##### Table of Contents

---

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, 2006

OR



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

For the transition period from
 to

Commission File Number 001-31625

WILLIAM LYON HOMES

(Exact name of registrant as specified in its charter)



|                                |  |                       
|------------------------------- |  | ----------------------
|Delaware                        |  | 33-0864902            
|(State or other jurisdiction of |  | (I.R.S. Employer      
|incorporation or organization)  |  | Identification Number)



|                                         |  |           
|---------------------------------------- |  | ----------
|4490 Von Karman Avenue                   |  | 92660     
|Newport Beach, California                |  | (Zip Code)
|(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:

None

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ̈No  x

Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes  x  No ̈

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated
filer ̈Accelerated filer  x                    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).  Yes ̈No  x

The number of shares of Common Stock outstanding as of March 1, 2007 was 1,000.

DOCUMENTS INCORPORATED BY REFERENCE

None



---



---

##### Table of Contents

WILLIAM LYON HOMES

INDEX



|         |  |                                                                                                              |  |         
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | --------
|         |  |                                                                                                              |  | Page No.
|         |  | PART I                                                                                                       |  |         
|         |  |                                                                                                             
|Item 1.  |  | Business                                                                                                     |  | 1       
|         |  |                                                                                                             
|Item 1A. |  | Risk Factors                                                                                                 |  | 13      
|         |  |                                                                                                             
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 21      
|         |  |                                                                                                             
|Item 2.  |  | Properties                                                                                                   |  | 21      
|         |  |                                                                                                             
|Item 3.  |  | Legal Proceedings                                                                                            |  | 22      
|         |  |                                                                                                             
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 23      
|         |  |                                                                                                             
|         |  | PART II                                                                                                      |  |         
|         |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 24      
|         |  |                                                                                                             
|Item 6.  |  | Selected Financial Data                                                                                      |  | 25      
|         |  |                                                                                                             
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 27      
|         |  |                                                                                                             
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 52      
|         |  |                                                                                                             
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 52      
|         |  |                                                                                                             
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 52      
|         |  |                                                                                                             
|Item 9A. |  | Controls and Procedures                                                                                      |  | 52      
|         |  |                                                                                                             
|Item 9B. |  | Other Information                                                                                            |  | 54      
|         |  |                                                                                                             
|         |  | PART III                                                                                                     |  |         
|         |  |                                                                                                             
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 55      
|         |  |                                                                                                             
|Item 11. |  | Executive Compensation                                                                                       |  | 59      
|         |  |                                                                                                             
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 68      
|         |  |                                                                                                             
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 69      
|         |  |                                                                                                             
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 72      
|         |  |                                                                                                             
|         |  | PART IV                                                                                                      |  |         
|         |  |                                                                                                             
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 73      
|         |  |                                                                                                             
|         |  | Index to Financial Statements                                                                                |  | 80      



i



---

##### Table of Contents

PART I



Item 1.Business



General



William Lyon
Homes, a Delaware corporation, and subsidiaries (the Company) are primarily engaged in the design, construction and sale of single family detached and attached homes in California, Arizona and Nevada. Since the founding of the
Companys predecessor in 1956, the Company and its joint ventures have sold over 68,000 homes. The Company conducts its homebuilding operations through five geographic regions (Southern California Coastal, Northern California, Inland Empire
California, Arizona and Nevada). For 2006, approximately 62% of the home closings of the Company and its joint ventures were derived from its California operations. For the year ended December 31, 2006, on a consolidated basis the Company had
revenues from home sales of $1.479 billion and delivered 2,887 homes, which includes $151.4 million of revenue and 347 delivered homes from consolidated joint ventures (see Note 2 of Notes to Consolidated Financial Statements).



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. At December 31, 2006, the Company marketed its homes through 53 sales locations in both its
wholly-owned projects and projects being developed in consolidated joint ventures. In 2006, the average sales price for consolidated homes delivered was $512,200. Base sales prices for actively selling projects in 2006 ranged from $105,000 to
$1,725,000.



As of December 31, 2006, the Company and its
consolidated joint ventures owned approximately 13,288 lots and had options to purchase an additional 7,377 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 both consolidated and 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 lots owned and controlled is adequate to supply its homebuilding operations at current operating levels for approximately five years.



The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential
projects. As described more fully in Critical Accounting Policies Variable Interest Entities certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary beneficiary.
Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Companys financial statements as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006.
The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Companys financial statements. The Companys investments in unconsolidated joint ventures are
accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Income allocations and cash distributions to the Company from the
unconsolidated joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners priority
returns and returns of partners capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of Notes to Consolidated Financial Statements for condensed combined financial information for the joint
ventures whose financial statements have been consolidated with the Companys financial statements. See Note 5 of Notes to Consolidated Financial Statements for condensed combined financial information for the unconsolidated joint
ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.



1



---

##### Table of Contents

The Company will continue to utilize its current inventory of lots and future land acquisitions to
conduct its operating strategy which consists of: (i) focusing on high growth core markets; (ii) maintaining conservative financial position and improving its credit profile; (iii) acquiring strong land positions through disciplined acquisition
strategies; (iv) maintaining a low cost structure; and (v) leveraging an experienced management with significant equity ownership.



The Company had total consolidated revenues from operations of $1.492 billion, $1.856 billion and $1.822 billion for the years ended December 31, 2006,
2005 and 2004, respectively. Homes closed by the Company, including its joint ventures, were 2,887, 3,196 and 3,471 for the years ended December 31, 2006, 2005 and 2004, respectively. Including its joint ventures, the Companys dollar
amount of backlog of homes sold but not closed as of December 31, 2006, was $295.5 million, a 57% decrease over the $691.6 million as of December 31, 2005. The cancellation rate of buyers who contracted to buy a home but did not close escrow was
approximately 33% during 2006 and 16% during 2005.



The Companys operations are dependent to a significant extent on debt financing and, to a
lesser extent, on joint venture financing. The Companys principal credit sources are its 75/8% Senior
Notes, 103/4% Senior Notes, 71/2% Senior Notes, secured revolving credit facilities, seller-provided financing, and land banking transactions. At December 31, 2006, the outstanding principal amount of the
75/8% Senior Notes was $150.0 million, the outstanding principal amount of the 103/4% Senior Notes was $247.2 million and the outstanding principal amount of the 71/2% Senior Notes was $150.0 million. The secured revolving credit facilities are revolving lines of credit with a
maximum commitment of $560.0 million at December 31, 2006. 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 secured revolving credit facilities are secured by substantially all of the Companys assets. At December 31, 2006, the outstanding principal amount under the secured revolving credit facilities
was $146.0 million. The Companys mortgage subsidiary has two revolving credit facilities to fund its mortgage operations, of which an aggregate $59.4 million was outstanding at December 31, 2006. See Managements Discussion and
Analysis of Financial Condition and Results of Operations  Financial Condition and Liquidity and Note 6 of Notes to Consolidated Financial Statements for more information relating to the revolving credit facilities
of the Company and its mortgage subsidiary.



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.



On May 18, 2006, General William Lyon announced the completion of a tender offer to purchase all of the outstanding shares of the common stock of the
Company not already owned by him for $109.00 net per share in cash. The shares tendered in the offer, together with the shares already owned by General Lyon, The William Harwell Lyon 1987 Trust and The William Harwell Lyon Separate Property Trust,
represented over 90% of the outstanding shares of the Company.



After receiving deliveries of a sufficient number of tendered shares to reach the 90% threshold, General Lyon and the two trusts contributed all the shares of the Company owned by them to WLH Acquisition Corp., a corporation owned by
General Lyon and the two trusts. On July 25, 2006, WLH Acquisition Corp. was then merged with and into the Company under the short-form merger provisions of Delaware law, with the Company continuing as the surviving corporation of
the merger. At the effective time of the merger, each outstanding share of the Companys common stock (except for shares owned by WLH Acquisition Corp. and by stockholders who properly exercise their appraisal rights in accordance with Delaware
law) was cancelled and converted into the right to receive $109.00 per share in cash, without interest, which is the same consideration that was paid for shares of the Company in the tender offer by General Lyon.



2



---

##### Table of Contents

As a consequence of the merger, the Companys equity now consists solely of 1,000 shares of common
stock outstanding held by General Lyon and the two trusts.



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 regions: Southern
California Coastal, Northern California, Inland Empire California, Arizona, and Nevada. Each of the regions has responsibility for the management of the Companys homebuilding and development operations within its geographic boundaries.



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



|                                      |  |                         |           |      |   |           |  |   |          
|------------------------------------- |  | ----------------------- | --------- | ---- | - | --------- |  | - | ---------
|                                      |  | Year Ended December 31,
|                                      |  | 2006                    |           | 2005 |   | 2004     
|                                      |  | (in thousands)         
|                                      |  | (note 1)               
|Consolidated                          |  |                         |           |      |   |           |  |   |          
|Southern California Coastal Region(2) |  | $                       | 530,151   |      | $ | 621,610   |  | $ | 469,333  
|Northern California Region(3)         |  |                         | 232,101   |      |   | 531,390   |  |   | 669,529  
|Inland Empire California Region(4)    |  |                         | 322,377   |      |   | 229,434   |  |   | 309,248  
|Arizona Region(5)                     |  |                         | 208,083   |      |   | 267,949   |  |   | 132,823  
|Nevada Region(6)                      |  |                         | 199,509   |      |   | 206,000   |  |   | 240,914  
|                                      |  |                         |           |      |   |           |  |   |          
|                                      |  | $                       | 1,492,221 |      | $ | 1,856,383 |  | $ | 1,821,847
|                                      |  |                         |           |      |   |           |  |   |          
|Unconsolidated joint ventures         |  |                         |           |      |   |           |  |   |          
|Nevada(6)                             |  | $                       | 17,046    |      | $ | 26,091    |  |   |         
|                                      |  |                         |           |      |   |           |  |   |          
|                                      |  | $                       | 17,046    |      | $ | 26,091    |  | $ |         
|                                      |  |                         |           |      |   |           |  |   |          

---

|(1) |  | Effective January 1, 2006, the Company reorganized its operating divisions into geographic regions. Each region has a management team led by a regional president. The Southern
California Coastal Region is divided into 3 operating divisions and the Northern California Region is divided into 2 operating divisions, each with a division manager and separate management team.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Southern California Coastal Region consists of operations in the counties of Orange, Los Angeles, Ventura and San Diego.
|--- |  | ------------------------------------------------------------------------------------------------------------------------



|(3) |  | The Northern California Region consists of operations in Contra Costa, El Dorado, Santa Clara, Sacramento, San Joaquin, Placer, Monterey and Stanislaus counties.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | The Inland Empire California Region consists of operations in Riverside and San Bernardino counties.
|--- |  | ----------------------------------------------------------------------------------------------------



|(5) |  | The Arizona Region consists of operations in the Phoenix area.
|--- |  | --------------------------------------------------------------



|(6) |  | The Nevada Region consists of operations in Clark and Nye counties.
|--- |  | -------------------------------------------------------------------



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



LAND ACQUISITION AND DEVELOPMENT



As of December 31, 2006, the Company and its consolidated joint ventures
owned approximately 13,288 lots and had options to purchase an additional 7,377 lots, substantially all of which are entitled.



The Company estimates that its current inventory of lots owned and controlled is adequate to supply its homebuilding operations at current operating
levels for approximately five years.



3



---

##### Table of Contents

The Company uses a land acquisition team, which includes members of its senior management, to manage the
risks associated with land ownership and development. It is the Companys policy that land can be purchased or sold only with the prior approval of senior management and the board of directors. The Companys land acquisition strategy has
been to undertake projects with shorter life-cycles in order to reduce development and market risk while maintaining an inventory of owned lots sufficient for construction of homes over a two-year period. The Companys strategy consists of the
following elements:



| |  |  | Completing due diligence prior to committing to acquire land;
| | - |  | -------------------------------------------------------------



| |  |  | Reviewing the status of entitlements and other governmental processing to mitigate zoning and other development risk;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Focusing on land as a component of a homes cost structure, rather than on the lands speculative value;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Limiting land acquisition size to reduce investment levels in any one project where possible;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Utilizing option, joint venture and other non-capital intensive structures to control land where feasible;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | Funding land acquisitions whenever possible with non-recourse seller financing;
| | - |  | -------------------------------------------------------------------------------



| |  |  | Employing centralized control of approval over all land transactions;
| | - |  | ---------------------------------------------------------------------



| |  |  | Expanding homebuilding operations in the Southwest, particularly in the Companys long established markets of California and Arizona and in Nevada, where it
entered the market in 1995; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Diversifying with respect to geography, markets and product types.
| | - |  | ------------------------------------------------------------------



Prior to committing to the acquisition of land, the Company conducts feasibility studies covering pertinent aspects of the
proposed commitment. These studies may include a variety of elements from technical aspects such as title, zoning, soil and seismic characteristics, to marketing studies that review population and employment trends, schools, transportation access,
buyer profiles, sales forecasts, projected profitability, cash requirements, and assessment of political risk and other factors. Prior to acquiring land, the Company considers assumptions concerning the needs of the targeted customer and determines
whether the underlying land price enables the Company to meet those needs at an affordable price. Before purchasing land, the Company attempts to project the commencement of construction and sales over a reasonable time period. The Company utilizes
outside architects and consultants, under close supervision, to help review acquisitions and design products.



During the year ended December 31, 2003, the Company and two unaffiliated parties formed a series of limited liability companies for the purpose of
acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. This unique acquisition is positioned to deliver
homes in multiple product segments in what the Company believe is one of the highest demand and supply constrained markets in the country. As of December 31, 2005, the limited liability companies sold substantially all of the lots. The Company
was required under certain specific conditions to purchase approximately one-half of the homesites and during the year ended December 31, 2005 the Company purchased 829 lots from the limited liability companies. Homebuilding activities began in 2005
and first deliveries began in 2006. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition and Liquidity and Note 5 of Notes to Consolidated Financial
Statements for more information relating to this transaction.



The Company and an unaffiliated party formed a limited liability company for the purpose of acquiring and developing 885 acres of land in Pahrump, Nevada into approximately 2,500 lots for residential homesites. The company has a 50% direct
interest in the limited liability company and will purchase approximately one-half of the developed lots. The limited liability company began developing the lots in 2004 and sold approximately 472 and 678 lots during the years ended December 31,
2006 and 2005, respectively, of which 209 and 488 lots were sold to the Company.



4



---

##### Table of Contents

HOMEBUILDING AND MARKET STRATEGY



The Company currently has a wide variety of product lines which enables it to meet the specific needs of each of its
markets. Although the Company primarily emphasizes sales to the entry-level and move-up home markets, it believes that this diversified product strategy enables it to best serve a wide range of buyers and adapt quickly to a variety of market
conditions. In order to reduce exposure to local market conditions, the Companys sales locations are geographically dispersed. At December 31, 2006, the Company and its joint ventures had 53 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 1,040 to 3,050 square feet, and the
detached housing ranges from 1,123 to 5,491 square feet.



Due
to the Companys product and geographic diversification strategy, the prices of the Companys homes also vary substantially. Base sales prices for the Companys attached housing range from approximately $230,000 to $995,000 and base
sales prices for detached housing range from approximately $105,000 to $1,725,000. On a consolidated basis, the average sales price of homes closed for the year ended December 31, 2006 was $512,200.



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.



5



---

##### Table of Contents

Description of Projects and Communities Under Development



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 regions as of December 31, 2006 and only includes projects with lots owned as of December 31, 2006, lots consolidated in accordance with
Interpretation No. 46 as of December 31, 2006 or homes closed for the year ended December 31, 2006.



|                                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|---------------------------------- |  | -------------------- |  | --------------------------------------- |  | ------------------------------------------- |  | -------------------------------- |  | ------------------------------- |  | --------------------------------------------- |  | ------------------- | ---------------------
|Project (County) Product           |  | Year ofFirstDelivery |  | EstimatedNumber ofHomes atCompletion(1) |  | CumulativeUnits Closedas ofDecember 31,2006 |  | Backlog atDecember 31,2006(2)(3) |  | Lots Ownedas ofDecember 31,2006 |  | Homes Closedfor theYear EndedDecember 31,2006 |  | Sales PriceRange(5)
|                                  
|SOUTHERN CALIFORNIA COASTAL REGION
|ORANGE COUNTY DIVISION             |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Wholly-Owned:                      |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Huntington Beach                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Seacove at the Waterfront          |  | 2004                 |  | 106                                     |  | 106                                         |  | 0                                |  | 0                               |  | 8                                             |  | $                   | 802,000 - 995,000    
|Irvine                             |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Ambridge at Quail Hill             |  | 2004                 |  | 128                                     |  | 128                                         |  | 0                                |  | 0                               |  | 8                                             |  | $                   | 500,000 - 570,000    
|Lombard Court                      |  | 2005                 |  | 150                                     |  | 150                                         |  | 0                                |  | 0                               |  | 81                                            |  | $                   | 445,000 - 633,000    
|Garland Park                       |  | 2005                 |  | 166                                     |  | 164                                         |  | 1                                |  | 2                               |  | 64                                            |  | $                   | 579,000 - 717,000    
|Tamarisk                           |  | 2005                 |  | 113                                     |  | 113                                         |  | 0                                |  | 0                               |  | 49                                            |  | $                   | 555,000 - 610,000    
|San Carlos                         |  | 2007                 |  | 152                                     |  | 0                                           |  | 13                               |  | 20                              |  | 0                                             |  | $                   | 408,000 - 566,000    
|Columbus Grove:                    |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Lantana                            |  | 2006                 |  | 102                                     |  | 39                                          |  | 1                                |  | 63                              |  | 39                                            |  | $                   | 825,000 - 900,000    
|Kensington                         |  | 2006                 |  | 63                                      |  | 30                                          |  | 4                                |  | 33                              |  | 30                                            |  | $                   | 690,000 - 790,000    
|Tustin                             |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Columbus Grove/Columbus Square:    |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Clarendon                          |  | 2007                 |  | 102                                     |  | 0                                           |  | 22                               |  | 102                             |  | 0                                             |  | $                   | 271,000 - 647,000    
|Astoria(6)                         |  | 2007                 |  | 102                                     |  | 0                                           |  | 6                                |  | 98                              |  | 0                                             |  | $                   | 925,000 - 1,000,000  
|Kensington II                      |  | 2008                 |  | 60                                      |  | 0                                           |  | 0                                |  | 60                              |  | 0                                             |  | $                   | 690,000 - 790,000    
|Cambridge Lane                     |  | 2007                 |  | 156                                     |  | 0                                           |  | 15                               |  | 156                             |  | 0                                             |  | $                   | 495,000 - 560,000    
|Ainsley Park                       |  | 2008                 |  | 84                                      |  | 0                                           |  | 0                                |  | 84                              |  | 0                                             |  | $                   | 625,000 - 725,000    
|Ciara(6)                           |  | 2007                 |  | 67                                      |  | 0                                           |  | 19                               |  | 67                              |  | 0                                             |  | $                   | 1,230,000 - 1,420,000
|Verandas                           |  | 2007                 |  | 97                                      |  | 0                                           |  | 0                                |  | 97                              |  | 0                                             |  | $                   | 675,000 - 760,000    
|Ladera Ranch                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Amarante                           |  | 2005                 |  | 53                                      |  | 53                                          |  | 0                                |  | 0                               |  | 9                                             |  | $                   | 965,000 - 1,060,000  
|Amarante II                        |  | 2006                 |  | 18                                      |  | 15                                          |  | 2                                |  | 3                               |  | 15                                            |  | $                   | 1,046,000 - 1,130,000
|Bellataire                         |  | 2005                 |  | 52                                      |  | 48                                          |  | 3                                |  | 4                               |  | 5                                             |  | $                   | 1,220,000 - 1,260,000
|Bellataire II                      |  | 2006                 |  | 23                                      |  | 22                                          |  | 0                                |  | 1                               |  | 22                                            |  | $                   | 1,180,000 - 1,220,000
|San Clemente                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Alora                              |  | 2007                 |  | 49                                      |  | 0                                           |  | 0                                |  | 17                              |  | 0                                             |  | $                   | 1,125,000 - 1,275,000
|Mirador at Talega                  |  | 2004                 |  | 76                                      |  | 76                                          |  | 0                                |  | 0                               |  | 23                                            |  | $                   | 1,115,000 - 1,270,000
|San Juan Capistrano                |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Floralisa                          |  | 2005                 |  | 80                                      |  | 54                                          |  | 2                                |  | 26                              |  | 44                                            |  | $                   | 1,310,000 - 1,410,000
|Estrella Rosa                      |  | 2006                 |  | 40                                      |  | 22                                          |  | 10                               |  | 18                              |  | 22                                            |  | $                   | 1,675,000 - 1,725,000
|                                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|TOTAL ORANGE COUNTY                |  |                      |  | 2,039                                   |  | 1,020                                       |  | 98                               |  | 851                             |  | 419                                           |  |                     |                      
|                                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|LOS ANGELES DIVISION               |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Wholly-Owned:                      |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Moorpark                           |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Meridian Hills                     |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Ashford                            |  | 2006                 |  | 113                                     |  | 4                                           |  | 5                                |  | 109                             |  | 4                                             |  | $                   | 850,000 - 975,000    
|Marquis                            |  | 2007                 |  | 135                                     |  | 0                                           |  | 11                               |  | 135                             |  | 0                                             |  | $                   | 890,000 - 1,080,000  
|Brighton (Affordable)              |  | 2008                 |  | 17                                      |  | 0                                           |  | 0                                |  | 17                              |  | 0                                             |  | $                   | 105,000 - 272,000    
|Hawthorne                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|360 at South Bay(6)                |  | 2007                 |  | 625                                     |  | 0                                           |  | 0                                |  | 625                             |  | 0                                             |  | $                   | 625,000 - 887,000    
|Los Angeles                        |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Arboreta at Rainbird               |  | 2008                 |  | 140                                     |  | 0                                           |  | 0                                |  | 140                             |  | 0                                             |  | $                   | 440,000 - 750,000    
|                                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|TOTAL LOS ANGELES                  |  |                      |  | 1,030                                   |  | 4                                           |  | 16                               |  | 1,026                           |  | 4                                             |  |                     |                      
|                                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|SAN DIEGO DIVISION                 |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Wholly-Owned:                      |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Promenade North, San Diego         |  | 2006                 |  | 168                                     |  | 6                                           |  | 0                                |  | 162                             |  | 6                                             |  | $                   | 455,000 -520,000     
|Alcala at Del Sur, San Diego       |  | 2005                 |  | 83                                      |  | 31                                          |  | 4                                |  | 52                              |  | 31                                            |  | $                   | 670,000 -773,000     
|Altair, Santee                     |  | 2008                 |  | 85                                      |  | 0                                           |  | 0                                |  | 85                              |  | 0                                             |  | $                   | 453,000 -513,000     
|Maybeck, San Diego                 |  | 2006                 |  | 120                                     |  | 5                                           |  | 5                                |  | 115                             |  | 5                                             |  | $                   | 695,000 -741,000     
|Sunset Cove, San Diego             |  | 2007                 |  | 77                                      |  | 0                                           |  | 0                                |  | 77                              |  | 0                                             |  | $                   | 586,000 -601,000     
|Levanto, San Diego                 |  | 2008                 |  | 100                                     |  | 0                                           |  | 0                                |  | 100                             |  | 0                                             |  | $                   | 432,000 -540,000     
|                                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      
|Total Wholly-Owned:                |  |                      |  | 633                                     |  | 42                                          |  | 9                                |  | 591                             |  | 42                                            |  |                     |                      
|                                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                      



6



---

##### Table of Contents

|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|------------------------------------------------- |  | -------------------- |  | --------------------------------------- |  | ------------------------------------------- |  | -------------------------------- |  | ------------------------------- |  | --------------------------------------------- |  | ------------------- | -----------------
|Project (County) Product                          |  | Year ofFirstDelivery |  | EstimatedNumber ofHomes atCompletion(1) |  | CumulativeUnits Closedas ofDecember 31,2006 |  | Backlog atDecember 31,2006(2)(3) |  | Lots Ownedas ofDecember 31,2006 |  | Homes Closedfor theYear EndedDecember 31,2006 |  | Sales PriceRange(5)
|Joint Ventures:                                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Ravenna, San Diego                                |  | 2005                 |  | 199                                     |  | 148                                         |  | 19                               |  | 51                              |  | 100                                           |  | $                   | 450,000 - 513,000
|Amante, San Diego                                 |  | 2005                 |  | 127                                     |  | 106                                         |  | 3                                |  | 21                              |  | 41                                            |  | $                   | 511,000 - 577,000
|Treviso, San Diego                                |  | 2005                 |  | 186                                     |  | 102                                         |  | 4                                |  | 84                              |  | 67                                            |  | $                   | 390,000 - 505,000
|Belleza at San Miguel Village, Chula Vista        |  | 2005                 |  | 195                                     |  | 186                                         |  | 6                                |  | 9                               |  | 64                                            |  | $                   | 360,000 - 420,000
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Total Joint Ventures:                             |  |                      |  | 707                                     |  | 542                                         |  | 32                               |  | 165                             |  | 272                                           |  |                     |                  
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|TOTAL SAN DIEGO                                   |  |                      |  | 1,340                                   |  | 584                                         |  | 41                               |  | 756                             |  | 314                                           |  |                     |                  
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|SOUTHERN CALIFORNIA COASTAL REGION COMBINED TOTAL |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Wholly-Owned                                      |  |                      |  | 3,702                                   |  | 1,066                                       |  | 123                              |  | 2,468                           |  | 465                                           |  |                     |                  
|Joint Ventures                                    |  |                      |  | 707                                     |  | 542                                         |  | 32                               |  | 165                             |  | 272                                           |  |                     |                  
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|                                                  |  |                      |  | 4,409                                   |  | 1,608                                       |  | 155                              |  | 2,633                           |  | 737                                           |  |                     |                  
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|                                                 
|NORTHERN CALIFORNIA REGION                       
|BAY AREA/CENTRAL VALLEY DIVISION                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Wholly-Owned:                                     |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Contra Costa County                               |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Seagate at Bayside, Hercules                      |  | 2005                 |  | 96                                      |  | 80                                          |  | 12                               |  | 16                              |  | 52                                            |  | $                   | 615,000 - 727,000
|Wavecrest at Bayside, Hercules                    |  | 2005                 |  | 76                                      |  | 76                                          |  | 0                                |  | 0                               |  | 38                                            |  | $                   | 724,000 - 776,000
|Rivergate Laurels, Antioch                        |  | 2005                 |  | 69                                      |  | 69                                          |  | 0                                |  | 0                               |  | 0                                             |  | $                   | 500,000 - 573,000
|Rivergate II, Antioch                             |  | 2006                 |  | 98                                      |  | 35                                          |  | 3                                |  | 63                              |  | 35                                            |  | $                   | 498,000 - 608,000
|Vista Del Mar, Pittsburgh                         |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Vineyard(6)                                       |  | 2007                 |  | 155                                     |  | 0                                           |  | 0                                |  | 155                             |  | 0                                             |  | $                   | 686,000 - 741,000
|Victory(6)                                        |  | 2007                 |  | 129                                     |  | 0                                           |  | 0                                |  | 129                             |  | 0                                             |  | $                   | 706,000 - 806,000
|Estates Custom Lots                               |  | 2008                 |  | 9                                       |  | 0                                           |  | 0                                |  | 9                               |  | 0                                             |  | $                   | 144,000 - 400,000
|San Joaquin County                                |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Seasons, Stockton                                 |  | 2005                 |  | 145                                     |  | 138                                         |  | 2                                |  | 7                               |  | 55                                            |  | $                   | 473,000 - 533,000
|Santa Clara County                                |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Baton Rouge, San Jose                             |  | 2005                 |  | 91                                      |  | 91                                          |  | 0                                |  | 0                               |  | 46                                            |  | $                   | 536,000 - 661,000
|Stanislaus County                                 |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Falling Leaf, Modesto                             |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Trails                                            |  | 2006                 |  | 100                                     |  | 5                                           |  | 0                                |  | 95                              |  | 5                                             |  | $                   | 355,000 - 430,000
|Groves                                            |  | 2006                 |  | 131                                     |  | 9                                           |  | 1                                |  | 122                             |  | 9                                             |  | $                   | 330,000 - 390,000
|Meadows                                           |  | 2006                 |  | 83                                      |  | 7                                           |  | 0                                |  | 76                              |  | 7                                             |  | $                   | 461,000 - 526,000
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Total Wholly-Owned                                |  |                      |  | 1,182                                   |  | 510                                         |  | 18                               |  | 672                             |  | 247                                           |  |                     |                  
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Joint Ventures:                                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Contra Costa County                               |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Vista Del Mar, Pittsburgh                         |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Villages                                          |  | 2007                 |  | 102                                     |  | 0                                           |  | 5                                |  | 102                             |  | 0                                             |  | $                   | 303,000 - 497,000
|Venue                                             |  | 2007                 |  | 132                                     |  | 0                                           |  | 9                                |  | 132                             |  | 0                                             |  | $                   | 363,000 - 626,000
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Total Joint Ventures:                             |  |                      |  | 234                                     |  | 0                                           |  | 14                               |  | 234                             |  | 0                                             |  |                     |                  
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|TOTAL BAY AREA/CENTRAL VALLEY                     |  |                      |  | 1,416                                   |  | 510                                         |  | 32                               |  | 906                             |  | 247                                           |  |                     |                  
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|SACRAMENTO DIVISION                               |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Wholly-Owned:                                     |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|San Joaquin County                                |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Ironwood II, Lathrop                              |  | 2003                 |  | 88                                      |  | 88                                          |  | 0                                |  | 0                               |  | 3                                             |  | $                   | 276,000 - 317,000
|Ironwood III, Lathrop                             |  | 2005                 |  | 109                                     |  | 107                                         |  | 0                                |  | 2                               |  | 36                                            |  | $                   | 490,000 - 571,000
|Placer County                                     |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Shady Lane at Whitney Ranch Rocklin               |  | 2006                 |  | 96                                      |  | 21                                          |  | 1                                |  | 75                              |  | 21                                            |  | $                   | 455,000 - 465,000
|Twin Oaks at Whitney Ranch Rocklin                |  | 2006                 |  | 92                                      |  | 7                                           |  | 1                                |  | 85                              |  | 7                                             |  | $                   | 634,000 - 666,000
|Sacramento County                                 |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Verona at Anatolia, Rancho Cordova                |  | 2005                 |  | 79                                      |  | 46                                          |  | 0                                |  | 33                              |  | 37                                            |  | $                   | 450,000 - 525,000
|Marquee at Fair Oaks                              |  | 2007                 |  | 190                                     |  | 0                                           |  | 0                                |  | 190                             |  | 0                                             |  | $                   | 386,000 - 478,000
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Total Wholly-Owned:                               |  |                      |  | 654                                     |  | 269                                         |  | 2                                |  | 385                             |  | 104                                           |  |                     |                  
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Joint Ventures:                                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Sacramento County                                 |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Big Horn, Elk Grove                               |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Plaza Walk                                        |  | 2005                 |  | 106                                     |  | 53                                          |  | 3                                |  | 53                              |  | 32                                            |  | $                   | 361,000 - 421,000
|Gallery Walk                                      |  | 2005                 |  | 149                                     |  | 71                                          |  | 3                                |  | 78                              |  | 43                                            |  | $                   | 230,000 - 364,000
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Total Joint Ventures                              |  |                      |  | 255                                     |  | 124                                         |  | 6                                |  | 131                             |  | 75                                            |  |                     |                  
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|TOTAL SACRAMENTO                                  |  |                      |  | 909                                     |  | 393                                         |  | 8                                |  | 516                             |  | 179                                           |  |                     |                  
|                                                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  



