registration Statement on
     Form S-4, and amendments thereto, (S.E.C. Registration No. 333-88569) and
     incorporated herein by this reference.

 (3) Previously filed as an exhibit to the Company's Registration Statement on
     Form S-1 and amendments thereto (S.E.C. Registration No. 33-79088) and
     incorporated herein by this reference.

 (4) Previously filed as an exhibit to the Company's Proxy Statement for Annual
     Meeting of Stockholders held on May 20, 1994 and incorporated herein by
     this reference.

 (5) Previously filed in connection with the Company's Registration Statement on
     Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and
     incorporated herein by this reference.

 (6) Previously filed as an exhibit to the Company's Quarterly Report on Form
     10-Q for the quarterly period ended June 30, 1998 and incorporated herein
     by this reference.

 (7) Previously filed as an exhibit to the Company's Report on Form 8-K dated
     December 31, 1998 and incorporated herein by this reference.

 (8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
     for the year ended December 31, 1998 and incorporated herein by this
     reference.

 (9) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
     for the year ended December 31, 1999 and incorporated herein by this
     reference.

(10) Previously filed as an exhibit to the Company's Quarterly Report on Form
     10-Q for the quarterly period ended September 30, 2000 and incorporated
     herein by this reference.

(11) Previously filed as an exhibit to the Company's Registration Statement on
     Form S-8 (SEC Registration No. 333-50232) and incorporated herein by this
     reference.