7



---

##### Table of Contents

|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|----------------------------------------- |  | -------------------- |  | --------------------------------------- |  | ------------------------------------------- |  | -------------------------------- |  | ------------------------------- |  | --------------------------------------------- |  | ------------------- | -----------------
|Project (County) Product                  |  | Year ofFirstDelivery |  | EstimatedNumber ofHomes atCompletion(1) |  | CumulativeUnits Closedas ofDecember 31,2006 |  | Backlog atDecember 31,2006(2)(3) |  | Lots Ownedas ofDecember 31,2006 |  | Homes Closedfor theYear EndedDecember 31,2006 |  | Sales PriceRange(5)
|NORTHERN CALIFORNIA REGION COMBINED TOTAL |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Wholly-Owned                              |  |                      |  | 1,836                                   |  | 779                                         |  | 20                               |  | 1,057                           |  | 351                                           |  |                     |                  
|Joint Ventures                            |  |                      |  | 489                                     |  | 124                                         |  | 20                               |  | 365                             |  | 75                                            |  |                     |                  
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|                                          |  |                      |  | 2,325                                   |  | 903                                         |  | 40                               |  | 1,422                           |  | 426                                           |  |                     |                  
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|                                         
|INLAND EMPIRE CALIFORNIA REGION          
|Wholly-Owned:                             |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Riverside County                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Heartland, North Corona                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Homestead                                 |  | 2005                 |  | 109                                     |  | 109                                         |  | 0                                |  | 0                               |  | 65                                            |  | $                   | 578,000 - 665,000
|Almont                                    |  | 2006                 |  | 91                                      |  | 91                                          |  | 0                                |  | 0                               |  | 91                                            |  | $                   | 492,000 - 568,000
|Parkside/Vander Stelt, Corona             |  | 2007                 |  | 122                                     |  | 18                                          |  | 25                               |  | 104                             |  | 18                                            |  | $                   | 568,000 - 683,000
|Kasbergen/Serafina, North Corona          |  | 2007                 |  | 314                                     |  | 30                                          |  | 89                               |  | 284                             |  | 30                                            |  | $                   | 323,000 - 413,000
|Bridle Creek, Corona                      |  | 2003                 |  | 274                                     |  | 200                                         |  | 6                                |  | 74                              |  | 28                                            |  | $                   | 698,000 - 886,000
|Sequoia at Wolf Creek, Temecula           |  | 2005                 |  | 125                                     |  | 97                                          |  | 7                                |  | 28                              |  | 83                                            |  | $                   | 392,000 - 438,000
|Savannah at Harveston Ranch, Temecula     |  | 2005                 |  | 162                                     |  | 76                                          |  | 13                               |  | 86                              |  | 76                                            |  | $                   | 334,000 - 386,000
|San Bernardino County                     |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|The Peaks at Citrus Heights, Fontana      |  | 2005                 |  | 150                                     |  | 134                                         |  | 7                                |  | 16                              |  | 62                                            |  | $                   | 597,000 - 680,000
|Adelina, Fontana                          |  | 2007                 |  | 109                                     |  | 0                                           |  | 0                                |  | 109                             |  | 0                                             |  | $                   | 350,000 - 426,000
|Rosabella, Fontana                        |  | 2008                 |  | 114                                     |  | 0                                           |  | 0                                |  | 114                             |  | 0                                             |  | $                   | 405,000 - 440,000
|Amador, Rancho Cucamonga                  |  | 2007                 |  | 99                                      |  | 0                                           |  | 0                                |  | 99                              |  | 0                                             |  | $                   | 375,000 - 447,000
|Vintners Grove, Rancho Cucamonga         |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Solera SFD                                |  | 2007                 |  | 78                                      |  | 0                                           |  | 0                                |  | 78                              |  | 0                                             |  | $                   | 535,000 - 625,000
|Canela Triplex                            |  | 2007                 |  | 78                                      |  | 0                                           |  | 0                                |  | 78                              |  | 0                                             |  | $                   | 405,000 - 475,000
|Chapman Heights, Yucaipa:                 |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Braeburn                                  |  | 2005                 |  | 113                                     |  | 65                                          |  | 2                                |  | 48                              |  | 46                                            |  | $                   | 569,000 - 609,000
|Crofton                                   |  | 2005                 |  | 140                                     |  | 90                                          |  | 7                                |  | 50                              |  | 70                                            |  | $                   | 443,000 - 473,000
|Westland                                  |  | 2005                 |  | 79                                      |  | 75                                          |  | 4                                |  | 4                               |  | 46                                            |  | $                   | 498,000 - 521,000
|Vista Bella                               |  | 2009                 |  | 108                                     |  | 0                                           |  | 0                                |  | 108                             |  | 0                                             |  | $                   | 303,000 - 341,000
|Redcort                                   |  | 2009                 |  | 90                                      |  | 0                                           |  | 0                                |  | 90                              |  | 0                                             |  | $                   | 338,000 - 362,000
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|INLAND EMPIRE CALIFORNIA REGION TOTAL     |  |                      |  | 2,355                                   |  | 985                                         |  | 160                              |  | 1,370                           |  | 615                                           |  |                     |                  
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|                                         
|ARIZONA REGION                           
|Wholly-Owned:                             |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Maricopa County                           |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Gateway Crossing, Gilbert                 |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Oakcrest                                  |  | 2003                 |  | 236                                     |  | 236                                         |  | 0                                |  | 0                               |  | 1                                             |  | $                   | 252,000 - 320,000
|Woodridge                                 |  | 2003                 |  | 165                                     |  | 165                                         |  | 0                                |  | 0                               |  | 1                                             |  | $                   | 292,000 - 355,000
|Sonoran Foothills, Phoenix                |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Desert Crown                              |  | 2004                 |  | 124                                     |  | 123                                         |  | 1                                |  | 1                               |  | 38                                            |  | $                   | 441,000 - 544,000
|Desert Sierra                             |  | 2004                 |  | 212                                     |  | 211                                         |  | 0                                |  | 1                               |  | 90                                            |  | $                   | 249,000 - 307,000
|Copper Canyon Ranch, Surprise             |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Rancho Vistas                             |  | 2004                 |  | 212                                     |  | 212                                         |  | 0                                |  | 0                               |  | 19                                            |  | $                   | 490,000 - 600,000
|Sunset Point                              |  | 2004                 |  | 282                                     |  | 260                                         |  | 10                               |  | 22                              |  | 129                                           |  | $                   | 287,000 - 383,000
|El Sendero Hills                          |  | 2004                 |  | 188                                     |  | 175                                         |  | 5                                |  | 13                              |  | 73                                            |  | $                   | 377,000 - 470,000
|Talavera, Phoenix                         |  | 2006                 |  | 134                                     |  | 46                                          |  | 47                               |  | 88                              |  | 46                                            |  | $                   | 256,000 - 332,000
|Coldwater Ranch                           |  | 2008                 |  | 368                                     |  | 0                                           |  | 0                                |  | 368                             |  | 0                                             |  | $                   | 194,000 - 262,000
|Collins Creek, Phoenix                   |  | 2007                 |  | 126                                     |  | 0                                           |  | 0                                |  | 126                             |  | 0                                             |  | $                   | 237,000 - 245,000
|Lehi Crossing, Mesa                       |  | 2007                 |  | 855                                     |  | 0                                           |  | 0                                |  | 113                             |  | 0                                             |  |                     |                  
|Rancho MercadoInn Suites Phoenix         |  | 2009                 |  | 1,889                                   |  | 0                                           |  | 0                                |  | 1,889                           |  | 0                                             |  | $                   | 206,000 - 294,000
|Lyons Gate, Gilbert:                     |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Pride                                     |  | 2006                 |  | 650                                     |  | 104                                         |  | 76                               |  | 546                             |  | 104                                           |  | $                   | 198,000 - 221,000
|Savanna                                   |  | 2006                 |  | 174                                     |  | 49                                          |  | 21                               |  | 125                             |  | 49                                            |  | $                   | 208,000 - 294,000
|Sahara                                    |  | 2006                 |  | 169                                     |  | 43                                          |  | 31                               |  | 126                             |  | 43                                            |  | $                   | 318,000 - 409,000
|Acacia                                    |  | 2007                 |  | 365                                     |  | 0                                           |  | 0                                |  | 365                             |  | 0                                             |  | $                   | 225,000 - 292,000
|Future Products                           |  | 2007                 |  | 213                                     |  | 0                                           |  | 0                                |  | 213                             |  | 0                                             |  |                     |                  
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Total Wholly-Owned:                       |  |                      |  | 6,362                                   |  | 1,624                                       |  | 191                              |  | 3,996                           |  | 593                                           |  |                     |                  
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Joint Ventures:                           |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Maricopa County                           |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Hastings Property, Queen Creek            |  | 2009                 |  | 823                                     |  | 0                                           |  | 0                                |  | 823                             |  | 0                                             |  | $                   | 159,000 - 417,000
|Circle G at the Church Farm North         |  | 2009                 |  | 1,745                                   |  | 0                                           |  | 0                                |  | 1,745                           |  | 0                                             |  | $                   | 156,000 - 484,000
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Total Joint Ventures:                     |  |                      |  | 2,568                                   |  | 0                                           |  | 0                                |  | 2,568                           |  | 0                                             |  |                     |                  
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|ARIZONA REGION TOTAL                      |  |                      |  | 8,930                                   |  | 1,624                                       |  | 191                              |  | 6,564                           |  | 593                                           |  |                     |                  
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  



8



---

##### Table of Contents

|                            |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|--------------------------- |  | -------------------- |  | --------------------------------------- |  | ------------------------------------------- |  | -------------------------------- |  | ------------------------------- |  | --------------------------------------------- |  | ------------------- | -----------------
|Project (County) Product    |  | Year ofFirstDelivery |  | EstimatedNumber ofHomes atCompletion(1) |  | CumulativeUnits Closedas ofDecember 31,2006 |  | Backlog atDecember 31,2006(2)(3) |  | Lots Ownedas ofDecember 31,2006 |  | Homes Closedfor theYear EndedDecember 31,2006 |  | Sales PriceRange(5)
|                           
|NEVADA REGION              
|Wholly-Owned:               |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Clark County                |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Summerlin, Las Vegas        |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Granada                     |  | 2004                 |  | 144                                     |  | 144                                         |  | 0                                |  | 0                               |  | 39                                            |  | $                   | 446,000 - 511,000
|The Lyon Collection         |  | 2005                 |  | 79                                      |  | 74                                          |  | 5                                |  | 5                               |  | 41                                            |  | $                   | 624,000 - 659,000
|Kingwood                    |  | 2006                 |  | 100                                     |  | 29                                          |  | 6                                |  | 71                              |  | 29                                            |  | $                   | 415,000 - 501,000
|North Las Vegas             |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|The Classics                |  | 2003                 |  | 227                                     |  | 227                                         |  | 0                                |  | 0                               |  | 7                                             |  | $                   | 290,000 - 315,000
|The Cottages                |  | 2004                 |  | 360                                     |  | 271                                         |  | 4                                |  | 89                              |  | 62                                            |  | $                   | 232,000 - 262,000
|La Tierra                   |  | 2006                 |  | 67                                      |  | 32                                          |  | 7                                |  | 35                              |  | 32                                            |  | $                   | 315,000 - 345,000
|Tierra Este                 |  | 2007                 |  | 126                                     |  | 0                                           |  | 0                                |  | 126                             |  | 0                                             |  | $                   | 315,000 - 345,000
|Carson Ranch, Las Vegas     |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|West Series I               |  | 2005                 |  | 71                                      |  | 67                                          |  | 0                                |  | 4                               |  | 25                                            |  | $                   | 395,000 - 430,000
|West Series II              |  | 2005                 |  | 59                                      |  | 29                                          |  | 10                               |  | 30                              |  | 28                                            |  | $                   | 456,000 - 511,000
|East Series I               |  | 2007                 |  | 103                                     |  | 30                                          |  | 3                                |  | 73                              |  | 30                                            |  | $                   | 405,000 - 440,000
|East Series II              |  | 2007                 |  | 58                                      |  | 0                                           |  | 0                                |  | 58                              |  | 0                                             |  | $                   | 470,000 - 518,000
|West Park, Las Vegas        |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Villas                      |  | 2006                 |  | 191                                     |  | 17                                          |  | 9                                |  | 174                             |  | 17                                            |  | $                   | 320,000 - 355,000
|Courtyards                  |  | 2006                 |  | 113                                     |  | 14                                          |  | 2                                |  | 99                              |  | 14                                            |  | $                   | 360,000 - 410,000
|Mesa Canyon, Las Vegas      |  | 2008                 |  | 49                                      |  | 0                                           |  | 0                                |  | 49                              |  | 0                                             |  | $                   | 430,000 - 467,000
|The Lyon Estates, Las Vegas |  | 2008                 |  | 129                                     |  | 0                                           |  | 0                                |  | 129                             |  | 0                                             |  | $                   | 635,000 - 700,000
|Mountain Falls, Pahrump:    |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Cascata                     |  | 2005                 |  | 147                                     |  | 135                                         |  | 1                                |  | 12                              |  | 81                                            |  | $                   | 216,000 - 238,000
|Tramonto                    |  | 2005                 |  | 212                                     |  | 136                                         |  | 3                                |  | 76                              |  | 70                                            |  | $                   | 266,000 - 301,000
|Tramonto Continuation       |  | 2010                 |  | 91                                      |  | 0                                           |  | 0                                |  | 91                              |  | 0                                             |  | $                   | 274,000 - 307,000
|Bella Sera                  |  | 2005                 |  | 129                                     |  | 69                                          |  | 4                                |  | 60                              |  | 41                                            |  | $                   | 322,000 - 362,000
|Ancora                      |  | 2007                 |  | 118                                     |  | 0                                           |  | 6                                |  | 118                             |  | 0                                             |  | $                   | 206,000 - 228,000
|                            |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|NEVADA REGION TOTAL         |  |                      |  | 2,573                                   |  | 1,274                                       |  | 60                               |  | 1,299                           |  | 516                                           |  |                     |                  
|                            |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|GRAND TOTALS:               |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|Wholly-Owned                |  |                      |  | 16,828                                  |  | 5,728                                       |  | 554                              |  | 10,190                          |  | 2,540                                         |  |                     |                  
|Joint Ventures              |  |                      |  | 3,764                                   |  | 666                                         |  | 52                               |  | 3,098                           |  | 347                                           |  |                     |                  
|                            |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  
|                            |  |                      |  | 20,592                                  |  | 6,394                                       |  | 606                              |  | 13,288                          |  | 2,887                                         |  |                     |                  
|                            |  |                      |  |                                         |  |                                             |  |                                  |  |                                 |  |                                               |  |                     |                  

---

|(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) |  | Of the total homes subject to pending sales contracts as of December 31, 2006, 554 represent homes completed or under construction and 52 represent homes not yet under
construction.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Lots owned as of December 31, 2006 include lots in backlog at December 31, 2006.
|--- |  | --------------------------------------------------------------------------------

|(5) |  | Sales price range reflects base price only and excludes any lot premium, buyer incentive and buyer selected options, which vary from project to project.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | All or a portion of the lots in this project are not owned as of December 31, 2006. The Company consolidated the purchase price of the lots in accordance with certain related
accounting pronouncements, and considers the lots owned at December 31, 2006.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



9



---

##### Table of Contents

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 eight 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 and its joint ventures projects was approximately 33% during 2006. 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s and its joint ventures inventory of completed and unsold homes was 136 homes as of December 31, 2006.



Warranty



The Company provides its homebuyers with a one-year limited warranty covering workmanship and materials. The Company also
provides its homebuyers with a limited warranty that covers construction defects, as defined in the limited warranty agreement provided to each home buyer, for the length of its legal liability for such defects (which may be up to ten
years in some circumstances), as determined by the law of the state in which the Company builds. The limited warranty covering construction defects is transferable to subsequent buyers not under direct contract with the Company and requires that
homebuyers agree to the definitions and procedures set forth in the warranty, including the submission of unresolved construction-related disputes to binding arbitration. The Company began providing this limited warranty at the end of 2001.



In connection with the limited warranty covering construction
defects, the Company obtained an insurance policy which expires on December 31, 2008, unless renewed. The Company has been informed by the insurance carrier that this insurance policy will respond to construction defect claims on homes that close
during each



10



---

##### Table of Contents

policy period for the duration of the Companys legal liability and that the policy will respond to potential losses relating to construction, including
soil subsidence. The insurance policy provides a single policy of insurance to the Company and the subcontractors enrolled in its insurance program. As a result, the Company is no longer required to obtain proof of insurance from these
subcontractors nor be named as an additional insured under their individual insurance policies. The Company still requires that subcontractors not enrolled in the insurance program provide proof of insurance and name the Company as an additional
insured under their insurance policy. Furthermore, the Company generally requires that its subcontractors provide the Company with an indemnity prior to receiving payment for their work.



There can be no assurance, however, that the terms and limitations of the limited warranty will be enforceable against the
homebuyers, that the Company will be able to renew its insurance coverage or renew it at reasonable rates, that the Company will not be liable for damages, the cost of repairs, and/or the expense of litigation surrounding possible construction
defects, soil subsidence or building-related claims or that claims will not arise out of uninsurable events not covered by insurance and not subject to effective indemnification agreements with the Companys subcontractors.



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.



Customer Financing  William Lyon Financial Services



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.



William Lyon Financial Services (formerly 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.



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 regional 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 the Companys operations to capitalize on favorable variances or to limit adverse financial
impacts.



Regulation



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 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



11



---

##### Table of Contents

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.



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.



William Lyon Financial Services is subject to state licensing laws as a
mortgage broker as well as Federal and state laws concerning real estate loans. Duxford Escrow, Inc. is licensed and subject to regulation under the California Escrow Law. The Companys wholly-owned subsidiary, William Lyon Homes, Inc., is
licensed as a general building contractor in California, Arizona and Nevada. In addition, William Lyon Homes, Inc. holds a corporate real estate license under the California Real Estate Law.



Duxford Title Reinsurance Company, a wholly-owned subsidiary of the Company,
provides title reinsurance to unrelated title insurers directly issuing title policies on homes sold by the Company in California, Nevada and Arizona. In February 2005, Duxford Title Reinsurance Company was notified by its title insurers that as a
result of current investigations by several state insurance regulators into the large number of captive reinsurance arrangements existing in the title insurance industry, the title insurers were suspending and/or terminating their current captive
reinsurance agreements with Duxford Title Reinsurance Company pending final determination from the appropriate regulatory bodies as to their permissibility or necessary modification to assure compliance with applicable law. In April 2005, in
response to a subpoena issued by the California Insurance Commissioner, the Company testified in connection with the Commissioners investigation of captive reinsurance arrangements, including testimony that in many instances, the Company pays
for the title insurance being issued. The Company has not had any further communication to date from the California Insurance Commissioner or any other state insurance regulator about this matter and does not believe that the resolution of this
matter will have a material effect on the Companys financial position, results of operations or cash flows. In November 2005, the Company was notified that the United States Department of Housing and Urban Development had instituted a formal
Federal investigation of the Company in connection with its participation in captive title reinsurance arrangements. The Company has fully cooperated with the Department in its investigation. Effective as of September 15, 2006, the Company and the
Department entered into a Settlement Agreement in which each desired to avoid prolonged proceedings, any further expense of investigation and/or possible litigation and to finally resolve the matter. Based on the Companys compliance with the
Settlement Agreement and with the Company not admitting liability or wrongdoing, the Department agreed to terminate its investigation and to take no enforcement action and the Company agreed to make a settlement payment of $850,000.



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.



12



---

##### Table of Contents

Corporate Organization and Personnel



Each of the Companys operating regions has responsibility for the Companys homebuilding and development
operations within the geographical boundaries of that region.



Effective January 1, 2006, the Company reorganized its operating divisions into geographic regions. Each region has a management team led by a regional president. Certain projects from the former San Diego division and the Southern
California division were reorganized into the Inland Empire California Region. The remaining projects are part of the Southern California Coastal Region. The Southern California Coastal Region is divided into 3 operating divisions and the Northern
California Region is divided into 2 operating divisions, each with a division manager and separate management team.



The Companys executive officers and regional presidents average more than 25 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, financial, treasury, human resources and legal matters).



As of December 31, 2006, the Company employed 730 full-time and
9 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, mortgage, engineering,
land acquisition, golf course operations, 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 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.



Available Information



The Companys Internet address is http://www.lyonhomes.com. The Company makes available free of charge on or through
its Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after such material was electronically filed with, or furnished to, the Securities and Exchange Commission.



Item 1A.Risk Factors



An investment in the Company entails the following risks and uncertainties. These risk factors should be carefully considered when evaluating any
investment in the Company. Any of these risks and uncertainties could cause the actual results to differ materially from the results contemplated by the forward-looking statements set forth herein, and could otherwise have a significant adverse
impact on the Companys business, prospects, financial condition or results of operations or on the price of the Companys common stock.



Revenues may decrease and results of operations may be adversely affected as a result of declines in demand for housing and other changes in economic and business
conditions.



The residential homebuilding industry is
cyclical and is highly sensitive to changes in general economic conditions such as levels of employment, consumer confidence and income, availability of financing for acquisitions, construction and permanent mortgages, interest rate levels,
inflation, in-migration trends and demand for housing. For example, California, where many of the Companys projects are located, underwent a significant recession in the early 1990s that affected demand for housing. Should current economic and
business conditions decline, demand for housing could be further affected. An important segment of the Companys



13



---

##### Table of Contents

customer base consists of move-up buyers, who often purchase homes subject to contingencies related to the sale of their existing homes. The difficulties
facing these buyers in selling their homes during recessionary periods may adversely affect home sales. Moreover, during such periods, the Company may need to reduce sales prices and offer greater incentives to buyers to compete for sales that may
result in reduced margins. Increases in the rate of inflation could adversely affect gross margins by increasing costs and expenses. In times of high inflation, demand for housing may decline and the Company may be unable to recover increased costs
through higher sales.



Interest rates and the unavailability of mortgage
financing can adversely affect demand for housing.



In
general, housing demand is negatively impacted by increases in interest rates and housing costs and the unavailability of mortgage financing. Most buyers finance their home purchases through third-party lenders providing mortgage financing. If
mortgage interest rates increase and, consequently, the ability of prospective buyers to finance home purchases is reduced, home sales, gross margins and cash flow may also be adversely affected and the impact may be material. The Companys
homebuilding activities also depend upon the availability and costs of mortgage financing for buyers of homes owned by potential customers, as those customers (move-up buyers) often need to sell their existing residences before they purchase the
Companys homes. Any reduction of financing availability could adversely affect home sales.



Changes in federal income tax laws may also affect demand for new homes. Various proposals have been publicly discussed to limit mortgage interest
deductions and to limit the exclusion of gain from the sale of a principal residence. Enactment of such proposals may have an adverse effect on the homebuilding industry in general. No meaningful prediction can be made as to whether any such
proposals will be enacted and, if enacted, the particular form such laws would take.



Financial condition and results of operations may be adversely affected by any decrease in the value of land inventory, as well as by the associated carrying costs.



The Company continuously acquires land for replacement and expansion of land inventory within the markets in which it
builds. The risks inherent in purchasing and developing land increase as consumer demand for housing decreases. Thus, the Company may have bought and developed land on which homes cannot be profitably built and sold. The market value of land,
building lots and housing inventories can fluctuate significantly as a result of changing market conditions. The Company employs measures to manage inventory risks which may not be successful. In addition, inventory carrying costs can be significant
and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, the Company may have to sell homes at significantly lower margins or at a loss. Further, the Company may be
required to write-down the book value of certain real estate assets in accordance with generally accepted accounting principles, and some of those write-downs could be material. Any material write-downs of assets could have a material adverse effect
on the Companys financial condition and earnings.



Adverse weather and
geological conditions may increase costs, cause project delays and reduce consumer demand for housing, all of which would adversely affect the Companys results of operations and prospects.



As a homebuilder, the Company is subject to numerous risks, many of which
are beyond managements control, including: adverse weather conditions such as droughts, floods, or wildfires, which could damage projects, cause delays in completion of projects, or reduce consumer demand for housing; shortages in labor or
materials, which could delay project completion and cause increases in the prices for labor or materials, thereby affecting the Companys sales and profitability; and landslides, soil subsidence, earthquakes and other geologic events, which
could damage projects, cause delays in the completion of projects or reduce consumer demand for the Companys projects. Many of the Companys projects are located in California, which has experienced significant earthquake activity. In
addition to directly damaging the Companys projects, earthquakes or other



14



---

##### Table of Contents

geologic events could damage roads and highways providing access to those projects, thereby adversely affecting the Companys ability to market homes in
those areas and possibly increasing the costs of completion.



There are some risks of loss for which the Company may be unable to purchase insurance coverage. For example, losses associated with landslides, earthquakes and other geologic events may not be insurable and other losses, such as those
arising from terrorism, may not be economically insurable. A sizeable uninsured loss could adversely affect the Companys business, results of operations and financial condition.



The Companys business is geographically concentrated, and sales, results of operations, financial condition and business would be
negatively impacted by a decline in regional economies.



The Company presently conducts all of its business in five geographical regions: Southern California, Northern California, Inland Empire California, Arizona and Nevada. Because the Companys operations are concentrated in these
geographic areas, a prolonged economic downturn in these markets could cause housing prices and sales to decline, which could have a material adverse effect on the Companys business, results of operations, and financial condition.



The Company may not be able to compete effectively against competitors in the
homebuilding industry.



The homebuilding industry is
highly competitive. Homebuilders compete for, among other things, desirable properties, financing, raw materials and skilled labor. The Company competes both with large homebuilding companies, some of which have greater financial, marketing and
sales resources than the Company, and with smaller local builders. The consolidation of some homebuilding companies may create competitors that have greater financial, marketing and sales resources than the Company and thus are able to compete more
effectively against the Company. In addition, there may be new entrants in the markets in which the Company currently conducts business. The Company also competes for sales with individual resales of existing homes and with available rental housing.



The Companys operating results are variable.



The Company has historically experienced, and in the future expects to
continue to experience, variability in operating results on a quarterly and an annual basis. Factors expected to contribute to this variability include, among other things:



| |  |  | the timing of land acquisitions and zoning and other regulatory approvals;
| | - |  | --------------------------------------------------------------------------



| |  |  | the timing of home closings, land sales and level of sales;
| | - |  | -----------------------------------------------------------



| |  |  | product mix;
| | - |  | ------------



| |  |  | the ability to continue to acquire additional land or options thereon at acceptable terms;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the condition of the real estate market and the general economy;
| | - |  | ----------------------------------------------------------------



| |  |  | delays in construction due to acts of God, adverse weather, reduced subcontractor availability, and strikes;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | changes in prevailing interests rates and the availability of mortgage financing; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | costs of material and labor.
| | - |  | ----------------------------



Many of the factors affecting the Companys results are beyond the Companys control and may be difficult to predict.



15



---

##### Table of Contents

Difficulty in obtaining sufficient capital could result in increased costs and delays in completion of projects.



The homebuilding industry is capital intensive and
requires significant up-front expenditures to acquire land and begin development. Land acquisition, development and construction activities may be adversely affected by any shortage or increased cost of financing or the unwillingness of third
parties to engage in joint ventures. Any difficulty in obtaining sufficient capital for planned development expenditures could cause project delays and any such delay could result in cost increases and may adversely affect the Companys sales
and future results of operations and cash flows.



The Companys success
depends on key executive officers and personnel.



The
Companys success is dependent upon the efforts and abilities of its executive officers and other key employees, many of whom have significant experience in the homebuilding industry and in the Companys regional markets. In particular,
the Company is dependent upon the services of General William Lyon and Wade H. Cable, the Chairman of the Board and Chief Executive Officer and President and Chief Operating Officer, respectively, as well as the services of the regional presidents
and division managers. On February 9, 2007, the Company announced the retirement of Wade H. Cable from the Company effective March 1, 2007. Accordingly, Douglas F. Bauer was appointed by the Board of Directors to the position of President and Chief
Operating Officer. The loss of the services of any of these executives or key personnel, for any reason, could have a material adverse effect upon the Companys business, operating results and financial condition.



Construction defect, soil subsidence and other building-related claims may be asserted
against the Company, and the Company may be subject to liability for such claims.



California law provides that consumers can seek redress for patent (i.e., observable) defects in new homes within three or four years (depending on the type of claim asserted) from when the defect is discovered
or should have been discovered. If the defect is latent (i.e., non-observable), consumers must still seek redress within three or four years from the date when the defect is discovered or should have been discovered, but in no event later
than ten years after the date of substantial completion of the work on the construction. Consumers purchasing homes in Arizona and Nevada may also be able to obtain redress under state laws for either patent or latent defects in their new homes.
Although the Company has obtained insurance for construction defect and subsidence claims, the Company may still be liable for damages, the cost of repairs, and/or the expense of litigation surrounding possible claims, including claims that arise
out of uninsurable events, such as landslides or earthquakes, or other circumstances not covered by insurance and not subject to effective indemnification agreements with subcontractors.



Governmental laws and regulations may increase the Companys expenses, limit the number of homes that the Company can build or delay
completion of projects.



The Company is subject to
numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning, development, building design, construction and similar matters which impose restrictive zoning and density requirements in order to limit the
number of homes that can eventually be built within the boundaries of a particular area. Projects that are not entitled may be subjected to periodic delays, changes in use, less intensive development or elimination of development in certain specific
areas due to government regulations. The Company 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 the Company operates. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. Projects for which the
Company has received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety, and
welfare issues, which can further delay these projects or prevent their development. As a result, home sales could decline and costs increase, which could negatively affect the Companys results of operations.



16



---

##### Table of Contents

The Company is subject to environmental laws and regulations, which may increase costs, limit the areas in which the
Company can build homes and delay completion of projects.



The Company is also subject to a variety of local, state, federal and other statutes, ordinances, rules and regulations concerning the environment. The particular environmental laws which apply to any given homebuilding site vary according
to the sites location, its environmental conditions and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and
other costs, and can prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas, which could negatively affect the Companys results of operations. Under various environmental laws, current or former
owners of real estate, as well as certain other categories of parties, may be required to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held liable to a governmental entity or to third parties for
property damage and for investigation and clean up costs incurred by such parties in connection with the contamination. In addition, in those cases where an endangered species is involved, environmental rules and regulations can result in the
elimination of development in identified environmentally sensitive areas.



The Companys results of operations and prospects may be adversely affected if it is not able to acquire desirable lots for residential buildout.



The Companys future growth depends upon the Companys ability to acquire attractive properties for development.
There is increasing competition for desirable lots in all of the Companys markets, particularly in California, as the number of properties available for residential development decreases. Shortages in available properties could cause the
Company to incur additional costs to acquire such properties or could limit the number of future projects and the Companys growth. The Companys financial position, future results and prospects may be adversely affected if properties at
desirable prices and locations are not continually available.



Utility
shortages or price increases could have an adverse impact on operations.



In prior years, certain areas in northern and southern California have experienced power shortages, including mandatory periods without electrical power, as well as significant increases in utility costs. The Company
may incur additional costs and may not be able to complete construction on a timely basis if such power shortages and utility rate increases continue. Furthermore, power shortages and rate increases may adversely affect the regional economies in
which the Company operates, which may reduce demand for housing. The Companys operations may be adversely impacted if further rate increases and/or power shortages occur.



The Companys business and results of operations are dependent on the availability and skill of subcontractors.



Substantially all construction work is done by subcontractors with the
Company acting as the general contractor. Accordingly, the timing and quality of construction depends on the availability and skill of the Companys subcontractors. While the Company has been able to obtain sufficient materials and
subcontractors during times of material shortages and believes that its relationships with suppliers and subcontractors are good, the Company does not have long-term contractual commitments with any subcontractors or suppliers. The inability to
contract with skilled subcontractors at reasonable costs on a timely basis could have a material adverse effect on the Companys business and results of operations.



An ownership change may have occurred with the result that the Companys ability to use tax net operating loss carryforwards may
have been severely limited and thus the Company may have liability for additional taxes.



On November 11, 1999, the Company implemented transfer restrictions with respect to shares of stock. In general, these transfer restrictions prohibited, without the prior approval of the Companys board of
directors, the direct or indirect sale, transfer, disposition, purchase or acquisition of any of the Companys stock by or to any



17



---

##### Table of Contents

holder who beneficially owned directly or through attribution 5% or more of the Companys stock; or who, upon the direct or indirect sale, transfer,
disposition, purchase or acquisition of any of the Companys stock, would beneficially own directly or through attribution 5% or more of the Companys stock. These transfer restrictions were intended to help reduce, but not eliminate, the
risk of unfavorable ownership changes which could have severely limited the Companys use of tax benefits from tax net operating loss carryforwards for use in offsetting taxable income. (See Note 9 of Notes to Consolidated Financial
Statements for more information on the Companys income taxes). It is possible that the tax authorities could take the position that the transfer restrictions did not provide the intended effect or adequate remedies for tax purposes.
Thus, transactions could have occurred that would severely limit the Companys ability to have used the tax benefits associated with the net operating loss carryforwards. In that case, the Internal Revenue Service or state taxing authorities
may seek payment from the Company of taxes that would otherwise have been payable by the Company, as well as penalties and interest. If the Company was required to make such payments, the Companys results of operations could be adversely
affected. Pursuant to the Companys certificate of incorporation, the transfer restrictions terminated on November 11, 2002.



Neither the amount of the net operating loss carryforwards nor the amount of limitation on such carryforwards claimed by the Company have been audited or
otherwise validated by the Internal Revenue Service, and it could challenge either amount that the Company has calculated. It is possible that legislation or regulations will be adopted that would limit the ability to use the tax benefits associated
with the Companys current tax net operating loss carryforwards.



Increased insurance costs and reduced insurance coverages may affect the Companys results of operations and increase the potential exposure to liability.



Recently, lawsuits have been filed against builders asserting claims of personal injury and property damage caused by the
presence of mold in residential dwellings. Some of these lawsuits have resulted in substantial monetary judgments or settlements against these builders. The Companys insurance may not cover all of the claims, including personal injury claims,
arising from the presence of mold or such coverage may become prohibitively expensive. If the Company is unable to obtain adequate insurance coverage, a material adverse effect on business, financial condition and results of operations could result
if the Company is exposed to claims arising from the presence of mold.



The cost of insurance has risen, deductibles and retentions have increased and the availability of insurance has diminished. Significant increases in the cost of insurance coverage or significant limitations on coverage could have a
material adverse effect on business, financial condition and results of operations from such increased costs or from liability for significant uninsurable or underinsured claims.



The Companys level of indebtedness could adversely affect its financial condition and prevent it from fulfilling its obligations.



Subject to restrictions, the Company may incur
substantial additional indebtedness. The Companys high level of indebtedness could have important consequences, including the following:



| |  |  | the ability to obtain additional financing for working capital, land acquisition costs, building costs, other capital expenditures, or general corporate purposes,
may be limited;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company will need to use a substantial portion of cash flow from operations to pay interest and principal on its senior notes and other indebtedness, which will
reduce the funds available for other purposes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company will have a higher level of indebtedness than competitors, which may put the Company at a competitive disadvantage and reduce the Companys
flexibility in planning for, or responding to, changing conditions in the industry, including increased competition;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



---

##### Table of Contents

| |  |  | substantially all of the Companys assets are pledged as security for the Companys credit agreements and a default on the secured debt could result in
foreclosure on the Companys assets which could, under certain circumstances, limit or prohibit the ability to operate as a going concern; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company will be more vulnerable to economic downturns and adverse developments in the business.
| | - |  | ---------------------------------------------------------------------------------------------------



The Company expects to obtain the money to pay expenses and to pay the
principal and interest on the Companys senior notes, and other obligations from cash flow from operations. The Companys ability to meet expenses depends on future performance, which will be affected by financial, business, economic and
other factors. The Company will not be able to control many of these factors, such as economic conditions in the markets where the Company operates and pressure from competitors. The Company cannot be certain that the cash flow will be sufficient to
allow it to pay principal and interest on debt, including the senior notes, support operations, and meet other obligations. If the Company does not have the resources, the Company may be required to refinance all or part of the existing debt,
including the senior notes, sell assets or borrow more money. The Company may not be able to do so on acceptable terms, if at all. In addition, the terms of existing or future debt agreements, including the credit facilities and the senior note
indentures, may restrict the Company from pursuing any of these alternatives.



The Company is the general partner in partnership joint ventures and may be liable for joint venture obligations.



Certain of the Companys active joint ventures are organized as limited partnerships. The Company is the general partner in each of these and may
serve as the general partner in future joint ventures. As a general partner, the Company may be liable for a joint ventures liabilities and obligations should the joint venture fail or be unable to pay these liabilities or obligations. In
addition, the Company has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships. The Company has also provided a completion guarantee for a limited partnership under its credit facility. If the
Company were required to satisfy such liabilities, obligations or completion guarantee, the results of operations could be adversely affected.



The Companys senior notes are unsecured, and effectively subordinated to other secured indebtedness.



The Companys credit facilities and construction loans are secured by
liens on the real estate under development that is financed by those facilities or loans. If the Company becomes insolvent or is liquidated, or if payment under any secured indebtedness was accelerated, the holders of the Companys secured
indebtedness would be entitled to repayment from their collateral before those assets could be used to satisfy any unsecured claims, including claims under the Companys senior notes or any guarantees of these notes. As a result, the senior
notes will be effectively subordinated to the secured indebtedness to the extent of the value of the assets securing that indebtedness, and the holders of the notes will likely recover ratably less than the secured creditors.



The guarantees of the Companys senior notes by the Companys subsidiaries may
be avoidable as fraudulent transfers and any new guarantees may be avoidable as preferences.



The guarantees of the Companys senior notes by the Companys subsidiaries may be subject to review under U.S. bankruptcy law and comparable
provisions of state fraudulent conveyance laws. Under these laws, if a court were to find that, at the time any subsidiary guarantor issued a guarantee of the notes:



| |  |  | it issued the guarantee to delay, hinder or defraud present or future creditors; or
| | - |  | -----------------------------------------------------------------------------------



| |  |  | it received less than reasonably equivalent value or fair consideration for issuing the guarantee at the time it issued the guarantee and:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | it was insolvent or rendered insolvent by reason of issuing the guarantee; or
| | - |  | -----------------------------------------------------------------------------



19



---

##### Table of Contents

| |  |  | it was engaged, or about to engage, in a business or transaction for which its assets constituted unreasonably small capital to carry on its business; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | it intended to incur, or believed that it would incur, debts beyond its ability to pay as they mature;
| | - |  | ------------------------------------------------------------------------------------------------------



then the court could avoid the obligations under the guarantee, subordinate the guarantee of
the senior notes to that of the guarantors other debt, require holders of the senior notes to return amounts already paid under that guarantee, or take other action detrimental to holders of the senior notes and the guarantees of the senior
notes.



The measures of insolvency for purposes of fraudulent
transfer laws vary depending upon the law of the jurisdiction that is being applied in any proceeding to determine whether a fraudulent transfer had occurred. Generally, however, a person would be considered insolvent if, at the time it incurred the
debt:



| |  |  | the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and mature; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | it could not pay its debts as they become due.
| | - |  | ----------------------------------------------



The Company cannot be sure what standard a court would use to determine whether or not a guarantor was solvent at the relevant time, or, regardless of the
standard that the court uses, that the issuance of the guarantee would not be avoided or the guarantee would not be subordinated to the guarantors other debt. If such a case were to occur, the guarantee could also be subject to the claim that,
since the guarantee was incurred for the benefit of the issuer of the senior notes, and only indirectly for the benefit of the guarantor, the obligations of the applicable guarantor were incurred for less than fair consideration.



In addition, if the Company is required to grant an additional subsidiary
guarantee for the notes at a time in the future when the guarantor was insolvent, its guarantee may also be avoidable as a preference under U.S. bankruptcy law or comparable provisions of state law.



The indentures for the senior notes impose significant operating and financial
restrictions, which may prevent us from capitalizing on business opportunities and taking some corporate actions.



The indentures for the senior notes impose significant operating and financial restrictions. These restrictions limit the ability of the Company and its
subsidiaries, among other things, to:



| |  |  | incur additional indebtedness;
| | - |  | ------------------------------



| |  |  | pay dividends or make other distributions;
| | - |  | ------------------------------------------



| |  |  | make investments;
| | - |  | -----------------



| |  |  | sell assets;
| | - |  | ------------



| |  |  | incur liens;
| | - |  | ------------



| |  |  | enter into agreements restricting the Companys subsidiaries ability to pay dividends;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | enter into transactions with affiliates; and
| | - |  | --------------------------------------------



| |  |  | consolidate, merge or sell all or substantially all of the Companys assets.
| | - |  | ----------------------------------------------------------------------------



The Companys other debt agreements contain additional restrictions. In addition, the Company may in the future enter
into other agreements governing indebtedness which impose yet additional restrictions. These restrictions may adversely affect the Companys ability to finance future operations or capital needs or to pursue available business opportunities. A
breach of any of these covenants could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together



20



---

##### Table of Contents

with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that indebtedness.



The Company may not be able to satisfy its obligations upon a change of control.



Upon the occurrence of a change of control,
as defined in the senior notes indentures, each holder of the senior notes will have the right to require the Company to purchase the senior notes at a price equal to 101% of the principal amount, together with any accrued and unpaid interest, to
the date of purchase. The Companys failure to purchase, or give notice of purchase of, the senior notes would be a default under the indenture, which could in turn be a default under the Companys other indebtedness. In addition, a change
of control may constitute an event of default under the Companys credit facilities. A default under the Companys credit facilities could result in an event of default under the indentures if the lenders accelerate the debt under the
credit facilities.



If this event occurs, the Company may not
have enough assets to satisfy all obligations under the indentures and any other indebtedness. In order to satisfy the obligations, the Company could seek to refinance the indebtedness under the senior notes and any other indebtedness or obtain a
waiver from the holders of the indebtedness. The Company may not be able to obtain a waiver or refinance the indebtedness on acceptable terms.



In addition, the definition of change of control in the indentures governing the senior notes includes a phrase relating to the sale, lease, transfer,
conveyance or other disposition of all or substantially all of the assets of the Company and the restricted subsidiaries. Although there is a developing body of case law interpreting the phrase substantially all, there is no
precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of senior notes to require the Company to repurchase such notes as a result of a sale, lease, transfer, conveyance or other disposition of less
than all of the assets of the Company and the restricted subsidiaries may be uncertain.



Moreover, under the indentures governing the senior notes, the Company could engage in certain important corporate events, including acquisitions, refinancings or other recapitalizations or highly leveraged
transactions, that would not constitute a change of control under the indentures and thus would not give rise to any repurchase rights, but which could increase the amount of indebtedness outstanding at such time or otherwise affect the
Companys capital structure or credit ratings or otherwise adversely affect holders of the senior notes. Any such transaction, however, would have to comply with the operating and financial restrictions contained in the indentures governing the
senior notes.



Item 1B.Unresolved Staff Comments



On June 8, 2006, the Company received a comment letter from the Securities and Exchange Commission with respect to the Companys Annual Report on
Form 10-K for fiscal year ended December 31, 2005. The Company filed a response on August 18, 2006. As of March 1, 2007, the Company has not received any additional correspondence from the SEC pertaining to the letter. In the opinion of
management, the resolution of these matters will not have a material impact on the Companys consolidated financial statements.



Item 2.Properties



Headquarters



The Companys corporate headquarters are located at 4490 Von Karman Avenue, Newport Beach, California, which it leases from a trust of which William
H. Lyon, a director of the Company, is the sole beneficiary. The Company leases or owns properties for its division offices and William Lyon Financial Services, 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.



21



---

##### Table of Contents

Item 3.Legal Proceedings



Litigation Arising from General Lyons Tender Offer



As described above in Item 1Business, on March 17, 2006, the Companys principal stockholder commenced a tender
offer (the Tender Offer) to purchase all outstanding shares of the Companys common stock not already owned by him. Initially, the price offered in the Tender was $93 per share, but it has since been increased to $109 per share.



Two purported class action lawsuits were filed in the Court of
Chancery of the State of Delaware in and for New Castle County, purportedly on behalf of the public stockholders of the Company, challenging the Tender Offer and challenging related actions of the Company and the directors of the Company. Stephen
L. Brown v. William Lyon Homes, et al., Civil Action No. 2015-N was filed on March 20, 2006, and Michael Crady, et al. v. General William Lyon, et al., Civil Action No. 2017-N was filed on March 21, 2006 (collectively, the Delaware
Complaints). On March 21, 2006, plaintiff in the Brown action also filed a First Amended Complaint. The Delaware Complaints name the Company and the directors of the Company as defendants. These complaints allege, among other things,
that the defendants have breached their fiduciary duties owed to the plaintiffs in connection with the Tender Offer and other related corporate activities. The plaintiffs sought to enjoin the Tender Offer and, among other things, to obtain
attorneys fees and expenses related to the litigation.



On March 23, 2006, the Company announced that its Board had appointed a special committee of independent directors who are not members of the Companys management or employed by the Company (the Special Committee) to
consider the Tender Offer. The members of the Special Committee were Harold H. Greene, Lawrence M. Higby, and Dr. Arthur Laffer. The Company also announced that the Special Committee had retained Morgan Stanley & Co. as its financial advisor and
Gibson, Dunn & Crutcher LLP as its legal counsel.



On March
24, 2006, the Delaware Chancery Court consolidated the Delaware Complaints into a single case entitled In re: William Lyon Homes Shareholder Litigation, Civil Action No. 2015-N (the Consolidated Delaware Action).



On April 10, 2006, the parties to the Consolidated Delaware Action executed a
Memorandum of Understanding (MOU), detailing a proposed settlement subject to the Delaware Chancery Courts approval. Pursuant to the MOU, General Lyon increased his offer of $93 per share to $100 per share, extended the closing
date of the offer to April 21, 2006, and, on April 11, 2006, filed an amended Schedule TO. Plaintiffs in the Consolidated Delaware Action have determined that the settlement is fair, reasonable, adequate, and in the best interests of
plaintiffs and the putative Class. The Special Committee also determined that the price of $100 per share was fair to the shareholders, and recommended that the Companys shareholders accept the revised Tender Offer and tender their
shares. Thereafter, General Lyon also decided to further extend the closing date of the Tender Offer from April 21, 2006 to April 28, 2006.



On April 23, 2006, Delaware Chancery Court conditionally certified a class in the Consolidated Delaware Action. The parties to the Consolidated Delaware
Action agreed to a Stipulation of Settlement, and on August 9, 2006, the Delaware Chancery Court certified a class in the Consolidated Delaware Action, approved the settlement, and dismissed the Consolidated Delaware Action with prejudice as to all
defendants and the class. On February 16, 2007, the matter was appealed to the Supreme Court of the State of Delaware.



A purported class action lawsuit challenging the Tender Offer was also filed in the Superior Court of the State of California, County of Orange. On March
17, 2006, a complaint captioned Alaska Electrical Pension Fund v. William Lyon Homes, Inc., et al., Case No. 06-CC-00047, was filed. On April 5, 2006, plaintiff in the Alaska Electrical action filed an Amended Complaint (the
California Action). The complaint in the California Action names the Company and the directors of the Company as defendants and alleges, among other things, that the defendants have breached their fiduciary duties to the public
stockholders. Plaintiff in the California Action also sought to enjoin the Tender Offer, and, among other things, to obtain attorneys fees and expenses related to the litigation.



22



---

##### Table of Contents

On April 20, 2006, the California court denied the request of plaintiff in the California Action to
enjoin the Tender Offer. Plaintiff filed a motion to certify a class in the California Action which was later taken off calendar, and the Company filed a motion to stay the California Action. On July 5, 2006, the California Court granted the
Companys motion to stay the California Action.



Other
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 involves 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



Not applicable.



23



---

##### Table of Contents

PART II



|Item  5.Market | for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|-------------- | -----------------------------------------------------------------------------------------------------



The Companys Common Stock was delisted from the NYSE in conjunction
with the Tender Offer and Merger. The Company is now a privately held company. See Note 7 of Notes to Consolidated Financial Statements.



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. However, 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 7 of Notes to Consolidated Financial Statements.



24



---

##### Table of Contents

Item 6.Selected Financial Data



The following table sets forth certain of the Companys historical financial data. The selected historical consolidated financial data as of December
31, 2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004 have been derived from the Companys audited consolidated financial statements and the related notes included elsewhere herein. The selected historical consolidated
financial data as of December 31, 2004, 2003 and 2002 and for the years ended December 31, 2003 and 2002 have been derived from the Companys audited financial statements for such years, which are not included herein. The selected historical
consolidated financial data set forth below are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under the heading Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the historical consolidated financial statements and accompanying notes included elsewhere herein.



|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|--------------------------------------------------------------------- |  | ----------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | -------- | - |  | - | -------- | -
|                                                                      |  | As of and for the Year Ended December 31, |           
|                                                                      |  | 2006                                      |            |   | 2005 |   |            | 2004 |  |   | 2003       |   |  | 2002 |         
|                                                                      |  | (dollars in thousands)                    |           
|                                                                      |  | (note 3)                                  |           
|Statement of Income Data:                                             |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|Operating revenue                                                     |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|Home sales                                                            |  | $                                         | 1,478,694  |   |      | $ | 1,745,067  |      |  | $ | 1,785,589  |   |  | $    | 866,657  |   |  | $ | 593,762  |  
|Lots, land and other sales                                            |  |                                           | 13,527     |   |      |   | 111,316    |      |  |   | 36,258     |   |  |      | 21,656   |   |  |   | 8,648    |  
|Management fees                                                       |  |                                           |           |   |      |   |           |      |  |   |           |   |  |      | 9,490    |   |  |   | 10,892   |  
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|                                                                      |  |                                           | 1,492,221  |   |      |   | 1,856,383  |      |  |   | 1,821,847  |   |  |      | 897,803  |   |  |   | 613,302  |  
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|Operating costs                                                       |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|Cost of saleshomes                                                   |  |                                           | (1,160,614 | ) |      |   | (1,307,027 | )    |  |   | (1,327,057 | ) |  |      | (714,385 | ) |  |   | (504,330 | )
|Cost of saleslots, land and other                                    |  |                                           | (16,524    | ) |      |   | (44,774    | )    |  |   | (23,173    | ) |  |      | (13,269  | ) |  |   | (9,404   | )
|Impairment loss on real estate assets(1)                              |  |                                           | (39,895    | ) |      |   | (4,600     | )    |  |   |           |   |  |      |         |   |  |   |         |  
|Sales and marketing                                                   |  |                                           | (72,349    | ) |      |   | (59,422    | )    |  |   | (58,792    | ) |  |      | (31,252  | ) |  |   | (22,862  | )
|General and administrative                                            |  |                                           | (61,390    | ) |      |   | (90,045    | )    |  |   | (80,784    | ) |  |      | (50,315  | ) |  |   | (39,366  | )
|Other                                                                 |  |                                           | (6,502     | ) |      |   | (2,450     | )    |  |   | (2,105     | ) |  |      | (1,834   | ) |  |   | (2,284   | )
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|                                                                      |  |                                           | (1,357,274 | ) |      |   | (1,508,318 | )    |  |   | (1,491,911 | ) |  |      | (811,055 | ) |  |   | (578,246 | )
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|Equity in income (loss) of unconsolidated joint ventures              |  |                                           | 3,242      |   |      |   | 4,301      |      |  |   | (699       | ) |  |      | 31,236   |   |  |   | 27,748   |  
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|Minority equity in income of consolidated entities                    |  |                                           | (16,914    | ) |      |   | (37,571    | )    |  |   | (49,661    | ) |  |      | (429     | ) |  |   |         |  
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|Operating income                                                      |  |                                           | 121,275    |   |      |   | 314,795    |      |  |   | 279,576    |   |  |      | 117,555  |   |  |   | 62,804   |  
|Financial advisory expenses                                           |  |                                           | (3,165     | ) |      |   | (2,191     | )    |  |   |           |   |  |      |         |   |  |   |         |  
|Other income, net                                                     |  |                                           | 5,599      |   |      |   | 2,176      |      |  |   | 5,572      |   |  |      | 6,397    |   |  |   | 4,977    |  
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|Income before provision for income taxes                              |  |                                           | 123,709    |   |      |   | 314,780    |      |  |   | 285,148    |   |  |      | 123,952  |   |  |   | 67,781   |  
|Provision for income taxes                                            |  |                                           | (48,931    | ) |      |   | (124,149   | )    |  |   | (113,499   | ) |  |      | (51,815  | ) |  |   | (18,270  | )
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|Net income                                                            |  | $                                         | 74,778     |   |      | $ | 190,631    |      |  | $ | 171,649    |   |  | $    | 72,137   |   |  | $ | 49,511   |  
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|Balance Sheet Data:                                                   |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|Cash and cash equivalents                                             |  | $                                         | 38,732     |   |      | $ | 52,369     |      |  | $ | 96,074     |   |  | $    | 24,137   |   |  | $ | 16,694   |  
|Real estate inventories                                               |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|Owned(1)                                                              |  |                                           | 1,431,753  |   |      |   | 1,303,476  |      |  |   | 1,059,173  |   |  |      | 698,047  |   |  |   | 491,952  |  
|Not owned(4)                                                          |  |                                           | 200,667    |   |      |   | 115,772    |      |  |   |           |   |  |      |         |   |  |   |         |  
|Investments in and advances to unconsolidated joint ventures          |  |                                           | 3,560      |   |      |   | 397        |      |  |   | 17,911     |   |  |      | 45,613   |   |  |   | 65,404   |  
|Total assets                                                          |  |                                           | 1,878,595  |   |      |   | 1,691,002  |      |  |   | 1,274,562  |   |  |      | 839,715  |   |  |   | 617,581  |  
|Total debt                                                            |  |                                           | 851,314    |   |      |   | 672,536    |      |  |   | 595,219    |   |  |      | 326,737  |   |  |   | 266,065  |  
|Minority interest                                                     |  |                                           | 109,859    |   |      |   | 227,178    |      |  |   | 142,096    |   |  |      | 142,496  |   |  |   | 80,647   |  
|Stockholders equity                                                  |  |                                           | 625,395    |   |      |   | 542,894    |      |  |   | 347,109    |   |  |      | 252,040  |   |  |   | 181,676  |  
|                                                                      |  |                                           |            |   |     
|Operating Data (including unconsolidated joint ventures) (unaudited): |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |          |   |  |   |          |  
|Number of net new home orders                                         |  |                                           | 2,202      |   |      |   | 3,321      |      |  |   | 3,371      |   |  |      | 3,443    |   |  |   | 2,607    |  
|Number of homes closed                                                |  |                                           | 2,887      |   |      |   | 3,196      |      |  |   | 3,471      |   |  |      | 2,804    |   |  |   | 2,522    |  
|Average sales price of homes closed                                   |  | $                                         | 512        |   |      | $ | 546        |      |  | $ | 514        |   |  | $    | 422      |   |  | $ | 379      |  
|Cancellation rates                                                    |  |                                           | 33         | % |      |   | 16         | %    |  |   | 17         | % |  |      | 18       | % |  |   | 19       | %
|Backlog at end of period, number of homes(2)                          |  |                                           | 606        |   |      |   | 1,291      |      |  |   | 1,166      |   |  |      | 1,266    |   |  |   | 627      |  
|Backlog at end of period, aggregate sales value(2)                    |  | $                                         | 295,505    |   |      | $ | 691,627    |      |  | $ | 623,578    |   |  | $    | 595,180  |   |  | $ | 259,123  |  

---

|(1) |  | The Company accounts for its real estate inventories under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (Statement No. 144). Statement No. 144 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 are less than the carrying amount of the assets. The estimation process used in determining the undiscounted cash flows of the assets is inherently uncertain because it involves estimates of future revenues
and costs. As described more fully below in the section entitled Real Estate Inventories and Cost of Sales, estimates of revenues and costs are supported by the Companys budgeting process. 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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





25



---

##### Table of Contents

| |  | The results of operations for the year ended December 31, 2006, include a non-cash charge of $39.9 million to record an impairment loss on real estate assets held by the Company at
certain of its homebuilding projects. The impairment was primarily attributable to slower than anticipated home sales and lower than anticipated net revenue due to softening market conditions. As a result, the future undiscounted cash flows
estimated to be generated were determined to be less than the carrying amount of the assets. Accordingly, the related real estate assets were written-down to their estimated fair value. The non-cash charge is reflected in impairment loss on real
estate assets in the accompanying consolidated statements of income.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The results of operations for the year ended December 31, 2005 included a non-cash charge of $4.6 million to record an impairment loss related to a golf course in the Companys
San Diego Division. The impairment loss was primarily attributable to lower than expected cash flows and continued net operating losses since the golf course opened in 2002. As a result, the future undiscounted cash flows estimated to be generated
were determined to be less than the assets carrying amount. Accordingly, the golf course asset was written-down to its estimated fair value. The non-cash charge had been previously reflected in other operating costs in the consolidated statement of
income for the year ended December 31, 2005. However, such amount has been reclassified to loss on impairment of real estate assets to be consistent with the financial statement presentation for the year ended December 31, 2006.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Backlog consists of homes sold under pending sales contracts that have not yet closed, some of which are subject to contingencies, including mortgage loan approval and the sale of
existing homes by customers. There can be no assurance that homes sold under pending sales contracts will close. Of the total homes sold subject to pending sales contracts as of December 31, 2006, 554 represent homes completed or under
construction and 52 represent homes not yet under construction. Backlog as of all dates is unaudited.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (Interpretation No. 46),
which addresses the consolidation of variable interest entities (VIEs). Under Interpretation No. 46, arrangements that are not controlled through voting or similar rights are accounted for as VIEs. An enterprise is required to
consolidate a VIE if it is the primary beneficiary of the VIE. Interpretation No. 46 applied immediately to arrangements created after January 31, 2003 and, with respect to arrangements created before February 1, 2003, the interpretation was applied
to the Company as of January 1, 2004. The adoption of Interpretation No. 46 has not affected the Companys consolidated net income. Prior period information has not been restated to conform to the presentation in the current period.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under Interpretation No. 46, a VIE is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated
financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity through voting or similar rights, (b) are not obligated to absorb expected losses of the entity or (c) do not
have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE, pursuant to Interpretation No. 46, an enterprise that absorbs a majority of the expected losses or residual returns of the VIE is
considered the primary beneficiary and must consolidate the VIE.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Based on the provisions of Interpretation No. 46, the Company has concluded that under certain circumstances when the Company (i) enters into option agreements for the purchase
of land or lots from an entity and pays a non-refundable deposit, (ii) enters into land banking arrangements or (iii) enters into arrangements with a financial partner for the formation of joint ventures which engage in homebuilding and land
development activities, a VIE may be created under condition (ii) (b) or (c) of the previous paragraph. The Company may be deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an
entitys expected losses if they occur. For each VIE created, the Company will compute expected losses and residual returns based on the probability of future cash flows as outlined in Interpretation No. 46. If the Company is determined to be
the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE will be consolidated with the Companys financial statements.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Based on the Companys analysis of arrangements created after January 31, 2003, no VIEs had been created for the period from February 1, 2003 through December 31, 2004
with respect to option agreements as identified under clause (i) of the previous paragraph. At December 31, 2003, certain joint ventures and a land banking arrangement created after January 31, 2003 had been determined to be VIEs under
Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures and land banking arrangement had been consolidated with the Companys financial
statements as of December 31, 2003 and for the period then ended. Effective January 1, 2004, certain additional joint ventures and land banking arrangements created prior to February 1, 2003 had been determined to be VIEs under Interpretation No. 46
in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of all of these joint ventures and land banking arrangements had been consolidated with the Companys financial statements as of
January 1, 2004 and for the year ended December 31, 2004. At December 31, 2006 and 2005, certain joint ventures, lot option agreements and land banking arrangements have been determined to be VIEs under Interpretation No. 46 in which the Company is
considered the primary beneficiary. Accordingly, the assets, liabilities and operations of all of these joint ventures, lot option agreements and land banking arrangements have been consolidated with the Companys financial statements as of
December 31, 2006 and 2005, and for the years ended December 31, 2006 and 2005.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



---

##### Table of Contents

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 and other financial information appearing elsewhere in this Annual Report on Form 10-K. As used herein, on a combined basis means the total of operations in
wholly-owned projects and in consolidated joint venture projects.



The Company is primarily engaged in the design, construction and sale of single family detached and attached homes in California, Arizona and Nevada. Since the founding of its predecessor in 1956, on a combined basis the Company has sold
over 68,000 homes. The Company conducts its homebuilding operations through five geographic regions: Southern California Coastal, Northern California, Inland Empire California, Arizona and Nevada. For the year ended December 31, 2006, on a
consolidated basis the Company had revenues from home sales of $1.479 billion and delivered 2,887 homes, which includes $151.4 million of revenue and 347 delivered homes from consolidated joint ventures. The Company believes that it is well
positioned for long term growth in all of its markets. However, due to recent slow downs of new orders, increases in cancellation rates and increasing price competition, the Company anticipates a decline in deliveries and revenues in 2007 as
compared to 2006. The Company presents information related to its unconsolidated joint ventures as such information represents an important aspect of the Companys business as well as a substantial portion of its operating income.



The Company and certain of its subsidiaries are general partners or
members in joint ventures involved in the development and sale of residential projects. As described more fully in Critical Accounting PoliciesVariable Interest Entities certain joint ventures have been determined to be variable
interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Companys financial statements as of and for the years
ended December 31, 2006 and 2005. Because the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 did not affect the Companys
consolidated net income. The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Companys financial statements. The Companys investments in unconsolidated
joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Income allocations and cash distributions to the Company
from the unconsolidated joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners
priority returns and returns of partners capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of Notes to Consolidated Financial Statements for condensed combined financial information for the
joint ventures whose financial statements have been consolidated with the Companys financial statements. See Note 5 of Notes to Consolidated Financial Statements for condensed combined financial information for the unconsolidated
joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint
ventures.



27



---

##### Table of Contents

Results of Operations



Selected financial and operating information for the Company including its consolidated projects and unconsolidated joint ventures as of and for the
periods presented is as follows:



|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|----------------------------------------------------- |  | --------------------------------------------- | ---------- | - | -------------- | - | -------- | ----------------- |  | - | ---------- | -
|                                                      |  | As of and for the year endedDecember 31, 2006 |           
|                                                      |  | Wholly-Owned                                  |            |   | Joint Ventures |   |          | ConsolidatedTotal | 
|Selected Financial Information (dollars in thousands) |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Homes closed                                          |  |                                               | 2,540      |   |                |   | 347      |                   |  |   | 2,887      |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Home sales revenue                                    |  | $                                             | 1,327,297  |   |                | $ | 151,397  |                   |  | $ | 1,478,694  |  
|Cost of sales                                         |  |                                               | (1,052,657 | ) |                |   | (107,957 | )                 |  |   | (1,160,614 | )
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Gross margin                                          |  | $                                             | 274,640    |   |                |   | 43,440   |                   |  | $ | 318,080    |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Gross margin percentage                               |  |                                               | 20.7       | % |                |   | 28.7     | %                 |  |   | 21.5       | %
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Number of homes closed                                |  |                                               |            |   |                |   |          |                   |  |   |            |  
|California                                            |  |                                               | 1,431      |   |                |   | 347      |                   |  |   | 1,778      |  
|Arizona                                               |  |                                               | 593        |   |                |   |         |                   |  |   | 593        |  
|Nevada                                                |  |                                               | 516        |   |                |   |         |                   |  |   | 516        |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Total                                                 |  |                                               | 2,540      |   |                |   | 347      |                   |  |   | 2,887      |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Average sales price                                   |  |                                               |            |   |                |   |          |                   |  |   |            |  
|California                                            |  | $                                             | 646,900    |   |                | $ | 436,300  |                   |  | $ | 605,800    |  
|Arizona                                               |  |                                               | 346,800    |   |                |   |         |                   |  |   | 346,800    |  
|Nevada                                                |  |                                               | 379,700    |   |                |   |         |                   |  |   | 379,700    |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Total                                                 |  | $                                             | 522,600    |   |                | $ | 436,300  |                   |  | $ | 512,200    |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Number of net new home orders                         |  |                                               |            |   |                |   |          |                   |  |   |            |  
|California                                            |  |                                               | 1,111      |   |                |   | 291      |                   |  |   | 1,402      |  
|Arizona                                               |  |                                               | 388        |   |                |   |         |                   |  |   | 388        |  
|Nevada                                                |  |                                               | 412        |   |                |   |         |                   |  |   | 412        |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Total                                                 |  |                                               | 1,911      |   |                |   | 291      |                   |  |   | 2,202      |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Average number of sales locations during period       |  |                                               |            |   |                |   |          |                   |  |   |            |  
|California                                            |  |                                               | 28         |   |                |   | 6        |                   |  |   | 34         |  
|Arizona                                               |  |                                               | 6          |   |                |   |         |                   |  |   | 6          |  
|Nevada                                                |  |                                               | 12         |   |                |   |         |                   |  |   | 12         |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Total                                                 |  |                                               | 46         |   |                |   | 6        |                   |  |   | 52         |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  





28



---

##### Table of Contents

|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|-------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | -------------- | - | ----------------- |  | - | -------
|                                                                                             |  | As of and for the year endedDecember 31, 2006
|                                                                                             |  | Wholly-Owned                                  |         | Joint Ventures |   | ConsolidatedTotal
|Backlog of homes sold but not closed at end of period                                        |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               | 303     |                |   | 52                |  |   | 355    
|Arizona                                                                                      |  |                                               | 191     |                |   |                  |  |   | 191    
|Nevada                                                                                       |  |                                               | 60      |                |   |                  |  |   | 60     
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               | 554     |                |   | 52                |  |   | 606    
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Dollar amount of backlog of homes sold but not closed at end ofperiod (dollars in thousands) |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  | $                                             | 197,123 |                | $ | 24,122            |  | $ | 221,245
|Arizona                                                                                      |  |                                               | 51,852  |                |   |                  |  |   | 51,852 
|Nevada                                                                                       |  |                                               | 22,408  |                |   |                  |  |   | 22,408 
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  | $                                             | 271,383 |                | $ | 24,122            |  | $ | 295,505
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Lots controlled at end of year                                                               |  |                                               |         |                |   |                   |  |   |        
|Owned lots                                                                                   |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               | 4,895   |                |   | 530               |  |   | 5,425  
|Arizona                                                                                      |  |                                               | 3,996   |                |   | 2,568             |  |   | 6,564  
|Nevada                                                                                       |  |                                               | 1,299   |                |   |                  |  |   | 1,299  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               | 10,190  |                |   | 3,098             |  |   | 13,288 
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Optioned lots(1)                                                                             |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               |         |                |   |                   |  |   | 2,872  
|Arizona                                                                                      |  |                                               |         |                |   |                   |  |   | 3,492  
|Nevada                                                                                       |  |                                               |         |                |   |                   |  |   | 1,013  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               |         |                |   |                   |  |   | 7,377  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total lots controlled                                                                        |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               |         |                |   |                   |  |   | 8,297  
|Arizona                                                                                      |  |                                               |         |                |   |                   |  |   | 10,056 
|Nevada                                                                                       |  |                                               |         |                |   |                   |  |   | 2,312  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               |         |                |   |                   |  |   | 20,665 
|                                                                                             |  |                                               |         |                |   |                   |  |   |        



29



---

##### Table of Contents

|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|----------------------------------------------------- |  | --------------------------------------------- | ---------- | - | -------------- | - | -------- | ----------------- |  | - | ---------- | -
|                                                      |  | As of and for the year endedDecember 31, 2005 |           
|                                                      |  | Wholly-Owned                                  |            |   | Joint Ventures |   |          | ConsolidatedTotal | 
|Selected Financial Information (dollars in thousands) |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Homes closed                                          |  |                                               | 2,508      |   |                |   | 688      |                   |  |   | 3,196      |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Home sales revenue                                    |  | $                                             | 1,338,208  |   |                | $ | 406,859  |                   |  | $ | 1,745,067  |  
|Cost of sales                                         |  |                                               | (1,012,761 | ) |                |   | (294,266 | )                 |  |   | (1,307,027 | )
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Gross margin                                          |  | $                                             | 325,447    |   |                | $ | 112,593  |                   |  | $ | 438,040    |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Gross margin percentage                               |  |                                               | 24.3       | % |                |   | 27.7     | %                 |  |   | 25.1       | %
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Number of homes closed                                |  |                                               |            |   |                |   |          |                   |  |   |            |  
|California                                            |  |                                               | 1,315      |   |                |   | 688      |                   |  |   | 2,003      |  
|Arizona                                               |  |                                               | 628        |   |                |   |         |                   |  |   | 628        |  
|Nevada                                                |  |                                               | 565        |   |                |   |         |                   |  |   | 565        |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Total                                                 |  |                                               | 2,508      |   |                |   | 688      |                   |  |   | 3,196      |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Average sales price                                   |  |                                               |            |   |                |   |          |                   |  |   |            |  
|California                                            |  | $                                             | 707,400    |   |                | $ | 591,400  |                   |  | $ | 667,600    |  
|Arizona                                               |  |                                               | 321,500    |   |                |   |         |                   |  |   | 321,500    |  
|Nevada                                                |  |                                               | 364,600    |   |                |   |         |                   |  |   | 364,600    |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Total                                                 |  | $                                             | 533,600    |   |                | $ | 591,400  |                   |  | $ | 546,000    |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Number of net new home orders                         |  |                                               |            |   |                |   |          |                   |  |   |            |  
|California                                            |  |                                               | 1,566      |   |                |   | 566      |                   |  |   | 2,132      |  
|Arizona                                               |  |                                               | 542        |   |                |   |         |                   |  |   | 542        |  
|Nevada                                                |  |                                               | 647        |   |                |   |         |                   |  |   | 647        |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Total                                                 |  |                                               | 2,755      |   |                |   | 566      |                   |  |   | 3,321      |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Average number of sales locations during period       |  |                                               |            |   |                |   |          |                   |  |   |            |  
|California                                            |  |                                               | 20         |   |                |   | 8        |                   |  |   | 28         |  
|Arizona                                               |  |                                               | 5          |   |                |   |         |                   |  |   | 5          |  
|Nevada                                                |  |                                               | 8          |   |                |   |         |                   |  |   | 8          |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  
|Total                                                 |  |                                               | 33         |   |                |   | 8        |                   |  |   | 41         |  
|                                                      |  |                                               |            |   |                |   |          |                   |  |   |            |  





30



---

##### Table of Contents

|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|-------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | -------------- | - | ----------------- |  | - | -------
|                                                                                             |  | As of and for the year endedDecember 31, 2005
|                                                                                             |  | Wholly-Owned                                  |         | Joint Ventures |   | ConsolidatedTotal
|Backlog of homes sold but not closed at end of period                                        |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               | 608     |                |   | 123               |  |   | 731    
|Arizona                                                                                      |  |                                               | 396     |                |   |                  |  |   | 396    
|Nevada                                                                                       |  |                                               | 164     |                |   |                  |  |   | 164    
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               | 1,168   |                |   | 123               |  |   | 1,291  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Dollar amount of backlog of homes sold but not closed at end ofperiod (dollars in thousands) |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  | $                                             | 427,102 |                | $ | 64,355            |  | $ | 491,457
|Arizona                                                                                      |  |                                               | 141,132 |                |   |                  |  |   | 141,132
|Nevada                                                                                       |  |                                               | 59,038  |                |   |                  |  |   | 59,038 
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  | $                                             | 627,272 |                | $ | 64,355            |  | $ | 691,627
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Lots controlled at end of year                                                               |  |                                               |         |                |   |                   |  |   |        
|Owned lots                                                                                   |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               | 4,296   |                |   | 1,290             |  |   | 5,586  
|Arizona                                                                                      |  |                                               | 3,627   |                |   | 822               |  |   | 4,449  
|Nevada                                                                                       |  |                                               | 1,483   |                |   |                  |  |   | 1,483  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               | 9,406   |                |   | 2,112             |  |   | 11,518 
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Optioned lots(1)                                                                             |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               |         |                |   |                   |  |   | 4,650  
|Arizona                                                                                      |  |                                               |         |                |   |                   |  |   | 8,232  
|Nevada                                                                                       |  |                                               |         |                |   |                   |  |   | 2,189  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               |         |                |   |                   |  |   | 15,071 
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total lots controlled                                                                        |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               |         |                |   |                   |  |   | 10,236 
|Arizona                                                                                      |  |                                               |         |                |   |                   |  |   | 12,681 
|Nevada                                                                                       |  |                                               |         |                |   |                   |  |   | 3,672  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               |         |                |   |                   |  |   | 26,589 
|                                                                                             |  |                                               |         |                |   |                   |  |   |        



31



---

##### Table of Contents

|                                                      |  |                                               |           |   |                |   |          |                   |  |   |            |  
|----------------------------------------------------- |  | --------------------------------------------- | --------- | - | -------------- | - | -------- | ----------------- |  | - | ---------- | -
|                                                      |  | As of and for the year endedDecember 31, 2004 |          
|                                                      |  | Wholly-Owned                                  |           |   | Joint Ventures |   |          | ConsolidatedTotal | 
|Selected Financial Information (dollars in thousands) |  |                                               |           |   |                |   |          |                   |  |   |            |  
|Homes closed                                          |  |                                               | 2,447     |   |                |   | 1,024    |                   |  |   | 3,471      |  
|                                                      |  |                                               |           |   |                |   |          |                   |  |   |            |  
|Home sales revenue                                    |  | $                                             | 1,246,277 |   |                | $ | 539,312  |                   |  | $ | 1,785,589  |  
|Cost of sales                                         |  |                                               | (941,225  | ) |                |   | (385,832 | )                 |  |   | (1,327,057 | )
|                                                      |  |                                               |           |   |                |   |          |                   |  |   |            |  
|Gross margin                                          |  | $                                             | 305,052   |   |                | $ | 153,480  |                   |  | $ | 458,532    |  
|                                                      |  |                                               |           |   |                |   |          |                   |  |   |            |  
|Gross margin percentage                               |  |                                               | 24.5      | % |                |   | 28.5     | %                 |  |   | 25.7       | %
|                                                      |  |                                               |           |   |                |   |          |                   |  |   |            |  
|Number of homes closed                                |  |                                               |           |   |                |   |          |                   |  |   |            |  
|California                                            |  |                                               | 1,312     |   |                |   | 1,024    |                   |  |   | 2,336      |  
|Arizona                                               |  |                                               | 402       |   |                |   |         |                   |  |   | 402        |  
|Nevada                                                |  |                                               | 733       |   |                |   |         |                   |  |   | 733        |  
|                                                      |  |                                               |           |   |                |   |          |                   |  |   |            |  
|Total                                                 |  |                                               | 2,447     |   |                |   | 1,024    |                   |  |   | 3,471      |  
|                                                      |  |                                               |           |   |                |   |          |                   |  |   |            |  
|Average sales price                                   |  |                                               |           |   |                |   |          |                   |  |   |            |  
|California                                            |  | $                                             | 692,200   |   |                | $ | 526,700  |                   |  | $ | 619,600    |  
|Arizona                                               |  |                                               | 241,800   |   |                |   |         |                   |  |   | 241,800    |  
|Nevada                                                |  |                                               | 328,700   |   |                |   |         |                   |  |   | 328,700    |  
|                                                      |  |                                               |           |   |                |   |          |                   |  |   |            |  
|Total                                                 |  | $                                             | 509,300   |   |                | $ | 526,700  |                   |  | $ | 514,400    |  
|                                                      |  |                                               |           |   |                |   |          |                   |  |   |            |  
|Number of net new home orders                         |  |                                               |           |   |                |   |          |                   |  |   |            |  
|California                                            |  |                                               | 1,157     |   |                |   | 955      |                   |  |   | 2,112      |  
|Arizona                                               |  |                                               | 677       |   |                |   |         |                   |  |   | 677        |  
|Nevada                                                |  |                                               | 582       |   |                |   |         |                   |  |   | 582        |  
|                                                      |  |                                               |           |   |                |   |          |                   |  |   |            |  
|Total                                                 |  |                                               | 2,416     |   |                |   | 955      |                   |  |   | 3,371      |  
|                                                      |  |                                               |           |   |                |   |          |                   |  |   |            |  
|Average number of sales locations during period       |  |                                               |           |   |                |   |          |                   |  |   |            |  
|California                                            |  |                                               | 17        |   |                |   | 11       |                   |  |   | 28         |  
|Arizona                                               |  |                                               | 6         |   |                |   |         |                   |  |   | 6          |  
|Nevada                                                |  |                                               | 7         |   |                |   |         |                   |  |   | 7          |  
|                                                      |  |                                               |           |   |                |   |          |                   |  |   |            |  
|Total                                                 |  |                                               | 30        |   |                |   | 11       |                   |  |   | 41         |  
|                                                      |  |                                               |           |   |                |   |          |                   |  |   |            |  





32



---

##### Table of Contents

|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|-------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | -------------- | - | ----------------- |  | - | -------
|                                                                                             |  | As of and for the year endedDecember 31, 2004
|                                                                                             |  | Wholly-Owned                                  |         | Joint Ventures |   | ConsolidatedTotal
|Backlog of homes sold but not closed at end of period                                        |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               | 357     |                |   | 245               |  |   | 602    
|Arizona                                                                                      |  |                                               | 482     |                |   |                  |  |   | 482    
|Nevada                                                                                       |  |                                               | 82      |                |   |                  |  |   | 82     
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               | 921     |                |   | 245               |  |   | 1,166  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Dollar amount of backlog of homes sold but not closed at end ofperiod (dollars in thousands) |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  | $                                             | 292,298 |                | $ | 160,280           |  | $ | 452,578
|Arizona                                                                                      |  |                                               | 136,815 |                |   |                  |  |   | 136,815
|Nevada                                                                                       |  |                                               | 34,185  |                |   |                  |  |   | 34,185 
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  | $                                             | 463,298 |                | $ | 160,280           |  | $ | 623,578
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Lots controlled at end of year                                                               |  |                                               |         |                |   |                   |  |   |        
|Owned lots                                                                                   |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               | 2,702   |                |   | 1,445             |  |   | 4,147  
|Arizona                                                                                      |  |                                               | 3,518   |                |   |                  |  |   | 3,518  
|Nevada                                                                                       |  |                                               | 1,193   |                |   |                  |  |   | 1,193  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               | 7,413   |                |   | 1,445             |  |   | 8,858  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Optioned lots(1)                                                                             |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               |         |                |   |                   |  |   | 4,532  
|Arizona                                                                                      |  |                                               |         |                |   |                   |  |   | 3,960  
|Nevada                                                                                       |  |                                               |         |                |   |                   |  |   | 1,262  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               |         |                |   |                   |  |   | 9,754  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total lots controlled                                                                        |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               |         |                |   |                   |  |   | 8,679  
|Arizona                                                                                      |  |                                               |         |                |   |                   |  |   | 7,478  
|Nevada                                                                                       |  |                                               |         |                |   |                   |  |   | 2,455  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               |         |                |   |                   |  |   | 18,612 
|                                                                                             |  |                                               |         |                |   |                   |  |   |        

---

|(1) |  | Optioned lots may be purchased by the Company as consolidated projects or may be purchased by newly formed unconsolidated joint ventures.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------



During the last half of the fourth quarter of 2005, the Company began to
experience slowing in new orders in many of its markets, increases in cancellation rates and increasing pricing pressures from several of its competitors who initiated aggressive incentive and discounting programs. This softening in the
Companys markets continued in 2006.



On a combined basis,
the number of net new home orders for the year ended December 31, 2006 decreased 33.7% to 2,202 homes from 3,321 homes for the year ended December 31, 2005. The number of homes closed on a combined basis for the year ended December 31, 2006
decreased 9.7% to 2,887 homes from 3,196 homes for the year ended December 31, 2005. On a combined basis, the backlog of homes sold but not closed as of December 31, 2006 was 606 homes, down 53.1% from 1,291 homes as of December 31, 2005.



Homes in backlog are generally closed within three to six
months. The dollar amount of backlog of homes sold but not closed on a combined basis as of December 31, 2006 was $295.5 million, down 57.3% from $691.6 million as of December 31, 2005. The cancellation rate of buyers who contracted to buy a home
but did not close escrow at the Companys projects was approximately 33% during 2006 and 16% during 2005; however, the cancellation rate from January 1, 2007 through February 25, 2007 has decreased to approximately 21%. The inventory of
completed and unsold homes was 136 homes as of December 31, 2006.



The Companys average number of sales locations increased to 52 for the year ended December 31, 2006, compared to 41 for the year ended December 31, 2005. The Companys number of new home orders per average



33



---

##### Table of Contents

sales location decreased from 82.2 for the year ended December 31, 2005 to 42.3 for the year ended December 31, 2006.



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 operating results may be adversely
impacted.



Comparisons of Years Ended December 31, 2006 and
2005



Consolidated operating revenue for the year ended
December 31, 2006 was $1.492 billion, a decrease of $364.2 million, or 19.6% from consolidated operating revenue of $1.856 billion for the year ended December 31, 2005. Revenue from sales of wholly-owned homes decreased slightly to $1.327 billion in
the 2006 period from $1.338 billion in the 2005 period. This decrease was comprised of (i) an increase of $17.0 million due to an increase in the number of wholly-owned homes closed to 2,540 in 2006 from 2,508 in 2005 and (ii) a decrease of $27.9
million due to a decrease in the average sales price of wholly-owned homes closed from $533,600 in the 2005 period to $522,600 in the 2006 period. Consolidated operating revenue includes revenue from sales of joint ventures due to the adoption of
Interpretation No. 46. Revenue from sales of joint venture homes decreased $255.5 million, or 62.8%, to $151.4 million in the 2006 period from $406.9 million in the 2005 period. This decrease was comprised of (i) a decrease of $53.8 million due to a
decrease in the average sales price of joint venture homes closed to $436,300 in the 2006 period from $591,400 in the 2005 period and (ii) a decrease of $201.7 million due to a decrease in the number of joint venture homes closed to 347 in 2006 from
688 in 2005. Revenue from sales of lots, land and other decreased to $13.5 million in the 2006 period from $111.3 million in the 2005 period, primarily due to the sale of a golf course in one of the Companys markets in the 2006 period and
other bulk sales of land in Nevada and Arizona compared to the bulk sale of land of $66.0 million in Arizona and of $45.3 million in California during the 2005 period. The decrease in the average sales price of units closed in wholly-owned projects
and in joint venture projects was due to a change in product mix and the softening of sales in certain of the Companys markets.



Total operating income decreased to $121.3 million in the 2006 period from $314.8 million in the 2005 period. The excess of revenue from sales of homes
over the related cost of sales (gross margin) decreased by $119.9 million to $318.1 million in the 2006 period from $438.0 million in the 2005 period primarily due to a decrease in the number of homes closed to 2,887 in the 2006 period from 3,196 in
the 2005 period and a decrease in gross margin percentage to 21.5% in the 2006 period from 25.1% in the 2005 period. The decrease in period-over-period gross margin percentage primarily reflects the close out of projects with higher average gross
margin percentages in 2005, a shift in product mix and the decrease in average sales prices in certain of the Companys markets. The excess of revenue from sales of lots, land and other over the related cost of sales (gross margin) decreased to
$(3.0) million in the 2006 period from $66.5 million in the 2005 period primarily due to the bulk sale of land in certain of the Companys markets in the 2005 period compared to the sale of a golf course in one of the Companys markets in
the 2006 period. In addition, costs of approximately $10.8 million were incurred related to the abandonment and write-off of project pre-acquisition costs and land option deposits for certain of the Companys potential projects in the 2006
period.



Operating costs for the year ended December 31, 2006
included an impairment loss on real estate assets of $39.9 million compared to $4.6 million in the 2005 period. During the 2006 period the impairment was primarily attributable to slower than anticipated home sales and lower than anticipated net
revenue due to softening market conditions. Accordingly, when the undiscounted cash flows estimated to be generated by real estate inventories are less than the carrying amount of such assets, the real estate assets are written-down to their
estimated fair value. During the 2005 period, an impairment loss related to a golf course in San Diego, California was attributable to lower than expected cash flows and continued net operating losses since the golf course opened in 2002.



34



---

##### Table of Contents

Sales and marketing expense increased by $12.9 million to $72.3 million in the 2006 period from $59.4
million in the 2005 period primarily due to (i) an increase of $7.5 million in advertising costs to $23.6 million in the 2006 period from $16.1 million in the 2005 period, (ii) an increase of $3.9 million in direct selling expenses to $39.6 million
in the 2006 period from $35.7 million in the 2005 period, and (iii) an increase of $1.5 in sales office expense to $9.1 million in the 2006 period from $7.6 million in the 2005 period. The increase in advertising costs is attributable to the
softening in the Companys markets which began in 2005 and is continuing into 2006 which has caused the Company to aggressively increase its marketing efforts in order to compete in markets where the demand for homes has decreased
significantly. The increase in direct selling expenses is caused by the increase in outside broker costs of $7.6 million to $19.5 million in the 2006 period from $11.9 million in the 2005 period, offset by a decrease in salesperson commission of
$2.5 to $14.5 million in the 2006 period from $17.0 million in the 2005 period. General and administrative expenses decreased by $28.6 million to $61.4 million in the 2006 period from $90.0 million in the 2005 period, primarily as a result of a
decrease of $31.3 million in bonus expense to $27.3 million, or approximately 18% of pre-tax, pre-bonus income, in the 2006 period from $58.5 million, or approximately, 16% of pre-tax, pre-bonus income in the 2005 period and an increase of $2.5
million in salaries and related benefits as a result of increased employee benefit costs in the 2006 period. Selling, general and administrative expense as a percentage of home sales revenue was 9.0% in the 2006 period compared to 8.6% in the 2005
period. Other operating costs consist of losses realized by golf course operations at certain of the Companys projects which increased to $6.5 million in the 2006 period compared to $2.5 million in the 2005 period. Equity in income from
unconsolidated joint ventures decreased to $3.2 million in the 2006 period from $4.3 million in the 2005 period. Minority equity in income of consolidated entities decreased to $16.9 million in the 2006 period from $37.6 million in the 2005 period,
primarily due to a decrease in the number of joint venture homes closed to 347 in the 2006 period from 688 in 2005.



The Company incurred financial advisory expenses of $3.2 million in the 2006 period due to the tender offer described below in Tender Offer and
Merger The Company incurred financial advisory expenses of $2.2 million in the 2005 period due to a proposed transaction which was not completed.



Total interest incurred increased to $80.2 million in the 2006 period from $73.2 million in the 2005 period, primarily as a result of an increase in the
average principal balance of debt outstanding and an increase in interest rates. All interest incurred was capitalized in the 2006 and 2005 periods.



The estimated overall effective tax rate for the year ending December 31, 2006 is 39.5%. During the year ended December 31, 2006, income tax benefits of
$3.1 million related to stock option exercises were excluded from the results of operations and credited to additional paid-in capital. At December 31, 2006, the Company has unused recognized built-in losses in the amount of $19.4 million which are
available to offset future taxable income and expire between 2009 and 2011. The utilization of these losses is limited to offset $3.9 million of taxable income per year; however, any unused losses in any year may be carried forward for utilization
in future years through 2011. The Companys ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be further limited under certain circumstances.



Neither the amount of the unused recognized built-in loss carryforwards nor
the amount of limitation on such carryforwards claimed by the Company has been audited or otherwise validated by the Internal Revenue Service, and it could challenge either amount that the Company has calculated. It is possible that legislation or
regulations will be adopted that would limit the Companys ability to use the tax benefits associated with the current tax loss carryforwards.



As a result of the factors outlined above, net income decreased to $74.8 million in the 2006 period from $190.6 million in the 2005 period.



Comparisons of Years Ended December 31, 2005 and 2004



Consolidated operating revenue for the year ended December 31, 2005 was
$1.856 billion, an increase of $34.5 million, or 1.9%, from consolidated operating revenue of $1.822 billion for the year ended December 31,



35



---

##### Table of Contents

2004. Revenue from sales of wholly-owned homes increased $91.9 million, or 7.4%, to $1.338 billion in the 2005 period from $1.246 billion in the 2004 period.
This increase was comprised of (i) an increase of $31.0 million due to an increase in the number of wholly-owned homes closed to 2,508 in 2005 from 2,447 in 2004 and (ii) an increase of $60.9 million due to an increase in the average sales price of
wholly-owned homes closed to $533,600 in the 2005 period from $509,300 in the 2004 period. Consolidated operating revenue includes revenue from sales of joint ventures due to the adoption of Interpretation No. 46. Revenue from sales of joint venture
homes decreased $132.4 million, or 24.6%, to $406.9 million in the 2005 period from $539.3 million in the 2004 period. This decrease was comprised of (i) an increase of $44.5 million due to an increase in the average sales price of joint venture
homes closed to $591,400 in the 2005 period from $526,700 in the 2004 period and (ii) a decrease of $176.9 million due to a decrease in the number of joint venture homes closed to 688 in 2005 from 1,024 in 2004. Revenue from sales of lots, land and
other increased to $111.3 million in 2005 from $36.3 million in 2004 due to the bulk sale of land of $66.0 million in Arizona and of $45.3 million in California during 2005. The increase in the average sales price of units closed in wholly-owned and
consolidated joint venture projects was primarily due to (i) price appreciation in certain markets and (ii) a change in product mix.



Total operating income increased to $314.8 million in the 2005 period from $279.6 million in the 2004 period. The excess of revenue from sales of homes
over the related cost of sales (gross margin) decreased by $20.5 million to $438.0 million in the 2005 period from $458.5 million in the 2004 period primarily due to (i) a decrease in the number of joint venture homes closed to 688 in 2005 from
1,024 in 2004, (ii) a decrease in joint venture gross margin percentage to 27.7% in 2005 from 28.5% in 2004, (iii) offset by an increase in the average sales price of joint venture homes to $591,400 in 2005 from $526,700 in 2004, (iv) an increase in
the number of wholly-owned homes closed to 2,508 in 2005 from 2,447 in 2004 and (v) an increase in the average sales price of wholly-owned homes closed to $533,600 in 2005 from $509,200 in 2004. The excess of revenue from sales of lots, land and
other over the related cost of sales (gross margin) increased by $53.4 million to $66.5 million in 2005 from $13.1 million in 2004 primarily due to the bulk sale of land in Arizona and California during 2005.



Operating costs for the year ending December 31, 2005 includes an impairment
loss of $4.6 million related to a golf course in San Diego, California. The impairment was attributable to lower than expected cash flows and continued net operating losses since the golf course opened in 2002.



Sales and marketing expense increased slightly to $59.4 million in the 2005
period from $58.8 million in the 2004 period primarily due to an increase in marketing fees paid to land sellers in certain of the communities in which the Company builds to $7.2 million in 2005 from $6.7 million in 2004. General and administrative
expenses increased $9.2 million in the 2005 period to $90.0 million from $80.8 million in the 2004 period primarily as a result of an increase in bonus expense to $58.5 million, or approximately 16% of pre-tax, pre-bonus income, in the 2005 period
from $54.1 million, or approximately 16% of pre-tax, pre-bonus income, in the 2004 period due to higher levels of pre-tax, pre-bonus income and an increase in salaries and benefits to $24.5 million in the 2005 period from $20.8 million in the 2004
period. Other operating costs consist of operating losses realized by golf course operations in certain of the Companys divisions which increased $0.4 million to $2.5 million in the 2005 period from $2.1 million in the 2004 period. Equity in
income (loss) from unconsolidated joint ventures increased to $4.3 million in the 2005 period from $(0.7) million in the 2004 period, primarily due to certain bulk sales of land by the Companys unconsolidated joint ventures. Minority equity in
income of consolidated entities decreased to $37.6 million in the 2005 period from $49.7 million in the 2004 period, primarily due to a decrease in the number of joint venture homes closed to 688 in 2005 from 1,024 in 2004.



The Company incurred financial advisory expenses of $2.2 million in the 2005
period with no comparable amount in the 2004 period due to a proposed transaction which was not completed.



Total interest incurred increased to $73.2 million in the 2005 period from $59.0 million in the 2004 period, primarily as a result of an increase in the
prime interest rate from an average of 6.19% during 2005 compared to 4.34% during 2004 and as a result of an increase in the average principal balance of debt outstanding in the 2005 period compared to the 2004 period.



36



---

##### Table of Contents

The estimated overall effective tax rate for the year ending December 31, 2005 is 39.4%. During the year
ended December 31, 2005, income tax benefits of $2.0 million related to stock option exercises were excluded from the results of operations and credited to additional paid-in capital. At December 31, 2005, the Company has unused recognized
built-in losses in the amount of $23.3 million which are available to offset future taxable income and expire between 2009 and 2011. The utilization of these losses is limited to offset $3.9 million of taxable income per year; however, any unused
losses in any year may be carried forward for utilization in future years through 2011. The Companys ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be further limited under
certain circumstances.



Neither the amount of the unused
recognized built-in loss carryforwards nor the amount of limitation on such carryforwards claimed by the Company has been audited or otherwise validated by the Internal Revenue Service, and it could challenge either amount that the Company has
calculated. It is possible that legislation or regulations will be adopted that would limit the Companys ability to use the tax benefits associated with the current tax loss carryforwards.



As a result of the foregoing factors, net income increased to $190.6 million
in the 2005 period from $171.6 million in the 2004 period.



Financial
Condition and Liquidity



The Company provides for its ongoing cash requirements principally from internally generated funds from the sales of real estate, outside borrowings and by forming new joint ventures with venture partners that provide
a substantial portion of the capital required for certain projects. The Company currently has outstanding 75/8%
Senior Notes due 2012, 103/4% Senior Notes due 2013 and 71/2% Senior Notes due 2014 and maintains secured revolving credit facilities (Revolving Credit Facilities). The Company has financed, and may in
the future finance, certain projects and land acquisitions with construction loans secured by real estate inventories, seller-provided financing and land banking transactions. The Company believes that its current borrowing capacity and increases
reasonably available to it, cash on hand and anticipated net cash flows from operations are and will be sufficient to meet its current and reasonably anticipated liquidity needs on both a near-term and long-term basis (and in any event for the next
twelve months) for funds to build homes, run its day-to-day operations, acquire land and capital assets and fund its mortgage operations. There is no assurance, however, that future cash flows will be sufficient to meet the Companys future
capital needs. The amount and types of indebtedness that the Company may incur may be limited by the terms of the indentures and credit or other agreements governing the Companys senior note obligations, revolving credit facilities and other
indebtedness.



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 either nationally or in regions in
which the Company operates, the outbreak of war or other hostilities involving the United States, mortgage and other interest rates, changes in prices of homebuilding materials, 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, the timing of receipt of
regulatory approvals and the opening of projects, and the availability and cost of land for future development. The Company cannot be certain that its cash flow will be sufficient to allow it to pay principal and interest on its debt, support its
operations and meet its other obligations. If the Company is not able to meet those obligations, it may be required to refinance all or part of its existing debt, sell assets or borrow more money. The Company may not be able to do so on terms
acceptable to it, if at all. In addition, the terms of existing or future indentures and credit or other agreements governing the Companys senior note obligations, revolving credit facilities and other indebtedness may restrict the Company
from pursuing any of these alternatives.



37



---

##### Table of Contents

75/8% Senior Notes



On November 22, 2004, the Companys 100% owned subsidiary,
William Lyon Homes, Inc., a California corporation, (California Lyon) closed its offering of $150.0 million principal amount of 75/8% Senior Notes due 2012 (the 75/8% Senior Notes).
The notes were sold pursuant to Rule 144A. The notes were issued at par, resulting in net proceeds to the Company of approximately $148.5 million. California Lyon agreed to file a registration statement with the Securities and Exchange Commission
relating to an offer to exchange the notes for publicly tradeable notes having substantially identical terms. On January 12, 2005, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an
offer to exchange any and all of its outstanding $150.0 million aggregate principal amount of 75/8% Senior Notes
due 2012, which are not registered under the Securities Act of 1933, for a like amount of its new 75/8% Senior
Notes due 2012, which are registered under the Securities Act of 1933, upon the terms and subject to the conditions set forth in the prospectus dated January 12, 2005. The exchange offer was completed for $146.5 million principal amount of the
75/8% Senior Notes on February 18, 2005. The remaining $3.5 million principal amount of the old notes remains
outstanding. The terms of the new notes are identical in all material respects to those of the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. Interest on the
75/8% Senior Notes is payable semi-annually on December 15 and June 15 of each year. Based on the current
outstanding principal amount of the 75/8% Senior Notes, the Companys semi-annual interest payments are
$5.7 million.



Except as set forth in the Indenture governing the 75/8% Senior Notes (75/8% Senior Notes Indenture), the 75/8% Senior Notes are not redeemable prior to December 15,
2008. Thereafter, the 75/8% Senior Notes will be redeemable at the option of California Lyon, in whole or in
part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before December 15, 2007, California Lyon may redeem up to 35% of the aggregate
principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 107.625% of the principal amount, plus accrued and unpaid interest, if any.



As of December 31,
2006, the outstanding 75/8% Senior Notes with a face value of $150.0 million had a fair value of approximately
$127.9 million, based on quotes from industry sources.



103/4% Senior Notes



California Lyon filed a Registration Statement on Form S-3 with the Securities and Exchange
Commission for the sale of $250.0 million of 103/4% Senior Notes due 2013 (the 103/4% Senior Notes) which became effective on March 12, 2003. The offering closed on March 17, 2003 and was fully
subscribed and issued. The notes were issued at a price of 98.493% to the public, resulting in net proceeds to the Company of approximately $246.2 million. The purchase price reflected a discount to yield 11% under the effective interest method and
the notes have been reflected net of the unamortized discount in the consolidated balance sheet. Interest on the 103/4% Senior Notes is payable on April 1 and October 1 of each year. Based on the current outstanding principal amount of the 103/4% Senior Notes, the Companys semi-annual interest payments are $13.4 million.



Except as set forth in the Indenture governing the 103/4% Senior Notes (103/4% Senior Notes Indenture), the 103/4% Senior Notes are not
redeemable prior to April 1, 2008. Thereafter, the 103/4% Senior Notes will be redeemable at the option of
California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before April 1, 2006, California Lyon may redeem
up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 110.75% of the principal amount, plus accrued and unpaid interest, if any.



As of December 31, 2006, the outstanding 103/4% Senior Notes with a face value
of $246.9 million had a fair value of approximately $240.0 million, based on quotes from industry sources.



38



---

##### Table of Contents

71/2% Senior Notes



On February 6, 2004, California Lyon closed its offering of $150.0
million principal amount of 71/2% Senior Notes due 2014 (the 71/2% Senior Notes). The notes were sold pursuant to Rule 144A and outside the United States to non-U.S. persons
in reliance on Regulation S. The notes were issued at par, resulting in net proceeds to the Company of approximately $147.6 million. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an
offer to exchange the notes for publicly tradeable notes having substantially identical terms. On July 16, 2004, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an offer to exchange
any and all of its outstanding $150.0 million aggregate principal amount of 71/2% Senior Notes due 2014, which
are not registered under the Securities Act of 1933, for a like amount of its new 71/2% Senior Notes due 2014,
which are registered under the Securities Act of 1933, upon the terms and subject to the conditions set forth in the prospectus dated July 16, 2004. The exchange offer was completed for the full principal amount of the 71/2% Senior Notes on August 17, 2004. The terms of the new notes are identical in all material respects to those of
the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. The new notes have been listed on the New York Stock Exchange. Interest on the 71/2% Senior Notes is payable on February 15 and August 15 of each year. Based on the current outstanding principal
amount of 71/2% Senior Notes the Companys semi-annual interest payments are $5.6 million.



Except as set forth in the Indenture governing the 71/2% Senior Notes (71/2% Senior Notes Indenture), the 71/2% Senior Notes are not redeemable prior to February 15,
2009. Thereafter, the 71/2% Senior Notes will be redeemable at the option of California Lyon, in whole or in
part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before February 15, 2007, California Lyon may redeem up to 35% of the
aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 107.50% of the principal amount, plus accrued and unpaid interest, if any.



As of December 31,
2006, the outstanding 71/2% Senior Notes with a face value of $150.0 million had a fair value of $124.9 million,
based on quotes from industry sources.



* * * * *



The 75/8% Senior Notes, the 103/4% Senior Notes and the 71/2% Senior Notes (collectively, the Senior Notes) are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation
(Delaware Lyon), which is the parent company of California Lyon, and all of Delaware Lyons existing and certain of its future restricted subsidiaries. The Senior Notes and the guarantees rank senior to all of the Companys and
the guarantors debt that is expressly subordinated to the Senior Notes and the guarantees, but are effectively subordinated to all of the Companys and the guarantors senior secured indebtedness to the extent of the value of the
assets securing that indebtedness.



Upon a
change of control as described in the respective Indentures governing the Senior Notes (the Senior Notes Indentures), California Lyon will be required to offer to purchase the Senior Notes at a purchase price equal to 101% of the
principal amount, plus accrued and unpaid interest, if any.



If
the Companys consolidated tangible net worth falls below $75.0 million for any two consecutive fiscal quarters, California Lyon will be required to make an offer to purchase up to 10% of each class of Senior Notes originally issued at a
purchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if any.



California Lyon is 100% owned by Delaware Lyon. Each subsidiary guarantor is 100% owned by California Lyon or Delaware Lyon. All guarantees of the Senior
Notes are full and unconditional and all guarantees are joint



39



---

##### Table of Contents

and several. There are no significant restrictions on the ability of Delaware Lyon or any guarantor to obtain funds from subsidiaries by dividend or loan.



The Senior Notes Indentures contain covenants that limit the
ability of Delaware Lyon and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase its stock; (iii) make investments; (iv) sell assets; (v) incur liens;
(vi) enter into agreements restricting the ability of Delaware Lyons restricted subsidiaries (other than California Lyon) to pay dividends; (vii) enter into transactions with affiliates; and (viii) consolidate, merge or sell all or
substantially all of Delaware Lyons and California Lyons assets. These covenants are subject to a number of important exceptions and qualifications as described in the Senior Notes Indentures.



The foregoing summary is not a complete description of the Senior Notes and
is qualified in its entirety by reference to the Senior Notes Indentures.



The net proceeds of the offerings were used to repay amounts outstanding under revolving credit facilities and other indebtedness. The remaining proceeds were used to pay fees and commissions related to the offering
and for other general corporate purposes.



At December 31,
2006, the Company had approximately $233.7 million of secured indebtedness, (excluding approximately $70.4 million of secured indebtedness of consolidated entities) and approximately $305.8 million of additional secured indebtedness available to be
borrowed under the Companys credit facilities, as limited by the Companys borrowing base formulas.



Revolving Credit Facilities



As of December 31, 2006, the Company has seven revolving credit facilities which have an aggregate maximum loan commitment of $560.0 million, (including
one facility of $150.0 million, one of $100.0 million, one of $90.0 million, one of $70.0 million and three of $50.0 million each), and mature at various dates through 2008. The revolving credit facilities have similar characteristics. The Company
may borrow amounts, subject to applicable borrowing base and concentration limitations, as defined. During the last year of the term of each facility, the commitment amount will decrease ratably until the commitment under each facility is reduced to
zero by the final maturity date, as defined in each respective agreement.



Availability under each credit facility is subject not only to the maximum amount committed under the respective facility, but also to both various borrowing base and concentration limitations. The borrowing base
limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases as the asset progresses from land under development to residence subject to contract of sale. Advances for each type of collateral become
due in whole or in part, subject to possible re-borrowing, and/or the collateral becomes excluded from the borrowing base, after a specified period or earlier upon sale. Concentration limitations further restrict availability under the credit
facilities. The effect of these borrowing base and concentration limitations essentially is to mandate minimum levels of the Companys investment in a project, with higher percentages of investment required at earlier phases of a project, and
with greater absolute dollar amounts of investment required as a project progresses. Each revolving credit facility is secured by deeds of trust on the real property and improvements thereon owned by the Company in the subdivision project(s)
approved by the respective lender, as well as pledges of all net sale proceeds, related contracts and other ancillary property. Also, each credit facility includes financial covenants, which may limit the amount that may be borrowed thereunder.
Outstanding advances bear interest at various rates, which approximate the prime rate. As of December 31, 2006, $146.0 million was outstanding under these credit facilities, with a weighted-average interest rate of 7.71%, and the undrawn
availability was $305.8 million as limited by the borrowing base formulas. Interest on the revolving credit facilities is calculated on the average, outstanding daily balance and is paid following the end of each month. During the year ended
December 31, 2006, the Company borrowed $1.263 billion and repaid $1.167 billion under these facilities. The maximum amount outstanding was $228.3 million and the weighted average



40



---

##### Table of Contents

borrowings were $152.6 million during the year ended December 31, 2006. Interest incurred on the revolving credit facilities for the year ended December 31,
2006 was $13.6 million. Delaware Lyon has guaranteed on an unsecured basis California Lyons obligations under certain of the revolving credit facilities and has provided an unsecured environmental indemnity in favor of the lender under the
$90.0 million bank line of credit. The Company routinely makes borrowings under its revolving credit facilities in the ordinary course of business within the maximum aggregate loan commitment amounts to fund its operations, including its land
acquisition and home building activities, and repays such borrowings, as required by the credit facilities, with the net proceeds from sales of the real property, including homes, which secure the applicable credit facility.



Under the revolving credit facilities, the Company is required to comply with
a number of covenants, the most restrictive of which require Delaware Lyon to maintain:



| | Ø |  | A tangible net worth, as defined, of $200.0 million, adjusted upwards quarterly by 50% of Delaware Lyons quarterly net income after June 30, 2004;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | Ø |  | A ratio of total liabilities to tangible net worth, each as defined, of less than 3.25 to 1; and
| | - |  | ------------------------------------------------------------------------------------------------



| | Ø |  | Minimum liquidity, as defined, of at least $10.0 million.
| | - |  | ---------------------------------------------------------



As of and for the year ending December 31, 2006, the Company is in compliance with these covenants.



Construction Notes Payable



At December 31, 2006, the Company had construction notes payable on certain
consolidated entities amounting to $70.4 million. The construction notes have various maturity dates through 2008 and bear interest at rates ranging from prime plus 0.25% to prime plus 2.0% at December 31, 2006. Interest is calculated on the average
daily balance and is paid following the end of each month or upon maturity of the note.



Seller Financing



At December 31, 2006, the Company had $28.3 million of notes payable outstanding related to land acquisitions for which seller financing was provided. The seller financing notes have various maturity dates through March 2008 and bear
interest at rates ranging from 9.0% to 12.0% at December 31, 2006. Interest is calculated on the average principal balance outstanding and is accrued and paid when the financing is repaid.



Revolving Mortgage Warehouse Credit Facilities



The Company, through its mortgage subsidiary and one of its unconsolidated
joint ventures, has entered into two revolving mortgage warehouse credit facilities with banks to fund its mortgage origination operations. The original credit facility, which matures in May 2007, provides for revolving loans of up to $30.0 million
outstanding, $20.0 million of which is committed (lender obligated to lend if stated conditions are satisfied) and $10.0 million is not committed (lender advances are optional even if stated conditions are otherwise satisfied). The
Companys mortgage subsidiary and one of its unconsolidated joint ventures entered into an additional $50.0 million credit facility which matures in April 2007. The Company expects the maturities to be extended by the lender at each maturity
date for an additional year. Mortgage loans are generally held for a short period of time and are typically sold to investors within 7 to 15 days following funding. The facilities are secured by substantially all of the assets of each of the
borrowers, including the mortgage loans held for sale, all rights of each of the borrowers with respect to contractual obligations of third party investors to purchase such mortgage loans, and all proceeds of sale of such mortgage loans. The
facilities, which have LIBOR based pricing, also contain certain financial covenants requiring the borrowers to maintain minimum tangible net worth, leverage, profitability and liquidity. These facilities are non-recourse and are not guaranteed by
the Company. At December 31, 2006 the outstanding balance under these facilities was $59.4 million.



41



---

##### Table of Contents

Land Banking Arrangements



The Company enters into purchase agreements with various land sellers. In
some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Companys revolving credit facilities and other corporate financing sources and limiting the Companys risk, the Company
transfers the Companys right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the
lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 25% of the total purchase price. The Company is under no obligation to
purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities.
These land banking arrangements help the Company manage the financial and market risk associated with land holdings. The use of these land banking arrangements is dependent on, among other things, the availability of capital to the option provider,
general housing market conditions and geographic preferences. As described in Note 2 of Notes to Consolidated Financial Statements, Interpretation No. 46, requires the consolidation of the assets, liabilities and operations of four of
the Companys land banking arrangements including, as of December 31, 2006, real estate inventories of $69.1 million, which are included in real estate inventories not owned in the accompanying balance sheet. The Company participates in one
land banking arrangement, which is not a VIE in accordance with Interpretation No. 46, and is not consolidated as of December 31, 2006. The deposits related to the unconsolidated land banking arrangement have been recorded in the accompanying
consolidated balance sheet.



In addition, the Company
participates in another land banking arrangement, which is not a VIE in accordance with Interpretation No. 46, but is consolidated in accordance with SFAS No. 49, Accounting for Product Financing Arrangements, (FAS 49). Under the
provisions of FAS 49, the Company has determined it is economically compelled, based on certain factors, to purchase the land in the land banking arrangement, and therefore, must record the remaining purchase price of the land of $131.6 million,
which is included in real estate inventories not owned and liabilities from inventories not owned in the accompanying balance sheet.



During the year ended December 31, 2005, the Company and an unaffiliated party formed a limited liability company (the LLC) for the purpose of
acquiring 222 acres in the city of Pittsburg, California and developing the land into 533 residential home sites. The LLC was determined to be a variable interest entity and is consolidated in the accompanying consolidated balance sheet. During the
year ended December 31, 2006, the LLC sold 284 lots to the Company for a purchase price of $43.3 million. The lots were acquired through two land banking arrangements which have been determined to be VIEs and are consolidated in the accompanying
consolidated balance sheet in real estate inventories not owned. The lots will be purchased from the two consolidated land banking arrangements on staged take-downs through 2008. Information pertaining to the two consolidated land banking
arrangements is included in the table below. The intercompany land sales and related profits have been eliminated in consolidation.



42



---

##### Table of Contents

Summary information with respect to the Companys consolidated and unconsolidated land banking
arrangements is as follows as of December 31, 2006 (dollars in thousands):



|                                                      |  |              |         |                |   |       
|----------------------------------------------------- |  | ------------ | ------- | -------------- | - | ------
|                                                      |  | Consolidated |         | Unconsolidated
|Total number of land banking projects                 |  |              | 5       |                |   | 1     
|                                                      |  |              |         |                |   |       
|Total number of lots                                  |  |              | 1,077   |                |   | 323   
|                                                      |  |              |         |                |   |       
|Total purchase price                                  |  | $            | 272,164 |                | $ | 64,000
|                                                      |  |              |         |                |   |       
|Balance of lots still under option and not purchased: |  |              |         |                |   |       
|Number of lots                                        |  |              | 1,027   |                |   | 323   
|                                                      |  |              |         |                |   |       
|Purchase price                                        |  | $            | 200,670 |                | $ | 64,000
|                                                      |  |              |         |                |   |       
|Forfeited deposits if lots are not purchased          |  | $            | 50,820  |                | $ | 3,922 
|                                                      |  |              |         |                |   |       



Joint Venture
Financing



The Company and certain of its subsidiaries
are general partners or members in joint ventures involved in the development and sale of residential projects. As described more fully in Critical Accounting PoliciesVariable Interest Entities certain joint ventures have been
determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Companys financial statements
as of and for the years ended December 31, 2006 and 2005. Because the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 did not affect
the Companys consolidated net income. The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Companys financial statements. The Companys investments
in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Income allocations and cash distributions
to the Company from the unconsolidated joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after
partners priority returns and returns of partners capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of Notes to Consolidated Financial Statements for condensed combined financial
information for the joint ventures whose financial statements have been consolidated with the Companys financial statements. See Note 5 of Notes to Consolidated Financial Statements for condensed combined financial information for
the unconsolidated joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing
obtained by the joint ventures.



As of December 31, 2006, the
Companys investment in and advances to unconsolidated joint ventures was $3.6 million and the venture partners investment in such joint ventures was $1.7 million. As of December 31, 2006, these joint ventures had obtained financing
from construction lenders which amounted to $38.6 million of outstanding indebtedness.



During the year ended December 31, 2003, California Lyon and two unaffiliated parties formed a
series of limited liability companies (Development LLCs) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the
land into 1,910 residential homesites. As of December 31, 2005, the Development LLCs sold substantially all of the lots. During the year ended December 31, 2005, California Lyon purchased 829 lots from the Development LLCs for a purchase price of
$183.6 million, of which 267 lots were purchased through three land banking arrangements for a purchase price of $84.1 million (see Note 2 of Notes to Consolidated Financial Statements for additional information regarding the
Companys land banking arrangements). California Lyon has a 121/2%



43



---

##### Table of Contents

indirect, minority interest in the Development LLCs and during the year ended December 31, 2005 earned income of $9.8 million from the sale of lots by the
Development LLCs, of which $5.2 million was deferred as a reduction to the cost basis of the lots purchased by California Lyon and will be recognized when homes are constructed on the lots and sold to third parties.



The Company is a member in an unconsolidated joint venture limited liability
company formed for the purpose of acquiring and developing land in Pahrump, Nevada. At December 31, 2006, the unconsolidated joint venture had outstanding land acquisition and development debt of $36.8 million, of which the Company guaranteed $18.4
million.



Assessment District Bonds



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. See Note 10 of Notes to
Consolidated Financial Statements.



Cash
Flows  Comparison of Years Ended December 31, 2006 and 2005



Net cash used in operating activities decreased to $22.2 million in the 2006 period from $44.5 million in the 2005 period. The change was primarily as a result of (i) an increase in net changes in accrued expenses to
a decrease of $112.7 million in the 2006 period from a decrease of $90.9 million in the 2005 period, (ii) decreased expenditures in real estate inventories owned to $147.8 million in the 2006 period from $232.2 million in the 2005 period, (iii) an
increase in net changes in receivables to an increase of $24.0 million in the 2006 period from a decrease of $104.2 million in the 2005 period, (iv) a decrease in provision for income taxes to $48.9 million in the 2006 period from $124.1 million in
the 2005 period, (v) impairment loss on real estate assets of $39.9 million in the 2006 period compared to $4.6 million in the 2005 period, and (vi) a decrease in net income to $74.8 million in the 2006 period from $190.6 million in the 2005 period.
The decrease in real estate inventories is primarily attributable to a decrease in land acquisitions during the 2006 period. The softening in the Companys markets which began in 2005 and continued in 2006 has decreased the amount of land
acquisitions by the Company during the 2006 period. The increase in net changes in accrued expenses is primarily attributable to a net decrease in income taxes payable of $31.3 million during the 2006 period from a balance of $35.5 million as of
December 31, 2005 compared to $4.2 million as of December 31, 2006 and a net decrease in accrued bonus expense of $32.3 million during the 2006 period, from a balance of $71.8 million as of December 31, 2005 compared to $39.4 million as of December
31, 2006. Comparatively, during the 2005 period, the net increase in income taxes payable was $4.5 million in the 2005 period, from a balance of $31.0 as of December 31, 2004 compared to a balance of $35.5 million as of December 31, 2005 and a net
increase in accrued bonus expense of $12.2 million from a balance of $59.6 million as of December 31, 2004 compared to a balance of $71.8 million as of December 31, 2005. The changes identified above for the two periods in the year ending December
31, 2006 are recurring in nature and are attributable to the timing of bonus payments and estimated income tax payments made, offset by normal accruals for the period. The increase in net changes in receivables is attributable to a decrease in
escrow proceeds receivable of $37.0 million during the 2006 period, from a balance of $84.3 million as of December 31, 2005 to a balance of $47.3 million as of December 31, 2006 compared to a net increase of $69.3 million during the 2005 period,
from a balance of $15.0 million as of December 31, 2004 to a balance of $84.3 million as of December 31, 2005. The large balance as of December 31, 2006 and 2005 was temporary in nature and primarily due to a significant number of homes closed in
the last five days of the year of 192 in 2006 and 254 in 2005 where the homes had closed escrow but the Company had not yet received the funds from the escrow and title companies. The entire balance of escrow proceeds receivable at December 31, 2006
and



44



---

##### Table of Contents

2005 was collected within the first few days of the following period. The remaining increase in the change in receivables is primarily attributable to a net
increase in first trust deed mortgage notes receivables of $11.9 million during the 2006 period to $59.7 million as of December 31, 2006 from $47.8 million as of December 31, 2005 compared to a net increase of $33.2 million during the 2005 period to
$47.8 million as of December 31, 2005 from $14.7 million as of December 31, 2004. This increase was also attributable to the significant number of homes closed in the last week of the year in 2006 and 2005 as described above. Substantially all of
the balance of first trust deed mortgage notes receivables was collected in the first few days of January 2007 and 2006 when the loans were sold to third party investors. The successful issuance of the 103/4% Senior Notes in 2003 and the 71/2% Senior Notes
and 75/8% Senior Notes in 2004, offset by the repayment of the 121/2% Senior Notes, provided the Company with increased financial resources. The risks inherent in purchasing and developing land increase as consumer demand for housing
decreases. Thus, the Company may have bought and developed land on which it cannot profitably build and sell homes. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market
conditions. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, the Company may have to sell homes at
significantly lower margins or at a loss.



Net cash (used in) provided by investing activities decreased to a use of $2.8 million in the 2006 period from a source of $16.5 million in the 2005 period. The change was primarily as a result of a decrease in net distributions of capital
from unconsolidated joint ventures from net distributions of $20.5 million in the 2005 period to no comparable amount in the 2006 period.



Net cash provided by (used in) financing activities decreased to a source of $11.3 million in the 2006 period from a use of $15.7 million in the 2005
period, primarily as a result of minority interest distributions of $147.0 million in the 2006 period compared to minority interest distributions of $76.7 million in the 2005 period, offset by an increase in net borrowings on notes payable to $157.9
million in the 2006 period from $60.7 million in the 2005 period.



Cash Flows  Comparison of Years Ended December 31, 2005 and 2004



Net cash (used in) provided by operating activities changed from a source of $87.3 million in 2004
to a use of $44.5 million in 2005. The change was primarily as a result of (i) an increase in equity in income of unconsolidated joint ventures from a loss of $0.7 million in 2004 to income of $4.3 million in 2005, (ii) an increase in distributions
of income from unconsolidated joint ventures from none in 2004 to $2.7 million in 2005, (iii) a decrease in net changes in receivables from an increase of $9.2 million in 2004 to a decrease of $104.2 million in 2005 and (iv) increased net
expenditures in real estate inventories from $195.3 million in 2004 to $232.2 million in 2005. The increase in net changes in receivables is attributable to a decrease in escrow proceeds receivable of $69.3 million during the 2005 period, from a
balance of $15.0 million as of December 31, 2004 to a balance of $84.3 million as of December 31, 2005 compared to a net decrease of $20.7 million during the 2004 period, from a balance of $35.7 million as of December 31, 2003 to a balance of $15.0
million as of December 31, 2005. The large balance as of December 31, 2006 and 2005 was temporary in nature and primarily due to a significant increase in the number of homes closed in the last five days of the year to in 2005 from 254 in 2004 where
the homes had closed escrow but the Company had not yet received the funds from the escrow and title companies. The entire balance of escrow proceeds receivable at December 31, 2005 and 2004 was collected within the first few days of the following
period. The successful issuance of the 103/4% Senior Notes in 2003 and the 71/2% Senior Notes and 75/8% Senior Notes in 2004, offset by the repayment of the 121/2%
Senior Notes (as described in financing activities below), provided the Company with increased financial resources. The risks inherent in purchasing and developing land increase as consumer demand for housing decreases. Thus, the Company may have
bought and developed land on which it cannot profitably build and sell homes. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions. In addition, inventory carrying
costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, the Company may have to sell homes at significantly lower margins or at a loss.



45



---

##### Table of Contents

Net cash provided by (used in) investing activities changed from a use of $17.1 million in 2004 to a
source of $16.5 million in 2005. The change was primarily as a result of (i) a decrease in investments in and advances to unconsolidated joint ventures from $9.4 million in 2004 to $1.4 million in 2005, (ii) an increase in distributions of capital
from unconsolidated joint ventures from $10.1 million in 2004 to $20.5 million in 2005 and (iii) a decrease in purchases of property and equipment from $17.8 million in 2004 to $2.6 million in 2005, due to the purchase of an aircraft in 2004.



Net
cash (used in) provided by financing activities decreased from a source of $1.7 million in 2004 to a use of $15.7 million in 2005. The change was primarily as a result of (i) an increase in net borrowings on notes payable from net principal payments
of $127.4 million in 2004 to net borrowings of $60.7 million in 2005, (ii) the issuance of the 75/8% Senior
Notes and the 71/2% Senior Notes in 2004 with no issuance of senior notes in 2005, (iii) a decrease in net
minority interest distributions from $86.8 million in 2004 to $76.7 million in 2005 and (iv) the repurchase of shares of common stock of $81.0 million in 2004 with no comparable amount in 2005.



Off-Balance Sheet Arrangements



The Company enters into certain off-balance sheet arrangements including
joint venture financing, option agreements, land banking arrangements and variable interests in consolidated and unconsolidated entities. These arrangements are more fully described above and in Notes 2, 5 and 11 of Notes to Consolidated
Financial Statements.



Contractual Obligations



The Companys contractual obligations consisted of the following at
December 31, 2006 (in thousands):



|                                      |  |                        |           |                 |   |           |  |           |         |                  |   |         |  |   |        
|------------------------------------- |  | ---------------------- | --------- | --------------- | - | --------- |  | --------- | ------- | ---------------- | - | ------- |  | - | -------
|                                      |  | Payments due by period
|Contractual obligations (note 1)      |  | Total                  |           | Less than1 year |   | 1-3 years |  | 3-5 years |         | More than5 years
|Revolving credit facilities           |  | $                      | 161,353   |                 | $ | 49,377    |  | $         | 111,976 |                  | $ |        |  | $ |       
|Construction notes payable            |  |                        | 72,248    |                 |   | 67,468    |  |           | 4,780   |                  |   |        |  |   |       
|Seller financing                      |  |                        | 31,802    |                 |   | 16,604    |  |           | 15,198  |                  |   |        |  |   |       
|Mortgage Warehouse Credit Facility    |  |                        | 61,046    |                 |   | 61,046    |  |           |        |                  |   |        |  |   |       
|75/8%
Senior Notes                    |  |                        | 218,625   |                 |   | 11,438    |  |           | 22,875  |                  |   | 22,875  |  |   | 161,437
|103/4% Senior Notes                   |  |                        | 417,969   |                 |   | 26,875    |  |           | 53,750  |                  |   | 53,750  |  |   | 283,594
|71/2%
Senior Notes                    |  |                        | 230,156   |                 |   | 11,250    |  |           | 22,500  |                  |   | 22,500  |  |   | 173,906
|Operating leases                      |  |                        | 7,124     |                 |   | 2,825     |  |           | 3,251   |                  |   | 1,048   |  |   |       
|Purchase obligations:                 |  |                        |           |                 |   |           |  |           |         |                  |   |         |  |   |        
|Land purchases and option commitments |  |                        | 407,665   |                 |   | 228,010   |  |           | 124,536 |                  |   | 55,119  |  |   |       
|Project commitments                   |  |                        | 395,788   |                 |   | 305,532   |  |           | 60,171  |                  |   | 30,085  |  |   |       
|                                      |  |                        |           |                 |   |           |  |           |         |                  |   |         |  |   |        
|Total                                 |  | $                      | 2,003,776 |                 | $ | 780,425   |  | $         | 419,037 |                  | $ | 185,377 |  | $ | 618,937
|                                      |  |                        |           |                 |   |           |  |           |         |                  |   |         |  |   |        

---

|(1) |  | The summary of contractual obligations above includes interest on all interest-bearing obligations. Interest on all fixed rate interest-bearing obligations is based on the stated
rate and is calculated to the stated maturity date. Interest on all variable rate interest bearing obligations is based on the rates effective as of December 31, 2006 and is calculated to the stated maturity date.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



46



---

##### Table of Contents

Critical Accounting Policies



The Companys financial statements have been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of
revenues and costs and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those which impact its most critical accounting policies. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the following
accounting policies are among the most important to a portrayal of the Companys financial condition and results of operations and require among the most difficult, subjective or complex judgments:



Real Estate Inventories and Cost of Sales



Real estate inventories are carried at cost net of impairment losses, if
any. Real estate inventories consist primarily of deposits, raw land, lots under development, homes under construction and completed homes of real estate projects. 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. The estimation process
involved in determining relative fair values and sales values is inherently uncertain because it involves estimates of current market values for land parcels before construction as well as future sales values of individual homes within a phase. The
Companys estimate of future sales values is supported by the Companys budgeting process. The estimate of future sales values is inherently uncertain because it requires estimates of current market conditions as well as future market
events and conditions. Additionally, in determining the allocation of costs to a particular land parcel or individual home, the Company relies on project budgets that are based on a variety of assumptions, including assumptions about construction
schedules and future costs to be incurred. It is possible that actual results could differ from budgeted amounts for various reasons, including construction delays, increases in costs which have not yet been committed, or unforeseen issues
encountered during construction that fall outside the scope of contracts obtained. While the actual results for a particular construction project are accurately reported over time, a variance between the budget and actual costs could result in the
understatement or overstatement of costs and a related impact on gross margins in a specific reporting period. To reduce the potential for such distortion, the Company has set forth procedures which have been applied by the Company on a consistent
basis, including assessing and revising project budgets on a monthly basis, obtaining commitments from subcontractors and vendors for future costs to be incurred, reviewing the adequacy of warranty accruals and historical warranty claims experience,
and utilizing the most recent information available to estimate costs. The variances between budget and actual amounts identified by the Company have historically not had a material impact on its consolidated results of operations. Management
believes that the Companys policies provide for reasonably dependable estimates to be used in the calculation and reporting of costs. The Company relieves its accumulated real estate inventories through cost of sales for the cost of homes
sold, as described more fully below in the section entitled Sales and Profit Recognition.



Impairment of Real Estate Inventories



The Company accounts for its real estate inventories under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (Statement No. 144). Statement No. 144 requires impairment losses to be recorded on real estate inventories when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by real estate inventories are less than the carrying amount of such assets. The estimation process used in determining the undiscounted cash flows of the assets is inherently uncertain because it
involves estimates of future revenues and costs. As described more fully above in the section entitled Real Estate Inventories and Cost



47



---

##### Table of Contents

of Sales, estimates of revenues and costs are supported by the Companys budgeting process. 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 results of operations for the year ended December 31, 2006, include a non-cash charge of $39.9 million to record an impairment loss on real estate assets held by the Company at certain of its
homebuilding projects. The impairment was primarily attributable to slower than anticipated home sales and lower than anticipated net revenue due to softening market conditions. As a result, the future undiscounted cash flows estimated to be
generated were determined to be less than the carrying amount of the assets. Accordingly, the related real estate assets were written-down to their estimated fair value. The non-cash charge is reflected in impairment loss on real estate assets in
the accompanying consolidated statements of income.



The
results of operations for the year ended December 31, 2005 included a non-cash charge of $4.6 million to record an impairment loss related to a golf course in the Companys San Diego Division. The impairment loss was primarily attributable to
lower than expected cash flows and continued net operating losses since the golf course opened in 2002. As a result, the future undiscounted cash flows estimated to be generated were determined to be less than the assets carrying amount.
Accordingly, the golf course asset was written-down to its estimated fair value. The non-cash charge had been previously reflected in other operating costs in the consolidated statement of income for the year ended December 31, 2005. However, such
amount has been reclassified to loss on impairment of real estate assets to be consistent with the financial statement presentation for the year ended December 31, 2006.



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 inventories 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.



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 of Financial Accounting Standards 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. The
profit recorded by the Company is based on the calculation of cost of sales which is dependent on the Companys allocation of costs which is described in more detail above in the section entitled Real Estate Inventories and Cost of
Sales.



Variable Interest Entities



Certain land purchase contracts and lot option
contracts are accounted for in accordance with Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (Interpretation No. 46). In addition, all joint ventures are
reviewed and analyzed under Interpretation No. 46 to determine whether or not these arrangements are accounted for under the principles of Interpretation No. 46 or other accounting rules. Under Interpretation No. 46, a variable interest entity
(VIE) is created when (i) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) the entitys equity
holders as a group either (a) lack direct or indirect ability to make decisions about the entity through voting or similar rights, (b) are not



48



---

##### Table of Contents

obligated to absorb expected losses of the entity if they occur or (c) do not have the right to receive expected residual returns of the entity if they
occur. If an entity is deemed to be a VIE pursuant to Interpretation No. 46, the enterprise that absorbs a majority of the expected losses, receives a majority of the entitys expected residual returns, or both, is considered the primary
beneficiary and must consolidate the VIE. Expected losses and residual returns for VIEs are calculated based on the probability of estimated future cash flows as defined in Interpretation No. 46. Based on the provisions of Interpretation No. 46,
whenever the Company enters into a land purchase contract or an option contract for land or lots with an entity and makes a non-refundable deposit, or enters into a joint venture, a VIE may be created and the arrangement is evaluated under
Interpretation No. 46. In order to (i) evaluate whether the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support from other parties, (ii) calculate expected losses, expected
residual returns and the probability of estimated future cash flows, and (iii) determine whether the Company is the primary beneficiary, the Company must exercise significant judgment regarding the interpretation of the terms of the underlying
agreements in light of Interpretation No. 46 and make assumptions regarding future events that may or may not occur. The terms of these agreements are subject to various interpretations and the assumptions used by the Company are inherently
uncertain. The use by the Company of different interpretations and/or assumptions could affect the Companys evaluation as to whether or not land purchase contracts, lot option contracts or joint ventures are VIEs and whether or not the Company
is the primary beneficiary of the VIE.



The Companys
critical accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements.



Related Party Transactions



See Item 13 and Note 10 of the Notes to Consolidated Financial Statements for a description of the Companys transactions with related
parties.



Tender Offer and Merger



On March 17, 2006, General William Lyon, Chairman of the Board and Chief
Executive Officer of the Company, announced that he commenced an offer to purchase all outstanding shares of common stock of William Lyon Homes not already owned by him for $93.00 per share in cash. The expiration date for the tender offer at the
time of the offer was Thursday, April 13, 2006, unless the offer were extended.



The offer was subject to the non-waivable condition that there shall have been validly tendered and not withdrawn before the offer expires at least a majority of the outstanding shares not owned by General Lyon, The
William Harwell Lyon 1987 Trust, The William Harwell Lyon Separate Property Trust or the officers and directors of William Lyon Homes immediately before the commencement of the offer. The offer was also subject to the receipt by General Lyon of the
proceeds under his financing commitment from Lehman Commercial Paper Inc. and Lehman Brothers Inc. The offer was also subject to other terms and conditions as set forth in the tender offer materials filed with the Securities and Exchange Commission
and distributed to William Lyon Homes stockholders, and was initially subject to the further condition that sufficient shares were tendered in the offer such that the tendered shares, together with the shares already directly or indirectly
owned by General Lyon and the trusts, would represent at least 90% of the shares outstanding upon expiration of the offer.



On March 23, 2006, the Company announced that its board of directors had formed a special committee of independent directors to consider the offer by
General Lyon with the assistance of outside financial and legal advisors which the special committee retained. On April 10, 2006, General Lyon announced that he would amend his tender offer for all the outstanding shares of William Lyon Homes by
increasing the offer price to $100 per share. The special committee determined that it would recommend that stockholders tender their shares in connection with the amended offer. General Lyon also extended his offer until Friday, April 21, 2006.
General Lyon had also reached an agreement, subject to final court approval, to settle certain class action lawsuits that had been filed in Delaware on behalf of William Lyon Homes stockholders. As described below in Note 7 



49



---

##### Table of Contents

Commitments and Contingencies, the Delaware Chancery Court approved the settlement on August 9, 2006. Another class action lawsuit filed in California has
been stayed by the California court.



On April 24, 2006,
General Lyon announced that he was extending his tender offer for all outstanding shares of William Lyon Homes not owned by him through April 28, 2006, and that he would waive the 90% condition to the offer. On May 1, 2006, General Lyon announced
that he was further extending the tender offer through May 12, 2006, and that he was further amending the tender offer by increasing the offer price to $109.00 per share. All other terms and conditions of the offer remain the same, as set forth in
the tender offer materials disseminated by General Lyon.



On
May 18, 2006, General Lyon announced the completion of his tender offer to purchase all of the outstanding shares of the common stock of the Company not already owned by him for $109.00 net per share in cash. Computershare Trust Company of New York,
the depositary for the offer, had advised General Lyon that an aggregate of 1,711,125 shares were tendered in the offer, including 310,652 shares that remained subject to guaranteed delivery procedures. The shares tendered in the offer, together
with the shares already owned by General Lyon, The William Harwell Lyon 1987 Trust and The William Harwell Lyon Separate Property Trust, represented over 90% of the outstanding shares of the Company, which would be sufficient to enable General Lyon
to effect a short-form merger with the Company under Delaware law.



On July 26, 2006, General Lyon announced that on July 25, 2006, WLH Acquisition Corp., a corporation owned by General Lyon, The William Harwell Lyon 1987 Trust and The William Harwell Lyon Separate Property Trust, was merged with and into
the Company, with the Company continuing as the surviving corporation of the merger. At the effective time of the merger, each outstanding share of the Companys common stock (except for shares owned by WLH Acquisition Corp. and by stockholders
who properly exercise their appraisal rights in accordance with Delaware law) was cancelled and converted into the right to receive $109.00 per share in cash, without interest, which is the same consideration that was paid for shares of the Company
in the tender offer by General Lyon. Shareholders of the Company as of the effective time of the merger were sent additional information by mail on the process for receiving the merger consideration or exercising their appraisal rights.



Prior to the completion of the merger, General Lyon and the two trusts
contributed all the shares of the Company owned by them, which constituted more than 90% of the outstanding shares, to WLH Acquisition Corp. WLH Acquisition Corp. was then merged with and into the Company pursuant to the short-form merger provisions
of Delaware law. Prior to the merger, the Company had cancelled and retired 1,275,000 shares of its common stock which had been repurchased and were being held in the treasury. After the merger, the Companys equity consists of 1,000 shares of
common stock outstanding. The Company will continue as a privately held company, wholly owned by General Lyon and the two trusts.



See Part IItem 3. Legal Proceedings for information on certain lawsuits which have been filed relating to General Lyons proposal.



Recently Issued Accounting Standards



In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. FAS 157 is not expected to materially affect how we determine fair value.



In September 2006, the Securities and Exchange Commission Staff issued Staff
Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial



50



---

##### Table of Contents

Statements, (SAB 108). SAB 108 addresses how the effects of prior year uncorrected financial statement misstatements should be considered
in current year financial statements. SAB 108 requires registrants to quantify misstatements using both balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material in light
of relative quantitative and qualitative factors. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. SAB 108 did not have an effect on the Companys consolidated financial
statements.



In July 2006, the Financial Accounting Standards
Board (the FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). This interpretation, among other things, creates a two step approach for evaluating uncertain tax
positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that
more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being
sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements. FIN 48 is effective for fiscal years beginning after
December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. The Company is evaluating the provisions of FIN 48 and has not yet determined the impact
on the Companys financial statements.



On June 29, 2005,
the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 04-05, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights (EITF 04-05). The scope of EITF 04-05 is limited to limited partnerships or similar entities (such as limited liability companies that have governing provisions that are the functional equivalent of a limited
partnership) that are not variable interest entities under Interpretation No. 46 and provides a new framework for addressing when a general partner in a limited partnership, or managing member in the case of a limited liability company, controls the
entity. Under EITF 04-05, the Company may be required to consolidate certain investments in which the Company holds a general partner or managing member interest. EITF 04-05 was effective after June 29, 2005 for new entities formed after such date
and for existing entities for which the agreements are subsequently modified and was effective for the Companys fiscal year beginning January 1, 2006 for all other entities. The adoption of EITF 04-05 did not have any impact on the
Companys financial statements as of December 31, 2006. EITF 04-05 may require the consolidation of the assets, liabilities and operations of certain of the Companys homebuilding and land development joint ventures. Since the Company
already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of EITF 04-05 will not impact the Companys consolidated net income.



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



51



---

##### Table of Contents

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, terrorism or other hostilities involving the United States, whether an ownership change occurred which could, under certain circumstances, have resulted in the limitation of the
Companys ability to offset prior years taxable income with net operating losses, changes in home mortgage interest rates, changes in generally accepted accounting principles or interpretations of those principles, 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 its debt obligation 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. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, those factors or
conditions described under Managements Discussion and Analysis of Financial Condition and Results of Operations. The Companys past performance or past or present economic conditions in the Companys housing markets are
not indicative of future performance or conditions. Investors are urged not to place undue reliance on forward-looking statements. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of anticipated or unanticipated events or changes to projections over time unless required by federal securities law.



Item 7A.Quantitative and Qualitative Disclosures About Market Risk



The Companys exposure to market risk for changes in interest rates relates to the Companys floating rate debt with a total outstanding balance
at December 31, 2006 of $265.6 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 no reduction to income before provision for income taxes based on amounts outstanding and rates in effect at December 31, 2006, but would increase capitalized interest by approximately $1.7 million which would be amortized to cost of sales
as home closings occur.



Item 8.Financial Statements and Supplementary Data



The consolidated financial statements of William Lyon Homes and the reports of the independent registered public accounting firm, listed under Item 15,
are submitted as a separate section of this report beginning on page 80 and are incorporated herein by reference.



Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



None.



Item 9A.Controls and Procedures



Evaluation of Disclosure Controls and Procedures.    An evaluation was performed under the supervision and with the
participation of the Companys management, including its principal executive officer and principal financial officer, of the effectiveness of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Companys principal executive officer and principal financial officer concluded that the Companys disclosure controls and procedures were effective as
of the end of the period covered by this Annual Report. Although the Companys disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives, there can be no assurance that such disclosure
controls and procedures will always achieve their stated goals under all circumstances.



Changes in Internal Control Over Financial Reporting.    There have been no significant changes in the Companys internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange



52



---

##### Table of Contents

Act of 1934, as amended) that occurred during the Companys fourth fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.



Managements Annual Report on Internal Control Over Financial Reporting.    The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rules 13a-15(f), and for its assessment of the effectiveness of internal control over financial reporting. Under the supervision and with the participation of the Companys management, including its
principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control
 Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Based on the Companys evaluation under the framework in Internal Control  Integrated Framework,the Companys management concluded that its internal control over financial reporting was effective as of December 31, 2006.



The assessment by the Companys management of the effectiveness of the Companys internal control over financial reporting as of December 31,
2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report that is included herein.



53



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

William Lyon Homes



We have audited managements assessment, included in the accompanying Managements Annual Report on Internal Control Over Financial
Reporting, that William Lyon Homes maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The management of William Lyon Homes is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.



In our
opinion, managements assessment that William Lyon Homes maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion,
William Lyon Homes maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of William Lyon Homes as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders equity and cash flows for each of the three years in the period ended December 31, 2006 and our
report dated March 2, 2007 expressed an unqualified opinion thereon.



/s/ ERNST & YOUNG LLP



Irvine, California

March 2, 2007



Item 9B.Other Information



None.



54



---

##### Table of Contents

PART III



Item 10.Directors, Executive Officers and Corporate Governance



Information Regarding the Directors of William Lyon Homes



The following table lists the Directors of the Company and provides their respective ages and current positions with the Company as of March 1, 2007. Each
director holds office until the Companys next Annual Meeting and until his successor is duly elected and qualified. Except as described below, there are no family relationships between any director or executive officer and any other director
or executive officer of William Lyon Homes. Biographical information for each Director is provided below.



|                              |  |     |  |                                                                    
|----------------------------- |  | --- |  | -------------------------------------------------------------------
|Name                          |  | Age |  | Position                                                           
|General William Lyon          |  | 83  |  | Chairman of the Board of Directors and Chief Executive Officer     
|Douglas F. Bauer              |  | 45  |  | Director, President and Chief Operating Officer                    
|William H. Lyon               |  | 33  |  | Director, Executive Vice President and Chief Administrative Officer
|Douglas K. Ammerman (a, b, c) |  | 55  |  | Director                                                           
|Wade H. Cable                 |  | 58  |  | Director                                                           
|Richard E. Frankel            |  | 61  |  | Director                                                           
|Harold H. Greene (a, b, c)    |  | 67  |  | Director                                                           
|Lawrence M. Higby (a, b, c)   |  | 61  |  | Director                                                           
|Gary H. Hunt (a, b, c)        |  | 58  |  | Director                                                           
|Arthur B. Laffer (b, c)       |  | 66  |  | Director                                                           
|Alex Meruelo (a, b, c)        |  | 44  |  | Director                                                           

---

|(a) |  | Member of the Audit Committee
|--- |  | -----------------------------



|(b) |  | Member of the Compensation Committee
|--- |  | ------------------------------------



|(c) |  | Member of the Nominating and Corporate Governance Committee
|--- |  | -----------------------------------------------------------



GENERAL WILLIAM LYON was elected director and Chairman of the Board of the former The Presley Companies in
1987 and has served the Company in that capacity since November 1999. General Lyon is the Companys Chief Executive Officer. General Lyon also serves as the Chairman of the Board, President and Chief Executive Officer of the former William Lyon
Homes, which sold substantially all of its assets to the Company in 1999 and subsequently changed its name to Corporate Enterprises, Inc. In recognition of his distinguished career in real estate development, General Lyon was elected to the
California Building Industry Foundation Hall of Fame in 1985. General Lyon is a retired USAF Major General and was Chief of the Air Force Reserve from 1975 to 1979. General Lyon is a director of Fidelity Financial Services, Inc. and is Chairman of
the Board of Directors of Commercial Bank of California.



DOUGLAS F. BAUER, President and Chief Operating Officer, joined the Company in 1999 when it acquired substantially all of the assets of the former William Lyon Homes, where Mr. Bauer had served as Vice
President  Finance and Chief Financial Officer and Northern California Region President since his hire in January 1989. Effective on July 1, 2005, Mr. Bauer was appointed Executive Vice President. Effective on March 1, 2007, Mr. Bauer was
appointed as President and Chief Operating Officer of the Company. Prior experience includes seven years at Security Pacific National Bank in Los Angeles, California in various financial positions. Mr. Bauer has more than 20 years experience in the
real estate development and homebuilding industry.



WILLIAM H. LYON, Executive Vice President and Chief Administrative Officer, son of Chairman William Lyon, worked full time with the former William Lyon Homes from November 1997 through November 1999 as an
assistant project manager, has been employed by the Company since November 1999 and has been a member of the board of directors since January 25, 2000. Since joining the Company, Mr. Lyon has been employed as an



55



---

##### Table of Contents

assistant project manager and project manager and has participated in a training program designed to expose him to the many facets of real estate
development. From February 2003 until February 2005, he served as the Companys Director of Corporate Affairs. In February 2005, he was appointed Vice President and Chief Administrative Officer of the Company. Effective on March 1, 2007, Mr.
Lyon was appointed as Executive Vice President and Chief Administrative Officer. Mr. Lyon received a dual B.S. in Industrial Engineering and Product Design from Stanford University in 1997.



DOUGLAS K. AMMERMAN was appointed to the Board
of Directors on February 27, 2007. Mr. Ammermans business career includes almost three decades of service with KPMG, independent public accountants, until his retirement in 2002. He was the Managing Partner of the Orange County office and was
the National Partner in Charge  Tax. He is a certified public accountant and a member of the American Institute of Certified Public Accountants. Mr. Ammerman is a member of the Board of Directors of Fidelity National Financial (a company
listed on the New York Stock Exchange), where he also serves as Chairman of the Audit Committee. He also is a member of the Board of Directors of Quicksilver (a company listed on the New York Stock Exchange), where he also serves as Chairman of the
Audit Committee, a member of the Compensation Committee and a member of the Nominating and Corporate Governance Committee. He also is a member of the Board of Directors of El Pollo Loco, where he also serves as Chairman of the Audit Committee. Mr.
Ammerman has served as a director of The Pacific Club for twelve years and is a past president. He also has served as a director of the UCI Foundation for fourteen years.



WADE H. CABLE served from 1985 to 1999 as a director and President and Chief Executive Officer
of the former The Presley Companies and has served as a director and President and Chief Operating Officer of the Company since November 1999. Effective on March 1, 2007, Mr. Cable retired from the Company as President and Chief Operating Officer
but remains as a member of the Board of Directors. Prior to joining The Presley Companies, he worked for thirteen years with Pacific Enterprises as a senior executive in various of its real estate operations, including two years as an Executive Vice
President of Pacific Lighting Real Estate Group and four years as the President of Fredricks Development Company, a residential developer and homebuilder.



RICHARD E. FRANKEL has been associated with homebuilding entities for over 25 years, and joined the board of directors on
January 25, 2000. From 1977 to 1997, he held key positions including Chief Financial Officer, Investment Division Manager, Vice Chairman and President of the former William Lyon Homes. Until December 31, 2005, he served as Chairman and Chief
Executive Officer of William Lyon Financial Services, a wholly-owned subsidiary of the Company. He is also a director of Commercial Bank of California.



HAROLD H. GREENE joined the board of directors on October 17, 2005. Mr. Greene is a 40-year veteran of the commercial and
residential real estate lending industry. He most recently served as the Managing Director for Bank of Americas California Commercial Real Estate Division from 1998 to 2001 where he was responsible for lending to commercial real estate
developers in California and managed an investment portfolio of approximately $2.6 billion. From 1990 to 1998, Mr. Greene was the Executive Vice President of SeaFirst Bank in Seattle, Washington and prior to that he served as the Vice Chairman of
MetroBank from 1989 to 1990 and in various positions, including Senior Vice President in charge of the Asset Based Finance Group, with Union Bank, where he worked for 27 years. Mr. Greene currently serves as a director of Garys and Company
(mens clothing retailer) and as a director and member of the audit committee of Paladin Realty Income Properties, Inc. (real estate investments). He also serves as a director and member of the audit committee of NNN Realty Advisors (real
estate management).



LAWRENCE M.
HIGBY was appointed to the Board of Directors on January 17, 2006 and has more than 30 years of corporate executive experience. As Chief Executive Officer of Apria Healthcare, the nations largest integrated home healthcare
provider, Mr. Higby leads Aprias strategic direction and oversees the companys operations, marketing and sales strategies, government relations, clinical services, regulatory compliance, acquisitions, human resources, finance and
information systems functions. In addition, Mr. Higby serves as a board member of the Automobile Club of Southern California, the Orange County Performing Arts Center, the South Coast Repertory, and the American Association for Homecare (AAHomecare)
for which he is an active



56



---

##### Table of Contents

member of its executive committee. Prior to joining Apria Healthcare in 1997, Mr. Higby served as President and Chief Operating Officer of Unocals 76
Products Company and Group Vice President of Unocal Corporation from 1994 to 1997. From 1986 to 1994, Mr. Higby held various positions with The Times Mirror Company. From 1974 through 1985, he held executive management positions in sales and
marketing at various divisions of New York-based PepsiCo.



GARY H. HUNT joined the board of directors on October 17, 2005. He has more than three decades of experience in government, business, major land use planning and development, as well as governmental and
political affairs. Since 2001, Mr. Hunt has been the Managing Partner of California Strategies, LLC, a strategic consulting firm, in Newport Beach, California with offices in Sacramento and Los Angeles. Formerly Executive Vice President and a member
of the Board of Directors and the Executive Committee of The Irvine Company, a real estate developer, for which Mr. Hunt worked for 24 years, Mr. Hunts career also includes staff and appointed positions with the California State Legislature,
U.S. House of Representatives, California Governor Ronald Reagan, and President George W. Bush. He currently serves as Chairman of the California Bay Delta Authority. He also currently serves as a director of Glenair Inc., a manufacturer of
electrical connector accessories and as Chairman of the Board of Advisors of Kennecott Land Company, a real estate land developer in Utah. He also serves as a director and member of the audit committee of NNN Realty Advisors (real estate
management).



ARTHUR B. LAFFER
joined the board of directors on October 17, 2005. He is the Founder and has been Chairman and Chief Executive Officer of Laffer Associates, an economic research and financial consulting firm, in San Diego, California. Dr. Laffer has also been Chief
Executive Officer of Laffer Advisers Inc., a broker-dealer, since 1981, and Chief Executive Officer of Laffer Investments, an investment money management firm, since 1999. Dr. Laffer has been a leader in the nation in providing economic research and
global investment- research consulting services to real estate asset managers, pension funds, financial institutions, and top corporations. Commonly known as The Father of Supply-Side Economics, Dr. Laffer is a founding member of the
U.S. Congressional Policy Advisory Board, served two terms as a member of President Reagans Economic Policy Advisory Board, and helped shape public policy with his involvement in Californias Proposition 13, the groundbreaking California
initiative that drastically cut state property taxes in 1978. Dr. Laffer is a member of the board of directors and chairman of the audit and compensation committees of OXiGENE, Inc. (biopharmaceuticals); a member of the board of directors of Veolia
Environment (environmental management); and a member of the board of directors and a member of the audit and compensation committees of MPS Group, Inc. (business services provider).



ALEX MERUELO has invested extensively in residential and commercial real estate throughout
Southern California since 1987, primarily in Hispanic neighborhoods. Mr. Meruelo currently is the President and Chief Executive Officer of Meruelo Enterprises, Inc., Cantamar Property Management, Inc. and La Pizza Loca, Inc. Mr. Meruelo currently
owns and manages over 1,000 residential units and over 20 retail units and has overseen over 15 developments. Mr. Meruelo established La Pizza Loca, a fast food pizza restaurant, in 1986 and which now has over 50 franchised and company owned
restaurants serving Latino communities throughout Southern California. Since 1999, Mr. Meruelo has focused his endeavors on the construction industry and, through Meruelo Enterprises, owns a number of established Southern California utility
construction contractors including Herman Weissker, Inc., Doty Bros. Equipment Company and Tidwell Excavating. He has been a member of the board of directors since May 10, 2004. Mr. Meruelo is also a member of the board of directors and chairman of
the audit committee of Commercial Bank of California.



Audit Committee. The Company has a standing Audit Committee, which is chaired by Mr. Harold H. Greene and consists of Messrs. Greene, Ammerman, Higby, Hunt and Meruelo. Mr. Ammermans appointment as a member of the Audit
Committee was effective on February 27, 2007, the date he was appointed to the Board of Directors. The Board has determined that all committee members are independent and financially literate under the standards established by the Securities and
Exchange Commission (the SEC) and the New York Stock Exchange (the NYSE). The Board has determined that Mr. Greene is an audit committee financial expert as defined by the SEC.



57



---

##### Table of Contents

Information Regarding Executive Officers of William Lyon Homes



The executive officers of the Company are chosen annually by the Board of
Directors and each holds office until his or her successor is chosen and qualified or until his or her death, resignation or removal. There are no family relationships between any director or executive officer and any other director or executive
officer of the Company, except for William Lyon and William H. Lyon, who are father and son. The following table lists the Companys executive officers and provides their respective ages as of March 1, 2007 and their current positions.



|                     |  |     |  |                                                                       
|-------------------- |  | --- |  | ----------------------------------------------------------------------
|Name                 |  | Age |  | Position                                                              
|General William Lyon |  | 83  |  | Chairman of the Board of Directors and Chief Executive Officer        
|Douglas F. Bauer     |  | 45  |  | President and Chief Operating Officer                                 
|William H. Lyon      |  | 33  |  | Executive Vice President and Chief Administrative Officer             
|Mary J. Connelly     |  | 55  |  | Senior Vice President and Nevada Region President                     
|W. Thomas Hickcox    |  | 54  |  | Senior Vice President and Arizona Region President                    
|Thomas J. Mitchell   |  | 46  |  | Senior Vice President and Southern California Coastal Region President
|Larry I. Smith       |  | 52  |  | Senior Vice President and Inland Empire California Region President   
|Michael D. Grubbs    |  | 48  |  | Senior Vice President and Chief Financial Officer                     
|W. Douglass Harris   |  | 63  |  | Senior Vice President, Corporate Controller and Corporate Secretary   
|Richard S. Robinson  |  | 60  |  | Senior Vice President  Finance                                       
|Cynthia E. Hardgrave |  | 58  |  | Vice President  Tax and Internal Audit                               



Officers serve at the
discretion of the Board of Directors, subject to rights, if any, under contracts of employment. See Employment Contracts in Part III, Item 11. Biographical information for General Lyon, Mr. Bauer and Mr. William H. Lyon is provided
above. See Information Regarding the Directors of William Lyon Homes.



MARY J. CONNELLY, Senior Vice President and Nevada Region President, joined The Presley Companies in May 1995, after eight years association with Gateway Development, six of which
were served as Managing Partner in Nevada. Ms. Connelly was Vice President  Finance for the Companys San Diego Division from 1985 to 1987, and she has more than 20 years experience in the real estate development and homebuilding
industry.



W. THOMAS HICKCOX,
Senior Vice President and Arizona Region President, joined the Company in May 2000. Mr. Hickcox was previously President of Continental Homes in Phoenix, Arizona, with 16 years of service at that company. Mr. Hickcox has more than 20 years
experience in the real estate development and homebuilding industry.



THOMAS J. MITCHELL, Senior Vice President and Southern California Coastal Region President, joined the Company in 1999 when it acquired substantially all of the assets of the former William Lyon Homes, where
Mr. Mitchell had served as a Project Manager, Vice President, and Division President since his hire in December 1988. Mr. Mitchell has more than 20 years experience in the real estate development and homebuilding industry.



LARRY I. SMITH, Senior Vice President and
Inland Empire California Region President, joined The Presley Companies in May 1995 and has served the Company in that capacity since November 1999, after six years as Vice President and Southern California Division Manager of Coleman Homes, Inc.
Previous experience includes ten years in sales and marketing executive positions and consulting activities with southern California real estate firms. Mr. Smith has more than 20 years experience in the real estate development and homebuilding
industry.



MICHAEL D. GRUBBS,
Senior Vice President and Chief Financial Officer, joined the Company in 1999 when it acquired substantially all of the assets of the former William Lyon Homes, where Mr. Grubbs had served as



58



---

##### Table of Contents

Vice President and Corporate Controller after his hire in December 1992. Mr. Grubbs has more than 20 years experience in residential real estate and
homebuilding finance.



W. DOUGLASS
HARRIS, Senior Vice President, Corporate Controller and Corporate Secretary joined The Presley Companies in June 1992 and has served the Company in that capacity since November 1999. Mr. Harris has served as the Corporate Secretary of
the Company since October 2002. Previously, Mr. Harris spent seven years with Shapell Industries, Inc., another major California homebuilder, as its Vice President and Corporate Controller. Mr. Harris has been involved with the real estate
development and homebuilding industry for more than 30 years.



RICHARD S. ROBINSON, Senior Vice President  Finance, joined the Company in 1999 when it acquired substantially all of the assets of the former William Lyon Homes, where Mr. Robinson had served since May
1997 as Senior Vice President, and as Vice President  Treasurer and other administrative positions at The William Lyon Company or one of its subsidiaries or affiliates since his hire in June 1979. His experience in residential real estate
development and homebuilding finance totals more than 30 years.



CYNTHIA E. HARDGRAVE, Vice President  Tax and Internal Audit, joined the Company in 1999 when it acquired substantially all of the assets of the former William Lyon Homes, where Ms. Hardgrave had served
in various tax management positions since her hire in July 1989. Ms. Hardgrave has more than 20 years experience in real estate tax and audit.



Section 16(a) Beneficial Ownership Reporting Compliance



Based solely upon a review of reports received by the Company during or with respect to the year ended December 31, 2006 pursuant to Rule 16a-3(e) of the
Securities Exchange Act of 1934, all reports required during or with respect to the year ended December 31, 2006 on Form 3, Form 4 and Form 5 were timely filed by the Companys directors, officers and 10% stockholders.



Code of Ethics



The Board has adopted a Code of Business Conduct and Ethics (the Code of Ethics) that is applicable to all
directors, employees, and officers of the Company. The Code of Ethics constitutes the Companys code of ethics within the meaning of Section 406 of the Sarbanes-Oxley Act and the Companys code of business conduct and
ethics within the meaning of the listing standards of the NYSE. The Company intends to disclose future amendments to certain provisions of the Code of Ethics, or waivers of such provisions applicable to the Companys directors and
executive officers, on the Companys website at www.lyonhomes.com.



The Code of Ethics is available on the Companys website at www.lyonhomes.com. In addition, printed copies of the Code of Ethics are available upon written request to Investor Relations, William Lyon Homes, 4490 Von Karman Avenue,
Newport Beach, California 92660.



Item 11.Executive Compensation



Compensation Discussion and Analysis



Attracting, retaining, and motivating well-qualified executives is essential to the success of any company. This is particularly the case with us, as our
industry is highly competitive and is subject to market fluctuations beyond our control. In light of the highly competitive market for top executive talent in our industry, the goals of our compensation program are to provide significant rewards for
successful performance, and to encourage retention of top executives who may have attractive opportunities at other companies. At the same time, we try to keep our selling, general and administrative (SG&A) costs at competitive
levels when compared with other major homebuilders.



59



---

##### Table of Contents

Our compensation decisions are made by the Compensation Committee, which is composed entirely of
independent outside members of our Board of Directors. The Compensation Committee receives recommendations from our senior executives and consults with outside independent compensation consultants, such as Kenneth R. Abel, Ph.D, as it deems
appropriate. The Compensation Committee and its consultants also consider publicly-available information on the executive compensation of other major homebuilders. Members of our executive team are involved in the compensation process by assembling
data to present to the Compensation Committee and by working with the outside independent compensation consultants to give them the information necessary to enable them to complete their reports.



Internal Revenue Code Section 162(m) generally disallows a tax deduction to
reporting companies for compensation over $1,000,000 paid to each of the companys chief executive officer and the four other most highly compensated officers, except for compensation that is performance based. Since we no longer
have a class of publicly-traded equity securities outstanding, we are no longer subject to Section 162(m), and therefore it is not a factor in our compensation decisions.



Elements Of Compensation



Salary



OurCompensation Committee generally reviews the base salary of our named executive officers annually. In view of our desire to reward performance
and loyalty while keeping SG&A costs competitive, we do not regard salary as the principal component of the compensation of our named executive officers. We believe that the salaries of our named executive officers are very conservative when
compared with the salaries paid by other major homebuilders to similar officers.



Bonuses



Near the
beginning of each year, the Compensation Committee sets objective performance criteria for the bonuses of named executive officers for that year. Although the Compensation Committee sets the objective performance criteria at the beginning of each
year, in practice the objective performance criteria have been essentially the same for the past several years. We believe that the virtual uniformity of the objective performance criteria over the past several years has helped to reward
productivity and loyalty by stabilizing the goalposts for bonuses over changing economic times. The objective performance criteria which the Compensation Committee has selected tie each named executive officers bonus directly to our
consolidated pre-tax, pre-bonus income (or, in the case of a region president, to his regions pre-tax, pre-bonus income), thereby directly rewarding performance.



We believe that our bonus plan for our named executive officers is similar to the bonus plans at other major homebuilders.
Application of the objective performance criteria can produce large bonuses in the event that we have (or our relevant region has) high pre-tax, pre-bonus income. We believe that large bonuses to our named executive officers are appropriate if we
have (or our relevant region has) high pre-tax, pre-bonus income, particularly because in recent years we have not awarded any options or other equity compensation.



A named executive officers right to receive a bonus is conditioned on his being actively employed by us on the date of
payment, except in the case of retirement, death or disability. Bonuses for a particular year will be paid out over two years, with 75% paid following the determination of the bonus, and 25% paid one year later, again conditioned on continued
employment to the date of payment, except in the case of retirement, death or disability. These provisions help insure the loyalty and continued service of our named executive officers.



Our Compensation Committee retains the discretion to increase the bonus of a named executive officer in the event of an
extraordinary performance, or decrease it in the case of a substandard performance, and may make this determination on the basis of objective or subjective criteria, including, but not limited to, the pay levels of executives at other major
homebuilders. In practice, the Compensation Committee has seldom exercised this discretion in recent years.



60



---

##### Table of Contents

Deferred Compensation



As explained more fully below, our Executive Deferral Plan gives our named executive officers the opportunity to defer any
whole percentage of their base salary and bonus, so long as the percentage does not exceed 20% and the amount deferred is not less that $10,000 annually. Deferred salary and bonuses are deemed to be invested in one or more hypothetical investment
options, which will be individually chosen by each named executive officer from a list of investment alternatives. Each named executive officers deferred compensation account will be adjusted to reflect the investment performance of the
selected investment, including any appreciation or depreciation. The hypothetical investment alternatives are for bookkeeping purposes only, and we are not obligated to invest the deferred compensation in the investment alternatives specified by the
named executive officers. Rather, our obligation ultimately to pay the deferred compensation and earnings is one of our general, unsecured obligations to creditors.



We believe that the Executive Deferral Plan rewards performance and loyalty by giving our named executive officers a
valuable tax and personal planning tool. Also, because our obligation ultimately to pay deferred compensation and earnings to a named executive officer is one of our unsecured general obligations to creditors, a named executive officer who
participates in the Executive Deferral Plan has a compelling interest in our continued success.



Summary Compensation Table



The following table summarizes the annual and long-term compensation during 2006 of the Companys Principal Executive Officer and Principal Financial Officer and the three additional most highly compensated executive officers whose
annual salaries and bonuses exceeded $100,000 in total during the fiscal year ended December 31, 2006 (collectively, the Named Executive Officers).



|                                                                                                     |  |      |  |              |           |           |   |                |  |                 |   |                                               |   |                                                                       |  |                             |           |           |   |   |  |   |       |  |   |          
|---------------------------------------------------------------------------------------------------- |  | ---- |  | ------------ | --------- | --------- | - | -------------- |  | --------------- | - | --------------------------------------------- | - | --------------------------------------------------------------------- |  | --------------------------- | --------- | --------- | - | - |  | - | ----- |  | - | ---------
|Name and Principal Position                                                                          |  | Year |  | Salary($)(1) |           | Bonus ($) |   | StockAwards($) |  | OptionAwards($) |   | Non-EquityIncentive PlanCompensation($)(1)(2) |   | Change inPension ValueandNonqualifiedDeferredCompensationEarnings ($) |  | All OtherCompensation($)(3) |           | Total ($)
|General William Lyon Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |  | 2006 |  | $            | 1,000,000 |           | $ |               |  | $               |  |                                               | $ |                                                                      |  | $                           | 4,529,730 |           | $ |  |  | $ |      |  | $ | 5,529,730
|                                                                                                     |  |      |  |              |           |           |   |                | 
|Michael D. Grubbs Senior Vice President and Chief Financial Officer (Principal Financial Officer)    |  | 2006 |  |              | 225,000   |           |   |               |  |                 |  |                                               |   |                                                                      |  |                             | 754,955   |           |   |  |  |   | 6,600 |  |   | 986,555  
|                                                                                                     |  |      |  |              |           |           |   |                | 
|Wade H. Cable Director(4)                                                                            |  | 2006 |  |              | 500,000   |           |   |               |  |                 |  |                                               |   |                                                                      |  |                             | 4,529,730 |           |   |  |  |   | 6,600 |  |   | 5,036,330
|                                                                                                     |  |      |  |              |           |           |   |                | 
|Douglas F. Bauer Director, President and Chief Operating Officer(4)                                  |  | 2006 |  |              | 275,000   |           |   |               |  |                 |  |                                               |   |                                                                      |  |                             | 1,542,893 |           |   |  |  |   | 6,600 |  |   | 1,824,493
|                                                                                                     |  |      |  |              |           |           |   |                | 
|Thomas J. Mitchell Senior Vice President and Southern California Coastal Region President            |  | 2006 |  |              | 225,000   |           |   |               |  |                 |  |                                               |   |                                                                      |  |                             | 1,605,000 |           |   |  |  |   | 6,600 |  |   | 1,836,600

---

|(1) |  | Includes amounts which the executive would have been entitled to be paid, but which at the election of the executive were deferred by payment into the Companys 401(k) plan and
deferred compensation plans.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | The 2006 Senior Executive Bonus Plan (the Plan) provides that (i) the Chief Executive Officer (CEO) and the Chief Operating Officer
(COO) are each eligible to receive a bonus of 3% of the Companys
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



61



---

##### Table of Contents

| | consolidated pre-tax, pre-bonus income; (ii) the Executive Vice President (EVP) is eligible to receive a bonus of 3⁄4 of 1% of the
Companys consolidated pre-tax, pre-bonus income and 3% of the Northern California Regions pre-tax, pre-bonus income, determined after allocation to the Region of its allocable portion of corporate general and administrative expenses; and
(iii) the Chief Financial Officer (CFO) is eligible to receive a bonus of 1⁄2 of 1% of the Companys consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Region President is eligible to receive a bonus of 3%
of the regions pre-tax, pre-bonus income, determined after allocation to the region of its allocable portion of corporate general and administrative expenses. Awards under the Plan will be paid over two years, with 75% paid following the
determination of the bonus awards, and 25% paid one year later. The amounts payable one year later are conditioned upon continued employment to the date of payment, except in the case of retirement, death or disability. All awards under the Plan
will be prorated downward if the sum of all calculated awards under the Plan and the Companys 2006 bonus plans for other officers and employees of the Company and its subsidiaries would exceed 20% of the Companys consolidated pre-tax,
pre-bonus income.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Represents matching contributions made by the Company into each executives 401(k) plan account in an amount equal to 3% of each executives eligible earnings, up to the
maximum permitted. Does not include perquisites or other personal benefits provided to the executive, since the aggregate incremental cost to the Company of such perquisites or other personal benefits provided to the executive is less than $10,000.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | During 2006 and until March 1, 2007, Wade H. Cable served as President and Chief Operating Officer of the Company. Effective on March 1, 2007, Mr. Cable retired as President and
Chief Operating Officer of the Company; however, he remains as a member of the Board of Directors. Upon Mr. Cable s retirement, Douglas F. Bauer was appointed to the position of President and Chief Operating Officer of the Company. During 2006
and until March 1, 2007, Mr. Bauer served as Executive Vice President and Northern California Region President.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Board of Directors approved the Companys 2006 Senior Executive Bonus Plan (the Plan) on February 28, 2006. The Plan provides that
the (i) Chief Executive Officer (CEO) and the Chief Operating Officer (COO) are each eligible to receive a bonus of 3% of the Companys pre-tax, pre-bonus income; (ii) the Executive Vice President (EVP) is
eligible to receive a bonus of 3⁄4 of 1% of the Companys consolidated pre-tax, pre-bonus income and 3% of the Northern California Regions pre-tax, pre-bonus income, determined after allocation to the Region of its allocable portion of
corporate general and administrative expenses; and (iii) the Chief Financial Officer (CFO) is eligible to receive a bonus of 1⁄2 of 1% of the Companys consolidated pre-tax, pre-bonus income. In addition, under the Plan,
each Region President is eligible to receive a bonus of 3% of the divisions pre-tax, pre-bonus income, determined after allocation to the division of its allocable portion of corporate general and administrative expenses. All other
participants under the Plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income. In addition, the Companys board of directors has approved a cash
bonus plan applicable in 2006 for all of its full-time, salaried employees who are not included in the Companys 2006 Senior Executive Bonus Plan. All participants under this cash bonus plan are eligible to receive bonuses based upon specified
percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income.



On February 27, 2007, the Compensation Committee of the Board of Directors approved the 2007 Cash Bonus Plan (including the 2007 Senior Executive Bonus Plan) with terms substantially similar to those of the 2006 Plan.
A description of the plan is filed as an exhibit to this report.



The Compensation Committee retains the discretion to increase the bonus of a named executive officer in the event of an extraordinary performance, or decrease it in the case of a substandard performance, and may make this determination on
the basis of objective or subjective criteria, including, but not limited to, the pay levels of executives at other major homebuilders



For the CEO, COO, EVP, CFO, division presidents, executives and managers, awards under bonus plans are paid over two years, with 75% paid following the
determination of bonus awards, and 25% paid one year later. The deferred amounts would be forfeited in the event of termination for any reason except retirement, death or disability.



62



---

##### Table of Contents

The Company has implemented deferred compensation plans that allow certain officers and employees to
defer a portion of their total income (base salary and bonuses). The deferral amount can be up to 20% of total income with a minimum of $10,000 annually.



Grants of Plan-Based Awards



The following table sets forth information concerning each grant of an award to each of the Named Executive Officers in the year ended December 31, 2006:



|                     |  |                   |  |                                                                |   |                                                           |   |                                                         |  |                                                                |   |                                             |   |                                                 |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |  
|-------------------- |  | ----------------- |  | -------------------------------------------------------------- | - | --------------------------------------------------------- | - | ------------------------------------------------------- |  | -------------------------------------------------------------- | - | ------------------------------------------- | - | ----------------------------------------------- |  | - | - |  | - | - |  | - | - |  | - | - |  | - | - |  | - | -
|                     |  |                   |  | Estimated Future Payouts UnderNon-Equity Incentive Plan Awards |   | Estimated Future PayoutsUnder Equity Incentive PlanAwards |   | All OtherStockAwards:Numberof Sharesof Stockor Units(#) |  | All OtherOptionAwards:Number
ofSecuritiesUnderlyingOptions (#) |   | Exerciseor BasePrice ofOptionAwards($ / Sh) |   | Grant DateFair Valueof StockandOptionAwards ($)
|Name                 |  | Grant Date        |  | Threshold($)(3)                                                |   | Target($)(1)(2)                                           |   | Maximum($)(3)                                           |  | Threshold(#)                                                   |   | Target(#)                                   |   | Maximum(#)                                      |  |   |   | 
|General William Lyon |  | February 27, 2007 |  | $                                                              |  |                                                           | $ | 4,529,730                                               |  | $                                                              |  |                                             | $ |                                                |  | $ |  |  | $ |  |  | $ |  |  | $ |  |  | $ |  |  | $ | 
|Michael D. Grubbs    |  | February 27, 2007 |  |                                                                |  |                                                           |   | 754,955                                                 |  |                                                                |  |                                             |   |                                                |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   | 
|Wade H. Cable        |  | February 27, 2007 |  |                                                                |  |                                                           |   | 4,529,730                                               |  |                                                                |  |                                             |   |                                                |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   | 
|Douglas F. Bauer     |  | February 27, 2007 |  |                                                                |  |                                                           |   | 1,542,893                                               |  |                                                                |  |                                             |   |                                                |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   | 
|Thomas J. Mitchell   |  | February 27, 2007 |  |                                                                |  |                                                           |   | 1,605,000                                               |  |                                                                |  |                                             |   |                                                |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   | 

---

|(1) |  | Includes amounts which the executive would have been entitled to be paid, but which at the election of the executive were deferred by payment into the Companys 401(k) plan and
deferred compensation plans.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | The 2006 Senior Executive Bonus Plan (the Plan) provides that (i) the Chief Executive Officer (CEO) and the Chief Operating Officer (COO) are each
eligible to receive a bonus of 3% of the Companys consolidated pre-tax, pre-bonus income; (ii) the Executive Vice President (EVP) is eligible to receive a bonus of 3⁄4 of 1% of the Companys consolidated pre-tax, pre-bonus
income and 3% of the Northern California Regions pre-tax, pre-bonus income, determined after allocation to the Region of its allocable portion of corporate general and administrative expenses; and (iii) the Chief Financial Officer
(CFO) is eligible to receive a bonus of 1⁄2 of 1% of the Companys consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Region President is eligible to receive a bonus of 3% of the regions pre-tax,
pre-bonus income, determined after allocation to the region of its allocable portion of corporate general and administrative expenses. Awards under the Plan will be paid over two years, with 75% paid following the determination of the bonus awards,
and 25% paid one year later. The amounts payable one year later are conditioned upon continued employment to the date of payment, except in the case of retirement, death or disability. All awards under the Plan will be prorated downward if the sum
of all calculated awards under the Plan and the Companys 2006 bonus plans for other officers and employees of the Company and its subsidiaries would exceed 20% of the Companys consolidated pre-tax, pre-bonus income. The Compensation
Committee retains the discretion to increase the bonus of a named executive officer in the event of an extraordinary performance, or decrease it in the case of a substandard performance, and may make this determination on the basis of objective or
subjective criteria, including, but not limited to, the pay levels of executives at other major homebuilders.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | There are no applicable thresholds or maximum awards under the Plan.
|--- |  | --------------------------------------------------------------------



Options/SAR Grants in Fiscal Year Ended December 31, 2006



No options were granted during 2006 to any director or Named Executive Officer.



On March 7, 2000, the compensation committee of the Companys board of directors unanimously voted to recommend for
approval to the board of directors a proposed compensation package which included the William Lyon Homes 2000 Stock Incentive Plan (the Stock Incentive Plan). Subject to adoption and approval of the Stock Incentive Plan by the
Companys stockholders, on April 6, 2000, acting by unanimous written consent, the board of directors approved and adopted the Stock Incentive Plan. At the Companys 2000 Annual Meeting on May 9, 2000, the stockholders adopted and approved
the Stock Incentive Plan. The Stock Incentive Plan has been administered by the compensation committee, by a delegation of the board of directors.





63



---

##### Table of Contents

On July 25, 2006, WLH Acquisition Corp., a Delaware corporation, merged with and into the Company (the
Merger). Pursuant to the Merger, each outstanding share of Common Stock (other than the shares of Common Stock owned by WLH Acquisition Corp. and the Company) was converted into the right to receive $109.00 per share in cash. As a result
of the Merger, the Company has terminated the Stock Incentive Plan and has terminated all offerings of the Companys Common Stock thereunder.



Effective on May 9, 2000, the Company issued options under the Stock Incentive Plan to purchase a total of 627,500 shares of common stock at $8.6875 per
share. During the year ended December 31, 2001, the Company issued additional options under the Stock Incentive Plan to purchase 32,500 shares of common stock at an average price of $11.50 per share. During the year ended December 31, 2006.
options were exercised to purchase 50,000 shares of common stock at a price of $8.6875. During the year ended December 31, 2005, options were exercised to purchase 35,831 shares of common stock at a price of $8.6875. During the year ended December
31, 2004, options were exercised to purchase 92,964 shares, 6,666 shares and 4,166 shares of common stock at a price of $8.6875, $13.00 and $9.10, respectively. No options remained unexercised at the time the Stock Incentive Plan was terminated as
described in the previous paragraph.



Option Exercises and Stock Vested
Table



The following table sets forth information
concerning all exercises of stock options and all vesting of stock during the fiscal year ended December 31, 2006 by each of the Named Executive Officers.



|                     |  |                                             |  |                                 |           |                                        |   |                              |  
|-------------------- |  | ------------------------------------------- |  | ------------------------------- | --------- | -------------------------------------- | - | ---------------------------- | -
|                     |  | Option Awards                               |  | Stock Awards                   
|                     |  | Number of Shares Acquired onExercise (#)(1) |  | Value Realizedon Exercise($)(2) |           | Number of SharesAcquired onVesting (#) |   | Value Realizedon Vesting ($)
|General William Lyon |  |                                            |  |                                 |          |                                        |  |                              | 
|Michael D. Grubbs    |  |                                            |  |                                 |          |                                        |  |                              | 
|Wade H. Cable        |  | 50,000                                      |  | $                               | 5,013,125 |                                        |  |                              | 
|Douglas F. Bauer     |  |                                            |  |                                 |          |                                        |  |                              | 
|Thomas J. Mitchell   |  |                                            |  |                                 |          |                                        |  |                              | 

---

|(1) |  | All exercised options for each of the Named Executive Officers were granted on May 9, 2000 under the Stock Incentive Plan. The options granted under the Stock Incentive Plan vested
one-third on May 9, 2001, one-third on May 9, 2002 and one-third on May 9, 2003. The exercise price of these options is $8.6875.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | The value realized is calculated by determining the difference between the closing price of the Companys common stock on the New York Stock Exchange at exercise and the
exercise price.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Nonqualified Deferred Compensation Table



The following table sets forth information concerning
nonqualified deferred compensation during the fiscal year ended December 31, 2006 for each of the Named Executive Officers.



|                     |  |                                                 |           |                                               |   |                                         |   |                                       |  |                                              |  |   |          
|-------------------- |  | ----------------------------------------------- | --------- | --------------------------------------------- | - | --------------------------------------- | - | ------------------------------------- |  | -------------------------------------------- |  | - | ---------
|Name                 |  | ExecutiveContributionsin LastFiscal Year ($)(1) |           | RegistrantContributionsin LastFiscal Year ($) |   | AggregateEarningsin LastFiscal Year ($) |   | AggregateWithdrawals/Distributions($) |  | AggregateBalance atLast FiscalYear-End($)(2)
|General William Lyon |  |                                                 |          |                                               |  |                                         |   |                                      |  |                                             |  |   |         
|Michael D. Grubbs    |  | $                                               | 100,000   |                                               |  |                                         | $ | 56,723                                |  |                                             |  | $ | 492,518  
|Wade H. Cable        |  |                                                 | 2,288,550 |                                               |  |                                         |   | 770,704                               |  |                                             |  |   | 6,908,447
|Douglas F. Bauer     |  |                                                 | 100,000   |                                               |  |                                         |   | 10,548                                |  |                                             |  |   | 110,548  
|Thomas J. Mitchell   |  |                                                 | 250,000   |                                               |  |                                         |   | 26,371                                |  |                                             |  |   | 276,371  



64



---

##### Table of Contents

---

|(1) |  | Amounts shown as Executive Contributions in Last Fiscal Year are reported as compensation in the last completed fiscal year in the Summary Compensation Table above.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Amounts shown as Aggregate Balance at Last Fiscal Year End include amounts shown as Executive Contributions in Last Fiscal Year and also include executive contributions in previous
years amounting to $325,000 for Mr. Grubbs and $3,653,290 for Mr. Cable.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Executive Deferral Plan



Under the Executive
Deferral Plan, the Company provides a select group of management and highly compensated employees of the Company and its affiliates the opportunity to enter into agreements for the deferral of a specified percentage of their compensation. The
obligations of the Company under such agreements (the Executive Deferral Obligations) will be unsecured general obligations of the Company to pay the deferred compensation in the future in accordance with the terms of the Executive
Deferral Plan and will rank pari passu with other unsecured and unsubordinated indebtedness of the Company from time to time outstanding.



To participate in the Executive Deferral Plan in a particular year, eligible employees must enroll in the Executive Deferral Plan and select the
percentage of deferral before the beginning of that calendar year. The amount of compensation to be deferred by each participating employee (Participant) will be determined in accordance with the Executive Deferral Plan based on election
by the Participant. Participants may elect to defer any whole percentage of their base salary and bonus, so long as such percentage does not exceed twenty percent (20%) annually, and the amount deferred is not less than $10,000. The Company may make
discretionary contributions to the Executive Deferral Plan in addition to amounts deferred by Participants.



The Executive Deferral Obligations will be deemed invested in one or more hypothetical investment options, which will be individually chosen by each
Participant from a list of hypothetical investment alternatives. Each Participants deferred compensation account will be adjusted to reflect the investment performance of the selected hypothetical investment, including any appreciation or
depreciation. Gains or losses are posted to the Participants account at the end of every calendar quarter, or more frequently if determined by the Companys Board of Directors. The hypothetical investment alternatives are for bookkeeping
purposes only, and the Company is not obligated actually to invest the deferred compensation in the investment alternatives specified by the Participants. The Company does not consider the investment returns on the hypothetical investment
alternatives to be preferential, because the Companys 401(k) plan, which covers a broad range of the Companys employees, offers investment alternatives that are substantially similar to the hypothetical investment alternatives offered
under the Executive Deferral Plan.



The Board of Directors of
the Company is charged with the general administration of the Executive Deferral Plan and the Executive Deferral Obligations. However, to the extent permitted by regulations promulgated by the Internal Revenue Service under Section 409A of the
Internal Revenue Code, as amended, if the Company undergoes a Change in Control (as defined in the Executive Deferral Plan), the Executive Deferral Plan will be administered by a committee of the individuals who were members of the
Companys Board of Directors 90 days before the Change in Control, with any vacancy in such committee being filled by a person selected by the other members of the committee.



No trustee has been appointed having the authority to take action with respect to the Executive Deferral Obligations and
each Participant will be responsible for acting independently with respect to, among other things, the giving of notices, responding to any requests for consents, waivers or amendments pertaining to the Executive Deferral Obligations, enforcing
covenants and taking action upon a default. The Company will, however, establish a grantor (rabbi) trust as described below.



The Executive Deferral Obligations will be distributed by the Company in accordance with the terms of the Executive Deferral Plan and upon the following
circumstances: upon a date selected by a Participant (the date



65



---

##### Table of Contents

selected must be no earlier than the January 1 of the third calendar year after the election is made), termination of employment, death or disability, or
upon the occurrence of certain hardship circumstances.



A
Participants right or the right of any other person to the Executive Deferral Obligations cannot be assigned, transferred, anticipated or otherwise encumbered.



The Company has the right to amend or terminate the Executive Deferral Plan at any time without notice to or consent of any
person. However, no such amendment or termination shall reduce (i) the amount credited to the Participants account; and (ii) the Participants vested percentage in the Companys discretionary contributions and any deemed investment
earnings, gains, losses and changes in value credited on such discretionary contributions. If the Executive Deferral Plan is terminated, benefits will be distributed at the same times and in the same manner as they would have been if the termination
had not occurred. The Executive Deferral Plan may also be amended at any time, to the extent that in the opinion of the Company, the amendment is necessary to ensure that the Executive Deferral Plan will be characterized as a plan maintained for a
select group of management or highly compensated employees as described in sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended. No such
amendment shall be considered prejudicial to any interest of a Participant or a beneficiary designated by a Participant.



The Executive Deferral Obligations are not convertible into any other security of the Company. The Company is required to establish a grantor trust, of
which the Company is the grantor, within the meaning of subpart E, part I, subchapter J, subtitle A of the Internal Revenue Code of 1986, as amended (commonly referred to as a rabbi trust). In the event of the Companys bankruptcy
or insolvency, Participants have no rights to any assets held by such grantor trust, except as general creditors of the Company. The amounts to be contributed to the grantor trust will be determined by the Company in its discretion.



Employment Contracts, Termination of Employment and Change-in-Control Arrangements



Employees, including executive officers, enter into
annual employment agreements which provide that their employment is at-will. The employment agreements with each of General William Lyon, Michael D. Grubbs and Thomas J. Mitchell provide for an annual salary effective January 1, 2007 of $1,000,000,
$225,000 and $225,000 respectively. The employment agreement with Wade H. Cable provided for an annual salary of $500,000 effective January 1, 2007 until the date of his retirement on March 1, 2007. The employment agreement with Douglas F. Bauer
provides for an annual salary of $275,000 effective January 1, 2007 and increasing to an annual salary of $500,000 effective on March 1, 2007 upon his promotion to President and Chief Operating Officer of the Company. Each employment agreement also
provides for a monthly automobile allowance of $400, except for General William Lyon. The employment agreements do not provide for any severance or other payments on termination of employment, or in connection with a change in control of the
Company.



The Company has entered into indemnification
agreements with all of its directors and the Named Executive Officers, among others, to provide them with the maximum indemnification allowed under the Companys certificate of incorporation and applicable law, including indemnification for all
judgments and expenses incurred as the result of any lawsuit in which such person is named as a defendant by reason of being a director, officer or employee of the Company, to the maximum extent such indemnification is permitted by the laws of
Delaware.



Compensation Committee Interlocks and Insider Participation



The members of the Companys Compensation Committee
are Douglas K. Ammerman, Harold H. Greene, Lawrence M. Higby, Gary H. Hunt, Arthur B. Laffer and Alex Meruelo. None of the members of the Compensation Committee has ever been an officer or employee of the Company or any of its subsidiaries. None of
the Companys executive officers has ever served as a director or member of the Compensation Committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served in either of those
capacities for the Company.



66



---

##### Table of Contents

Compensation Committee Report



The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on
that review and discussion, has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006.



Compensation Committee



Arthur B. Laffer, Chairman

Harold H. Greene

Lawrence M. Higby

Gary H. Hunt

Alex Meruelo



Director Compensation



Outside directors receive an annual fee of $60,000 per year, payable $15,000 per calendar quarter, and $2,500 for each board meeting attended in person
and $1,500 for each meeting attended via teleconference. In addition, the chairperson of the Audit Committee of the Board of Directors receives a fee of $10,000 per year, payable $2,500 per calendar quarter, to serve in such capacity, the
chairperson of each other committee of the Board of Directors receives a fee of $7,500 per year, payable $1,875 per calendar quarter, to serve in such capacity, and other committee members receive a fee of $2,000 per year, payable $500 per calendar
quarter, per committee for service on committees of the Board of Directors.



During 2006 Messrs. Harold H. Greene, Lawrence M. Higby and Arthur B. Laffer served on a Special Committee of the Board of Directors appointed to evaluate a tender offer received from General William Lyon, Chairman
and Chief Executive Officer of the Company. Mr. Greene received a fee of $70,000 for his service as Chairman and Messrs. Higby and Laffer each received a fee of $60,000 for their service as members of the Special Committee. The Special Committee was
disbanded upon the successful conclusion of the tender offer in July 2006.



The following table sets forth information concerning the compensation of the directors during the fiscal year ended December 31, 2006.



|                   |  |                               |         |                |   |                 |   |                                         |   |                                                                        |   |                          |   |           |   |        
|------------------ |  | ----------------------------- | ------- | -------------- | - | --------------- | - | --------------------------------------- | - | ---------------------------------------------------------------------- | - | ------------------------ | - | --------- | - | -------
|Name               |  | Fees Earnedor Paidin Cash ($) |         | StockAwards($) |   | OptionAwards($) |   | Non-EquityIncentive PlanCompensation($) |   | Change inPension Valueand NonqualifiedDeferredCompensationEarnings ($) |   | All OtherCompensation($) |   | Total ($)
|Richard E. Frankel |  | $                             | 70,500  |                |  |                 |  |                                         |  |                                                                        |  |                          |  |           | $ | 70,500 
|Harold H. Greene   |  |                               | 154,500 |                |  |                 |  |                                         |  |                                                                        |  |                          |  |           |   | 154,500
|Lawrence M. Higby  |  |                               | 132,500 |                |  |                 |  |                                         |  |                                                                        |  |                          |  |           |   | 132,500
|Gary H. Hunt       |  |                               | 76,500  |                |  |                 |  |                                         |  |                                                                        |  |                          |  |           |   | 76,500 
|Arthur B. Laffer   |  |                               | 137,500 |                |  |                 |  |                                         |  |                                                                        |  |                          |  |           |   | 137,500
|Alex Meruelo       |  |                               | 82,000  |                |  |                 |  |                                         |  |                                                                        |  |                          |  |           |   | 82,000 



The Company has
adopted the William Lyon Homes 2004 Outside Directors Deferred Compensation Plan effective as of December 28, 2004, pursuant to which each outside director may elect to defer payment of a portion or all of his annual compensation until his
retirement date or a fixed payment date in the future at which time he would receive all deferred amounts and accumulated earnings thereon, if any, in a lump sum. No directors have currently elected to defer director compensation under the plan.



67



---

##### Table of Contents

Under the Companys Non-Qualified Retirement Plan for Outside Directors, each outside director is
eligible to receive $2,000 per month beginning on the first day of the month following death, disability or retirement at age 72; or, in the case of an outside director who ceases participation in the plan prior to death, disability or retirement at
age 72 but has completed at least ten years of service as a director, eligibility for benefit payments pursuant to the plan begins on the first day of the month following the latter of (a) the day on which such person attains the age of 65, or (b)
the day on which such persons service terminates after completing at least ten years of service as a director. The monthly payments will continue for the number of months that equals the number of months the outside director served as a
director and are payable to the directors beneficiary in the event of the directors death. If a retired outside director receiving payments under the plan resumes his status as a director or becomes an employee, the payments under the
plan are suspended during the period of such service.



Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters



The following table sets forth certain information as to the number of shares of Common Stock beneficially owned as of March
1, 2007. The following table includes information for (a) each person or group that is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (b) each of the directors and nominees of the Company,
(c) each Named Executive Officer named in the Summary Compensation Table, and (d) all directors and executive officers of the Company as a group.



|                                                             |  |                          |     |  |                               |  
|------------------------------------------------------------ |  | ------------------------ | --- |  | ----------------------------- | -
|                                                             |  | As of March 1, 2007      |    
|                                                             |  | Shares BeneficiallyOwned |     |  | Percentage of AllCommon Stock |  
|General William Lyon(1)                                      |  | 664                      | (4) |  | 66.4                          | %
|The William Harwell Lyon 1987 Trust(2)                       |  | 282                      |     |  | 28.2                          | %
|The William Harwell Lyon Separate Property Trust(2)          |  | 54                       |     |  | 5.4                           | %
|William H. Lyon(1)                                           |  | 0                        | (3) |  | 0.00                          | %
|Douglas K. Ammerman(1)                                       |  | 0                        |     |  | 0.00                          | %
|Wade H. Cable(1)                                             |  | 0                        |     |  | 0.00                          | %
|Douglas F. Bauer(1)                                          |  | 0                        |     |  | 0.00                          | %
|Richard E. Frankel(1)                                        |  | 0                        |     |  | 0.00                          | %
|Harold H. Greene(1)                                          |  | 0                        |     |  | 0.00                          | %
|Lawrence M. Higby(1)                                         |  | 0                        |     |  | 0.00                          | %
|Gary H. Hunt(1)                                              |  | 0                        |     |  | 0.00                          | %
|Arthur B. Laffer(1)                                          |  | 0                        |     |  | 0.00                          | %
|Alex Meruelo(1)                                              |  | 0                        |     |  | 0.00                          | %
|Michael D. Grubbs(1)                                         |  | 0                        |     |  | 0.00                          | %
|Thomas J. Mitchell(1)                                        |  | 0                        |     |  | 0.00                          | %
|All directors and executive officers as a group (18 persons) |  | 664                      | (3) |  | 66.4                          | %

---



|(1) |  | Stockholder is at the following mailing address: c/o William Lyon Homes, 4490 Von Karman Avenue, Newport Beach, CA 92660
|--- |  | ------------------------------------------------------------------------------------------------------------------------



|(2) |  | Stockholder is at the following mailing address: c/o Richard M. Sherman, Jr., Esq., Irell & Manella LLP, 840 Newport Center Drive, Suite 400, Newport Beach, CA 92660.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Does not include 282 shares of common stock held by The William Harwell Lyon 1987 Trust or 54 shares of common stock held by The William Harwell Lyon Separate Property Trust, of
each of which William H. Lyon is the sole beneficiary. William H. Lyon does not have or share, directly or indirectly, the power to vote or to direct the vote of these shares, and thus, William H. Lyon disclaims beneficial ownership of these shares.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | Includes 490 shares which are pledged as collateral in connection with a $267,000,000 credit facility obtained by General William Lyon in connection with the Tender Offer and Merger
as described herein.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



68



---

##### Table of Contents

Except as otherwise indicated in the above notes, shares shown as beneficially owned are those as to
which the named person possesses sole voting and investment power. However, under California law, personal property owned by a married person may be community property which either spouse may manage and control. The Company has no information as to
whether any shares shown in this table are subject to California community property law.



As of December 31, 2006, we had no securities authorized for issuance under compensation plans.



Item 13.Certain Relationships and Related Transactions, and Director Independence



Acquisition of Real Estate Projects from Entities Controlled by General William Lyon and/or William H. Lyon.



On October 26, 2000,
the Companys board of directors (with General 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 General 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. In addition, one-half of the net profits in excess of six percent from the development are to be paid to the seller.
Phase takedowns of approximately 20 lots each were anticipated to occur at two to three month intervals for each of several product types through September 2004. As of December 31, 2004, all lots were purchased under this agreement. During the
years ended December 31, 2004, the Company purchased 92 lots under this agreement for a total purchase price of $1,984,000. During the years ended December 31, 2006, 2005 and 2004, the Company paid $0, $1,949,000 and $1,689,000, respectively, for
one-half of the net profits in excess of six percent from the development. This land acquisition qualified as an affiliate transaction under the Companys 121/2% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994 (Indenture). Pursuant to the terms of the Indenture, the Company 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 delivered to the Trustee under the Indenture a resolution of
the Companys Board of Directors 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 was approved by a majority of the disinterested members of the Companys Board of Directors of the Company. Further, the Company 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.



Purchase of Land from Unconsolidated Joint Venture.



The Company purchased land for a total purchase price of $6,221,000, $116,773,000 and $33,655,000 during the years ended
December 31, 2006, 2005 and 2004, respectively, from certain of the Companys joint ventures.



Agreements with Entities Controlled by General William Lyon and William H. Lyon.



For the years ended December 31, 2006, 2005 and 2004, the Company incurred reimbursable on-site labor costs of $133,000, $146,000 and $183,000,
respectively, for providing customer service to real estate projects developed by entities controlled by General William Lyon and William H. Lyon, of which $1,000 and $32,000 was due to the Company at December 31, 2006 and 2005, respectively. In
addition, the Company earned fees of $98,000, $121,000 and $110,000, respectively, for tax and accounting services performed for entities controlled by General William Lyon and William H. Lyon during the years ended December 31, 2006, 2005 and 2004,
of which $92,000 was due to the Company at December 31, 2005.





69



---

##### Table of Contents

Rent Paid to a Trust of which William H. Lyon is the Sole Beneficiary.



For each of the years ended December 31, 2006, 2005, and 2004, the Company
incurred charges of $755,000 related to rent on the Companys corporate office, from a trust of which William H. Lyon is the sole beneficiary.



Charges Incurred Related to the Charter and Use of Aircraft.



During the year ended December 31, 2004, the Company incurred charges of $172,000 related to the charter and use of aircraft owned by an affiliate of
General William Lyon.



Effective September 1, 2004, the Company
entered into an aircraft consulting and management agreement with an affiliate (the Affiliate) of William Lyon to operate and manage the Companys aircraft which was placed in service effective as of September 1, 2004. The terms of
the agreement provide that the Affiliate shall consult and render its advice and management services to the Company with respect to all functions necessary to the operation, maintenance and administration of the aircraft. The Companys business
plan for the aircraft includes (i) use by Company executives for traveling on Company business to the Companys divisional offices and other destinations, (ii) charter service to outside third parties and (iii) charter service to General
William Lyon personally. Charter services for outside third parties are contracted for at market rates. As compensation to the Affiliate for its management and consulting services under the agreement, the Company pays the Affiliate a fee equal to
(i) the amount equal to 107% of compensation paid by the Affiliate for the pilots supplied pursuant to the agreement, (ii) $50 per operating hour for the aircraft and (iii) $9,000 per month for hangar rent. In addition, all maintenance work,
inspections and repairs performed by the Affiliate on the aircraft are charged to the Company at the Affiliates published rates for maintenance, inspection and repairs in effect at the time such work is completed. The total compensation paid
to the Affiliate under the agreement amounted to $1,488,000, $1,414,000 and $317,000 during the years ended December 31, 2006, 2005 and 2004, respectively.



Effective July 1, 2006, General William Lyon entered into a time sharing agreement (the Agreement) with the Company pertaining to his personal
use of the aircraft. The agreement calls for General Lyon to reimburse the company for all costs incurred by the Company during his personal flights plus a surcharge on fuel consumption of two times the cost. Pursuant to the Agreement and the rates
charged to General Lyon prior to the Agreement, the Company had earned revenue of $524,000, $457,000 and $187,000 for charter services provided to General William Lyon personally, for the years ended December 31, 2006, 2005 and 2004, respectively,
of which $333,000 and $129,000 was due to the Company at December 31, 2006 and 2005.



Mortgage Loans.



In 2006, the Company offered
home mortgage loans to its employees and directors through its mortgage company subsidiary, William Lyon Financial Services (formerly Duxford Financial, Inc.). These loans were made in the ordinary course of business and on substantially the same
terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. These loans did not involve more than the normal risk of collectability or present other unfavorable features and were
sold to investors typically within 7 to 15 days.



Finders Fee
Agreement.



The Company and Alex Meruelo are parties to an
agreement pursuant to which Mr. Meruelo is eligible to receive a finders fee based upon the cash distributions received by a subsidiary of the Company from a joint venture development project relating to a portion of the Fort Ord military base
in Monterey County, California. The joint venture development project resulted from Mr. Meruelos introduction of the Company to Woodman Development Company, LLC (Woodman) and the subsequent formation of East Garrison Partners I,
LLC (EGP) as a joint venture between Woodman and Lyon East Garrison Company I, LLC (EGC). The finders



70



---

##### Table of Contents

fee will equal 5% of all net cash distributions distributed by EGP to EGC with respect to EGCs existing 50% interest in EGP that are in excess of
distributions with respect to certain deficit advances, deficit preferred returns, returns of capital and preferred returns on unreturned capital. The calculation of the finders fee will be based on net cash distributions received from EGP on
land sales and will not be determined on the basis of any revenues, profits or distributions received from any affiliate of EGC for the construction and sale or leasing of residential or commercial buildings on such lots. Mr. Meruelo is not
obligated to perform any services for EGC other than the introduction to Woodman. As of December 31, 2006, no amounts had been paid to Mr. Meruelo under this agreement.



Certain Family Relationships.



William H. Lyon, one of the Companys directors and the Executive Vice President and Chief Administrative Officer of the Company, is the son of
General William Lyon. General William Lyon is the Companys Chairman of the Board of Directors and the Chief Executive Officer. In 2006, William H. Lyon received a base salary of $115,000 and a monthly car allowance of $400 from the Company,
and earned a bonus of $177,445 under the terms of the Companys 2006 Cash Bonus Plan. The bonus earned by William H. Lyon in 2006 is consistent with bonuses earned by other Company employees with similar responsibilities.



Terry A. Connelly, who is Senior Vice President and Director of Operations of
the Companys Nevada Region, is married to Mary J. Connelly, President of the Nevada Region. In 2006, Mr. Connelly received a base salary of $160,000 and a monthly car allowance of $400 from the Company, and earned a bonus of $206,370 under the
terms of the Companys 2006 Cash Bonus Plan. The bonus earned by Mr. Connelly in 2006 is consistent with the bonuses earned by other Company employees with similar responsibilities.



Jeffrey D. Frankel, who is a Project Manager in the Companys Northern California Region, is the son of Richard E.
Frankel, a director of the Company. In 2006, Mr. Frankel received a base salary of $105,000 and a monthly car allowance of $400 from the Company, and earned a bonus of $41,551 under the terms of the Companys 2006 Cash Bonus Plan. The bonus
earned by Mr. Frankel in 2006 is consistent with the bonuses earned by other Company employees with similar responsibilities.



Director Independence



The Board of Directors has determined that Douglas K. Ammerman, Harold H. Greene, Lawrence M. Higby, Gary H. Hunt, Arthur B. Laffer and Alex Meruelo
are independent directors under standards established by the Securities and Exchange Commission (the SEC) and the New York Stock Exchange (the NYSE).



Nominating and Corporate Governance Committee.    The Company has a standing Nominating
and Corporate Governance Committee, which is chaired by Mr. Meruelo and consists of Messrs. Meruelo, Ammerman, Greene, Higby, Hunt and Laffer. Mr. Ammermans appointment as a member of the Nominating and Corporate Governance Committee was
effective on February 27, 2007, the date he was appointed to the Board of Directors. The Board has determined that all committee members are independent under standards established by the SEC and the NYSE.



Audit Committee.    The Company has a
standing Audit Committee, which is chaired by Mr. Greene and consists of Messrs. Greene, Ammerman, Higby, Hunt and Meruelo. Mr. Ammermans appointment as a member of the Audit Committee was effective on February 27, 2007, the date he was
appointed to the Board of Directors. The Board has determined that all committee members are independent and financially literate under the standards established by the SEC and the NYSE. The Board has determined that Mr. Greene is an audit
committee financial expert as defined by the SEC.



Compensation Committee.    The Company has a standing Compensation Committee, which, until February 27, 2007, was chaired by Mr. Laffer and consists of Messrs. Laffer, Ammerman, Greene, Higby, Hunt



71



---

##### Table of Contents

and Meruelo. Effective on February 27, 2007, Mr. Hunt became Chairman of the Compensation Committee, replacing Mr. Laffer, who remains as a member of the
Compensation Committee. Mr. Ammermans appointment as a member of the Compensation Committee was effective on February 27, 2007, the date he was appointed to the Board of Directors. The Board has determined that all committee members are
independent under standards established by the SEC and the NYSE.



Item 14.Principal Accountant Fees and Services



The fees for professional services provided by Ernst & Young LLP in fiscal years 2006 and 2005 were:



|                   |  |      |           |      |   |          
|------------------ |  | ---- | --------- | ---- | - | ---------
|Type of Fees       |  | 2006 |           | 2005
|Audit Fees         |  | $    | 1,086,000 |      | $ | 1,027,000
|Audit-Related Fees |  |      | 94,000    |      |   | 202,000  
|Tax Fees           |  |      | 92,000    |      |   | 324,000  
|                   |  |      |           |      |   |          
|Total Fees         |  | $    | 1,272,000 |      | $ | 1,553,000
|                   |  |      |           |      |   |          



In the above table, in
accordance with the definitions of the SEC, Audit Fees include fees for the audit of the Companys consolidated financial statements included in its Annual Report on Form 10-K, review of the unaudited financial statements included
in its quarterly reports on Form 10-Q, comfort letters, consents, assistance with documents filed with the SEC, and accounting and reporting consultation in connection with the audit and /or quarterly reviews. Audit Fees also includes
fees incurred in connection with the audit of the Companys internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Tax Fees include fees for tax compliance and tax planning.
Audit-Related Fees are fees for assurance and related services that are reasonably related to the performance of the audit or review of the Companys financial statements and includes fees for audits of separate financial statements
of consolidated joint ventures.



Pre-Approval
Policies and Procedures:    The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax services, and other services performed by the independent registered public accounting firm.
The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the Audit Committee must approve the permitted
service before the independent auditors are engaged to perform it. The Audit Committee has delegated to the Chair of the Audit Committee authority to approve permitted services provided that the Chair reports any decisions to the Committee at its
next scheduled meeting.



The Audit Committee considered the
compatibility of the provision of other services by Ernst & Young LLP with the maintenance of Ernst & Young LLPs independence. The Audit Committee approved all audit and non-audit services provided by Ernst & Young LLP in
2006.



72



---

##### Table of Contents

PART IV



Item 15.Exhibits and Financial Statement Schedules



(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:



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|William Lyon Homes                                      |  |     
|Report of Independent Registered Public Accounting Firm |  | 81  
|Consolidated Balance Sheets                             |  | 82  
|Consolidated Statements of Income                       |  | 83  
|Consolidated Statements of Stockholders Equity         |  | 84  
|Consolidated Statements of Cash Flows                   |  | 85  
|Notes to Consolidated Financial Statements              |  | 87  



(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:



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                   
|3.1(2)        |  | Certificate of Incorporation of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                                   
|3.2(1)        |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                          
|3.3(38)       |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                          
|3.4(38)       |  | Certificate of Amendment of Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                     
|3.5(2)        |  | Bylaws of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                                                         
|4.1(23)       |  | Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and
guarantees).                                                                                                                                                                                                            
|4.2(15)       |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as
Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).  
|4.3(24)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee
(supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).             
|4.4(3)        |  | Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and
guarantees).                                                                                                                                                                                                          
|4.5(15)       |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as
Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).



73



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                    
|4.6(24)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee
(supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).            
|4.7(14)       |  | Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and
guarantees).                                                                                                                                                                                                          
|4.8(15)       |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as
Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
|4.9(24)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee
(supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).           
|10.1(11)      |  | Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a Delaware
corporation.                                                                                                                                                                                                                     
|10.2(34)      |  | First Amendment to Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a
Delaware corporation.                                                                                                                                                                                                  
|10.3(4)       |  | 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).                                                                                                                                              
|10.4(6)       |  | Agreement for First Modification of Deeds of Trust and Other Loan Instruments, dated as of June 8, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.                                                  
|10.5(5)       |  | Agreement for Second Modification of Deeds of Trust and Other Loan Instruments, dated as of July 23, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.                                                
|10.6(5)       |  | Agreement for Third Modification of Deeds of Trust and Other Loan Instruments, dated as of December 19, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.                                             
|10.7(5)       |  | Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments, dated as of May 29, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.                                                 
|10.8(7)       |  | Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.                                                   
|10.9(3)       |  | Agreement for Sixth Modification of Deeds of Trust and Other Loan Agreements, dated as of November 14, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.                                              



74



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                             
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                 
|10.10(12)     |  | Agreement for Seventh Modification of Deeds of Trust and Other Loan Instruments dated as of October 6, 2004 by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
|10.11(25)     |  | Agreement for Eighth Modification of Deeds of Trust and Other Loan Instruments dated as of October 14, 2005 by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
|10.12(37)     |  | Agreement for Ninth Modification of Deeds of Trust and Other Loan Instruments dated as of October 31, 2006 by and between William Lyon Homes, Inc., a California corporation, and Guaranty
Bank, a federal savings bank organized and existing under the laws of the United States, as lender.              
|10.13(4)      |  | 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.                                                                             
|10.14(17)     |  | Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of September 18, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
California Bank & Trust, a California banking corporation, as lender.                                            
|10.15(5)      |  | Second Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of December 13, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and California Bank & Trust, a California banking corporation, as lender.                                      
|10.16(3)      |  | Third Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of January 26, 2004, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
California Bank & Trust, a California banking corporation, as lender.                                        
|10.17(11)     |  | Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes,
Inc., a California corporation.                                                                                     
|10.18(27)     |  | First Amendment to Amended and Restated Revolving Line of Credit Loan Agreement, dated as of July 19, 2005, by and between William Lyon Homes, Inc. and California Bank &
Trust.                                                                                                                            
|10.19(34)     |  | Second Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and
William Lyon Homes, Inc., a California corporation.                                                                 
|10.20(7)      |  | Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as
Lender.                                                                                                                         
|10.21(10)     |  | Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2004 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as
Lender.                                                                                                                         
|10.22(32)     |  | Mortgage Warehouse Loan and Security Agreement dated June 29, 2006 by and between Duxford Financial, Inc. dba William Lyon Financial Services and/or Bayport Mortgage, L.P. and/or California
Pacific Mortgage, L.P., as Borrower and First Tennessee Bank as Lender.                                       
|10.23(8)      |  | Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                                                                  
|10.24(3)      |  | Amendment No. 1 to Credit Agreement dated as of January 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                                        
|10.25(15)     |  | First Amendment to Credit Agreement dated as of August 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                                         
|10.26(13)     |  | Amendment No. 2 to Credit Agreement dated as of November 15, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                                       
|10.27(9)      |  | Revolving Line of Credit Loan Agreement, dated as of March 11, 2003, by and among Moffett Meadows Partners, LLC, a Delaware limited liability company, as borrower, and California Bank &
Trust, a California banking corporation, and the other financial institutions named therein, as lenders.          



75



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                          
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                              
|10.28(9)      |  | Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware corporation.                                                                                            
|10.29(10)     |  | Borrowing Base Revolving Line of Credit Agreement, dated as of June 28, 2004, by and between William Lyon Homes, Inc., a California corporation, and Bank One, NA, a national banking
association.                                       
|10.30(15)     |  | Modification Agreement, dated as of December 7, 2004, by and between William Lyon Homes, Inc., a California corporation, and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA, a
national banking association).            
|10.31(27)     |  | Second Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of July 14, 2005, between William Lyon Homes, Inc. and JPMorgan Chase Bank, N.A. (successor by
merger to Bank One, NA).                     
|10.32(36)     |  | Third Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated October 23, 2006 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase
Bank, N.A., a National Banking Association.
|10.33(18)     |  | Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.                                                                                                   
|10.34(18)     |  | 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.                               
|10.35(18)     |  | Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5,
1999.                                                    
|10.36(4)      |  | 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.                                        
|10.37(19)     |  | William Lyon Homes 2000 Stock Incentive Plan.                                                                                                                                                                                            
|10.38(20)     |  | Form of Stock Option Agreements.                                                                                                                                                                                                         
|10.39(20)     |  | William Lyon Homes, Inc. 2000 Cash Bonus Plan.                                                                                                                                                                                           
|10.40(26)     |  | William Lyon Homes 2005 Senior Executive Bonus Plan.                                                                                                                                                                                     
|10.41(28)     |  | Description of 2005 Cash Bonus Plan.                                                                                                                                                                                                     
|10.42(29)     |  | Adjustment of Salary of Douglas F. Bauer.                                                                                                                                                                                                
|10.43(38)     |  | Description of 2006 Cash Bonus Plan.                                                                                                                                                                                                     
|10.44(38)     |  | 2006 Senior Executive Bonus Plan.                                                                                                                                                                                                        
|10.45(38)     |  | Description of 2007 Cash Bonus Plan.                                                                                                                                                                                                     
|10.46(38)     |  | 2007 Senior Executive Bonus Plan.                                                                                                                                                                                                        
|10.47(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.                                                                                  
|10.48(21)     |  | William Lyon Homes Executive Deferred Compensation Plan effective as of February 11, 2002.                                                                                                                                               
|10.49(22)     |  | William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002.                                                                                                                                       
|10.50(5)      |  | The Presley Companies Non-Qualified Retirement Plan for Outside Directors.                                                                                                                                                               
|10.51(16)     |  | William Lyon Homes 2004 Executive Deferred Compensation Plan.                                                                                                                                                                            
|10.52(16)     |  | William Lyon Homes 2004 Outside Directors Deferred Compensation Plan.                                                                                                                                                                    
|10.53(3)      |  | Underwriting Agreement dated as of March 12, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Warburg, LLC and Salomon Smith Barney Inc., as
Underwriters.                                              
|10.54(3)      |  | Purchase Agreement dated as of January 28, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Securities LLC, as Initial Purchaser.                                                                       
|10.55(3)      |  | Registration Rights Agreement dated as of February 6, 2004 by and among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Securities LLC, as Initial
Purchaser.                                                     



76



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                            
|10.56(13)     |  | Purchase Agreement dated as of November 15, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein) and UBS Securities LLC, as Initial Purchaser.                                                                                                                                                     
|10.57(14)     |  | Registration Rights Agreement dated as of November 22, 2004 by and among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Securities LLC, as Initial
Purchaser.                                                                                                                                  
|10.58(30)     |  | Summary of Director Compensation.                                                                                                                                                                                                                                                                                      
|10.59(30)     |  | Borrowing Base Revolving Line of Credit Agreement, dated as of February 14, 2006, by and between William Lyon Homes, Inc., a California corporation, and Wachovia Financial Services, Inc, a
North Carolina corporation, by and through its Agent, Wachovia Bank, National Association, a national banking association.
|10.60(35)     |  | First Amendment to Borrowing Base Revolving Line of Credit Agreement dated September 29, 2006 by and between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National
Association, a national banking association.                                                                               
|10.61(33)     |  | Borrowing Base Revolving Line of Credit Agreement dated as of July 10, 2006 by and between William Lyon Homes, Inc., a California corporation, and California National Bank.                                                                                                                                           
|10.62(31)     |  | Revolving Line of Credit Loan Agreement dated as of March 8, 2006 by and between William Lyon Homes, Inc., a California corporation, and Comerica Bank.                                                                                                                                                                
|12.1(38)      |  | Statement of computation of ratio of earnings to fixed charges.                                                                                                                                                                                                                                                        
|21.1(38)      |  | List of Subsidiaries of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                    
|31.1(38)      |  | Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                    
|31.2(38)      |  | Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                    
|32.1(38)      |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                     
|32.2(38)      |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                     

---

|(1) |  | Previously filed as an exhibit to the Current Report on Form 8-K of William Lyon Homes, a Delaware corporation (the Company) filed January 5, 2000 and incorporated
herein by this reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-4, and amendments thereto (SEC Registration No. 333-88569), and incorporated herein by this
reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | 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
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2002 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, 2001 and incorporated herein by this reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 and incorporated herein by this reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003 and incorporated herein by this reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Previously filed as an exhibit to Amendment No. 3 to the Companys Registration Statement on Form S-4 (File No. 333-114691) filed July 15, 2004 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 June 30, 2004 and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed September 22, 2004 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed October 18, 2004 and incorporated herein by this reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------



77



---

##### Table of Contents

|(13) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed November 19, 2004 and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(14) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed November 23, 2004 and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(15) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-4 (SEC Registration No. 333-121346) filed December 16, 2004 and incorporated herein by this
reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(16) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed December 30, 2004 and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(17) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 and incorporated herein by this reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(18) |  | 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.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(19) |  | 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.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(20) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(21) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-8 (SEC Registration No. 333-82448), and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(22) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(23) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(24) |  | Previously filed as an exhibit to Amendment No. 1 to the Companys Registration Statement on Form S-4 (SEC Registration No. 333-121346) filed January 10, 2005 and incorporated
herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(25) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed November 14, 2005 and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(26) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed November 9, 2005 and incorporated herein by this reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(27) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed July 14, 2005 and incorporated herein by this reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|(28) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------

|(29) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------

|(30) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(31) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed April 3, 2006 and incorporated herein by reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------

|(32) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed July 6, 2006 and incorporated herein by reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------

|(33) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed August 1, 2006 and incorporated herein by reference.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------

|(34) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed September 27, 2006 and incorporated herein by reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|(35) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed October 17, 2006 and incorporated herein by reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|(36) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed October 27, 2006 and incorporated herein by reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|(37) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed December 11, 2006 and incorporated herein by reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|(38) |  | Filed herewith.
|---- |  | ---------------



78



---

##### Table of Contents

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
|               |  |  | 
|March 14, 2007 |  |  |  | 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.



|                                            |  |                                                                                                    |  |                 
|------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ----------------
|Name                                        |  | Title                                                                                              |  | Date            
|                                            |  |                                                                                                   
|/s/    WILLIAM LYONWilliam Lyon             |  | Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)          |  | March 14, 2007  
|                                            |  |                                                                                                   
|/s/    DOUGLAS F.
BAUERDouglas F.
Bauer     |  | Director, President and Chief Operating Officer                                                    |  | March 14, 2007  
|                                            |  |                                                                                                   
|/s/    WILLIAM H. LYONWilliam H. Lyon       |  | Director, Executive Vice President and Chief Administrative Officer                                |  | March 14, 2007  
|                                            |  |                                                                                                   
|Douglas K. Ammerman                         |  | Director                                                                                           |  | March     , 2007
|                                            |  |                                                                                                   
|/s/    WADE H. CABLEWade H. Cable           |  | Director                                                                                           |  | March 14, 2007  
|                                            |  |                                                                                                   
|/S/    RICHARD E.
FRANKELRichard E.
Frankel |  | Director                                                                                           |  | March 14, 2007  
|                                            |  |                                                                                                   
|/S/    HAROLD H.
GREENEHarold H.
Greene     |  | Director                                                                                           |  | March 14, 2007  
|                                            |  |                                                                                                   
|Lawrence M. Higby                           |  | Director                                                                                           |  | March     , 2007
|                                            |  |                                                                                                   
|/S/    GARY H.
HUNTGary H. Hunt             |  | Director                                                                                           |  | March 14, 2007  
|                                            |  |                                                                                                   
|/S/    ARTHUR B.
LAFFERArthur B.
Laffer     |  | Director                                                                                           |  | March 14, 2007  
|                                            |  |                                                                                                   
|/s/    ALEX MERUELOAlex Meruelo             |  | Director                                                                                           |  | March 14, 2007  
|                                            |  |                                                                                                   
|/S/    MICHAEL D.
GRUBBSMichael D.
Grubbs   |  | Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)         |  | March 14, 2007  
|                                            |  |                                                                                                   
|/s/    W. DOUGLASS
HARRISW. Douglass
Harris |  | Senior Vice President, Corporate Controller and Corporate Secretary (Principal Accounting Officer) |  | March 14, 2007  



79



---

##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|                                                        | 
|William Lyon Homes                                      |  |     
|                                                        | 
|Report of Independent Registered Public Accounting Firm |  | 81  
|Consolidated Balance Sheets                             |  | 82  
|Consolidated Statements of Income                       |  | 83  
|Consolidated Statements of Stockholders Equity         |  | 84  
|Consolidated Statements of Cash Flows                   |  | 85  
|Notes to Consolidated Financial Statements              |  | 87  



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.



80



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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, 2006 and 2005,
and the related consolidated statements of income, stockholders equity and cash flows for each of the three years in the period ended December 31, 2006. These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



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



In our
opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of William Lyon Homes at December 31, 2006 and 2005, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of William Lyon
Homes internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and
our report dated March 2, 2007 expressed an unqualified opinion thereon.



/S/    ERNST & YOUNG LLP



Irvine, California

March 2, 2007



81



---

##### Table of Contents

WILLIAM LYON HOMES



CONSOLIDATED BALANCE SHEETS

(in thousands except number of shares and par value per share)



|                                                                                                                                                                                                                                                                              |  |              |           |      |   |          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                                                                                                                                                                                                                                                              |  | December 31,
|                                                                                                                                                                                                                                                                              |  | 2006         |           | 2005
|ASSETS                                                                                                                                                                                                                                                                       
|Cash and cash equivalents                                                                                                                                                                                                                                                     |  | $            | 38,732    |      | $ | 52,369   
|Receivables  Note 3                                                                                                                                                                                                                                                          |  |              | 119,491   |      |   | 143,481  
|Real estate inventories  Notes 2 and 4                                                                                                                                                                                                                                       |  |              |           |      |   |          
|Owned                                                                                                                                                                                                                                                                         |  |              | 1,431,753 |      |   | 1,303,476
|Not owned                                                                                                                                                                                                                                                                     |  |              | 200,667   |      |   | 115,772  
|Investments in and advances to unconsolidated joint ventures  Note 5                                                                                                                                                                                                         |  |              | 3,560     |      |   | 397      
|Property and equipment, less accumulated depreciation of $12,465 and $9,936 at December 31, 2006 and 2005,
respectively                                                                                                                                                       |  |              | 16,828    |      |   | 18,553   
|Deferred loan costs                                                                                                                                                                                                                                                           |  |              | 11,258    |      |   | 12,323   
|Goodwill  Note 1                                                                                                                                                                                                                                                             |  |              | 5,896     |      |   | 5,896    
|Other assets  Note 2                                                                                                                                                                                                                                                         |  |              | 50,410    |      |   | 38,735   
|                                                                                                                                                                                                                                                                              |  |              |           |      |   |          
|                                                                                                                                                                                                                                                                              |  | $            | 1,878,595 |      | $ | 1,691,002
|                                                                                                                                                                                                                                                                              |  |              |           |      |   |          
|                                                                                                                                                                                                                                                                             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                         
|Accounts payable                                                                                                                                                                                                                                                              |  | $            | 48,592    |      | $ | 67,326   
|Accrued expenses                                                                                                                                                                                                                                                              |  |              | 111,871   |      |   | 181,068  
|Liabilities from inventories not owned                                                                                                                                                                                                                                        |  |              | 131,564   |      |   |         
|Notes payable  Note 6                                                                                                                                                                                                                                                        |  |              | 304,096   |      |   | 125,619  
|75/8%
Senior Notes due December 15, 2012  Note 6                                                                                                                                                                                                                             |  |              | 150,000   |      |   | 150,000  
|103/4% Senior Notes due April 1, 2013  Note 6                                                                                                                                                                                                                                |  |              | 247,218   |      |   | 246,917  
|71/2%
Senior Notes due February 15, 2014  Note 6                                                                                                                                                                                                                             |  |              | 150,000   |      |   | 150,000  
|                                                                                                                                                                                                                                                                              |  |              |           |      |   |          
|                                                                                                                                                                                                                                                                              |  |              | 1,143,341 |      |   | 920,930  
|                                                                                                                                                                                                                                                                              |  |              |           |      |   |          
|Minority interest in consolidated entities  Note 2                                                                                                                                                                                                                           |  |              | 109,859   |      |   | 227,178  
|                                                                                                                                                                                                                                                                              |  |              |           |      |   |          
|Commitments and contingencies  Note 11                                                                                                                                                                                                                                       |  |              |           |      |   |          
|                                                                                                                                                                                                                                                                              |  |             
|Stockholders equity  Note 8                                                                                                                                                                                                                                                 |  |              |           |      |   |          
|Common stock, par value $.01 per share; 3,000 shares authorized; 1,000 shares outstanding at December 31, 2006; 30,000,000 shares authorized;
8,652,067 shares issued and outstanding at December 31, 2005; 1,275,000 shares issued and held in treasury at December 31, 2005 |  |              |          |      |   | 86       
|Additional paid-in capital                                                                                                                                                                                                                                                    |  |              | 43,213    |      |   | 35,404   
|Retained earnings                                                                                                                                                                                                                                                             |  |              | 582,182   |      |   | 507,404  
|                                                                                                                                                                                                                                                                              |  |              |           |      |   |          
|                                                                                                                                                                                                                                                                              |  |              | 625,395   |      |   | 542,894  
|                                                                                                                                                                                                                                                                              |  |              |           |      |   |          
|                                                                                                                                                                                                                                                                              |  | $            | 1,878,595 |      | $ | 1,691,002
|                                                                                                                                                                                                                                                                              |  |              |           |      |   |          



See accompanying notes.



82



---

##### Table of Contents

WILLIAM LYON HOMES



CONSOLIDATED STATEMENTS OF INCOME

(in thousands)



|                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|----------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                  |  | Year Ended December 31, |           
|                                                                  |  | 2006                    |            |   | 2005 |   |            | 2004 | 
|Operating revenue                                                 |  |                         |            |   |      |   |            |      |  |   |            |  
|Home sales                                                        |  | $                       | 1,478,694  |   |      | $ | 1,745,067  |      |  | $ | 1,785,589  |  
|Lots, land and other sales                                        |  |                         | 13,527     |   |      |   | 111,316    |      |  |   | 36,258     |  
|                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|                                                                  |  |                         | 1,492,221  |   |      |   | 1,856,383  |      |  |   | 1,821,847  |  
|                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Operating costs                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Cost of sales  homes                                             |  |                         | (1,160,614 | ) |      |   | (1,307,027 | )    |  |   | (1,327,057 | )
|Cost of sales  lots, land and other                              |  |                         | (16,524    | ) |      |   | (44,774    | )    |  |   | (23,173    | )
|Impairment loss on real estate assets  Note 1                    |  |                         | (39,895    | ) |      |   | (4,600     | )    |  |   |           |  
|Sales and marketing                                               |  |                         | (72,349    | ) |      |   | (59,422    | )    |  |   | (58,792    | )
|General and administrative                                        |  |                         | (61,390    | ) |      |   | (90,045    | )    |  |   | (80,784    | )
|Other  Note 1                                                    |  |                         | (6,502     | ) |      |   | (2,450     | )    |  |   | (2,105     | )
|                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|                                                                  |  |                         | (1,357,274 | ) |      |   | (1,508,318 | )    |  |   | (1,491,911 | )
|                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Equity in income (loss) of unconsolidated joint ventures  Note 5 |  |                         | 3,242      |   |      |   | 4,301      |      |  |   | (699       | )
|                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Minority equity in income of consolidated entities  Note 2       |  |                         | (16,914    | ) |      |   | (37,571    | )    |  |   | (49,661    | )
|                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Operating income                                                  |  |                         | 121,275    |   |      |   | 314,795    |      |  |   | 279,576    |  
|Financial advisory expenses  Note 7                              |  |                         | (3,165     | ) |      |   | (2,191     | )    |  |   |           |  
|Other income, net                                                 |  |                         | 5,599      |   |      |   | 2,176      |      |  |   | 5,572      |  
|                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Income before provision for income taxes                          |  |                         | 123,709    |   |      |   | 314,780    |      |  |   | 285,148    |  
|Provision for income taxes  Note 9                               |  |                         | (48,931    | ) |      |   | (124,149   | )    |  |   | (113,499   | )
|                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Net income                                                        |  | $                       | 74,778     |   |      | $ | 190,631    |      |  | $ | 171,649    |  
|                                                                  |  |                         |            |   |      |   |            |      |  |   |            |  





See accompanying notes.



83



---

##### Table of Contents

WILLIAM LYON HOMES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)



|                                                                                                 |  |              |   |  |                           |     |   |                   |   |         |   |  |   |         |  |   |         |  
|------------------------------------------------------------------------------------------------ |  | ------------ | - |  | ------------------------- | --- | - | ----------------- | - | ------- | - |  | - | ------- |  | - | ------- | -
|                                                                                                 |  | Common Stock |   |  | Additional Paid-InCapital |     |   | Retained Earnings |   |         |  
|                                                                                                 |  | Shares       |   |  | Amount                    |     |   |                   |   | Total   |  
|                                                                                                 |  |              |   |  |                          
|Balance  December 31, 2003                                                                      |  | 9,787        |   |  | $                         | 98  |   |                   | $ | 106,818 |   |  | $ | 145,124 |  | $ | 252,040 |  
|Issuance of common stock upon exercise of stock options                                          |  | 104          |   |  |                           | 1   |   |                   |   | 4,420   |   |  |   |        |  |   | 4,421   |  
|Purchase of common stock                                                                         |  | (1,275       | ) |  |                           | (13 | ) |                   |   | (80,988 | ) |  |   |        |  |   | (81,001 | )
|Net income for the year                                                                          |  |             |   |  |                           |    |   |                   |   |        |   |  |   | 171,649 |  |   | 171,649 |  
|                                                                                                 |  |              |   |  |                           |     |   |                   |   |         |   |  |   |         |  |   |         |  
|                                                                                                 |  |              |   |  |                          
|Balance  December 31, 2004                                                                      |  | 8,616        |   |  |                           | 86  |   |                   |   | 30,250  |   |  |   | 316,773 |  |   | 347,109 |  
|Issuance of common stock upon exercise of stock options and related income tax benefit and other |  | 36           |   |  |                           |    |   |                   |   | 5,154   |   |  |   |        |  |   | 5,154   |  
|Net income                                                                                       |  |             |   |  |                           |    |   |                   |   |        |   |  |   | 190,631 |  |   | 190,631 |  
|                                                                                                 |  |              |   |  |                           |     |   |                   |   |         |   |  |   |         |  |   |         |  
|                                                                                                 |  |              |   |  |                          
|Balance  December 31, 2005                                                                      |  | 8,652        |   |  |                           | 86  |   |                   |   | 35,404  |   |  |   | 507,404 |  |   | 542,894 |  
|Income tax benefit from unused recognized built-in losses  Note 9                               |  |             |   |  |                           |    |   |                   |   | 4,229   |   |  |   |        |  |   | 4,229   |  
|Issuance of common stock upon exercise of stock options and related income tax benefit           |  | 50           |   |  |                           | 1   |   |                   |   | 3,493   |   |  |   |        |  |   | 3,494   |  
|Elimination of common stock upon merger of WLH Acquisition Corp with and into Company  Note 7   |  | (8,702       | ) |  |                           | (87 | ) |                   |   | 87      |   |  |   |        |  |   |        |  
|Surviving common stock upon merger of WLH Acquisition Corp with and into the Company  Note 7    |  | 1            |   |  |                           |    |   |                   |   |        |   |  |   |        |  |   |        |  
|Net income                                                                                       |  |             |   |  |                           |    |   |                   |   |        |   |  |   | 74,778  |  |   | 74,778  |  
|                                                                                                 |  |              |   |  |                           |     |   |                   |   |         |   |  |   |         |  |   |         |  
|Balance  December 31, 2006                                                                      |  | 1            |   |  | $                         |    |   |                   | $ | 43,213  |   |  | $ | 582,182 |  | $ | 625,395 |  
|                                                                                                 |  |              |   |  |                           |     |   |                   |   |         |   |  |   |         |  |   |         |  



See accompanying notes.



84



---

##### Table of Contents

WILLIAM LYON HOMES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                            |  | Year Ended December 31, |           
|                                                                                            |  | 2006                    |            |   | 2005 |   |            | 2004 | 
|Operating activities                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Net income                                                                                  |  | $                       | 74,778     |   |      | $ | 190,631    |      |  | $ | 171,649    |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |                         |            |   |      |   |            |      |  |   |            |  
|Depreciation and amortization                                                               |  |                         | 2,529      |   |      |   | 2,092      |      |  |   | 1,327      |  
|Impairment loss on real estate assets                                                       |  |                         | 39,895     |   |      |   | 4,600      |      |  |   |           |  
|Equity in (income) loss of unconsolidated joint ventures                                    |  |                         | (3,242     | ) |      |   | (4,301     | )    |  |   | 699        |  
|Distributions of income from unconsolidated joint ventures                                  |  |                         | 2,599      |   |      |   | 2,708      |      |  |   |           |  
|Minority equity in income of consolidated entities                                          |  |                         | 16,914     |   |      |   | 37,571     |      |  |   | 49,661     |  
|State income tax refund credited to additional paid-in capital                              |  |                         | 10         |   |      |   | 1,845      |      |  |   |           |  
|Federal income tax refund credited to additional paid-in capital                            |  |                         | 1,820      |   |      |   |           |      |  |   |           |  
|Provision for income taxes                                                                  |  |                         | 48,931     |   |      |   | 124,149    |      |  |   | 113,499    |  
|Net changes in operating assets and liabilities:                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Receivables                                                                                 |  |                         | 23,990     |   |      |   | (104,179   | )    |  |   | 9,168      |  
|Real estate inventories - owned                                                             |  |                         | (147,790   | ) |      |   | (232,240   | )    |  |   | (195,340   | )
|Real estate inventories - not owned                                                         |  |                         | 67,793     |   |      |   |           |      |  |   |           |  
|Deferred loan costs                                                                         |  |                         | 1,065      |   |      |   | 1,659      |      |  |   | (1,004     | )
|Other assets                                                                                |  |                         | (20,079    | ) |      |   | (6,173     | )    |  |   | (5,122     | )
|Accounts payable                                                                            |  |                         | (18,734    | ) |      |   | 27,962     |      |  |   | (2,612     | )
|Accrued expenses                                                                            |  |                         | (112,669   | ) |      |   | (90,858    | )    |  |   | (54,632    | )
|                                                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Net cash (used in) provided by operating activities                                         |  |                         | (22,190    | ) |      |   | (44,534    | )    |  |   | 87,293     |  
|                                                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Investing activities                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Investment in and advances to unconsolidated joint ventures                                 |  |                         | (1,976     | ) |      |   | (1,379     | )    |  |   | (9,427     | )
|Distributions of capital from unconsolidated joint ventures                                 |  |                         |           |   |      |   | 20,486     |      |  |   | 10,126     |  
|Purchases of property and equipment                                                         |  |                         | (804       | ) |      |   | (2,579     | )    |  |   | (17,768    | )
|                                                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Net cash (used in) provided by investing activities                                         |  |                         | (2,780     | ) |      |   | 16,528     |      |  |   | (17,069    | )
|                                                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Financing activities                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Proceeds from borrowings on notes payable                                                   |  |                         | 2,139,789  |   |      |   | 1,855,452  |      |  |   | 1,768,933  |  
|Principal payments on notes payable                                                         |  |                         | (1,981,937 | ) |      |   | (1,794,799 | )    |  |   | (1,896,365 | )
|Issuance of 75/8% Senior Notes                                                              |  |                         |           |   |      |   |           |      |  |   | 148,500    |  
|Issuance of 71/2% Senior Notes                                                              |  |                         |           |   |      |   |           |      |  |   | 147,563    |  
|Minority interest distributions, net                                                        |  |                         | (146,953   | ) |      |   | (76,664    | )    |  |   | (86,849    | )
|Common stock issued for exercised options                                                   |  |                         | 434        |   |      |   | 312        |      |  |   | 932        |  
|Common stock purchased                                                                      |  |                         |           |   |      |   |           |      |  |   | (81,001    | )
|                                                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) financing activities                                         |  |                         | 11,333     |   |      |   | (15,699    | )    |  |   | 1,713      |  
|                                                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Net (decrease) increase in cash and cash equivalents                                        |  |                         | (13,637    | ) |      |   | (43,705    | )    |  |   | 71,937     |  
|Cash and cash equivalents  beginning of year                                               |  |                         | 52,369     |   |      |   | 96,074     |      |  |   | 24,137     |  
|                                                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents  end of year                                                     |  | $                       | 38,732     |   |      | $ | 52,369     |      |  | $ | 96,074     |  
|                                                                                            |  |                         |            |   |      |   |            |      |  |   |            |  



See accompanying notes.



85



---

##### Table of Contents

WILLIAM LYON HOMES



CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)



|                                                                                                              |  |                         |          |   |      |   |          |      |  |   |        
|------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------
|                                                                                                              |  | Year Ended December 31,
|                                                                                                              |  | 2006                    |          |   | 2005 |   |          | 2004
|Supplemental disclosures of cash flow and non-cash activities:                                                |  |                         |          |   |      |   |          |      |  |   |        
|Issuance of notes payable for land acquisitions                                                               |  | $                       | 20,625   |   |      | $ | 11,686   |      |  | $ |       
|                                                                                                              |  |                         |          |   |      |   |          |      |  |   |        
|Issuance of note payable to secure land option agreement                                                      |  | $                       |         |   |      | $ | 4,709    |      |  | $ | 5,420  
|                                                                                                              |  |                         |          |   |      |   |          |      |  |   |        
|Net real estate inventories not owned                                                                         |  | $                       | 152,688  |   |      | $ | 115,771  |      |  |   |       
|                                                                                                              |  |                         |          |   |      |   |          |      |  |   |        
|Consolidation of other assets and minority interest from variable interest entities                           |  | $                       | (8,404   | ) |      | $ | 8,404    |      |  | $ |       
|                                                                                                              |  |                         |          |   |      |   |          |      |  |   |        
|Net liabilities from inventories not owned                                                                    |  | $                       | (131,564 | ) |      | $ |         |      |  | $ |       
|                                                                                                              |  |                         |          |   |      |   |          |      |  |   |        
|Net minority interests                                                                                        |  | $                       | (12,720  | ) |      | $ | (124,175 | )    |  | $ |       
|                                                                                                              |  |                         |          |   |      |   |          |      |  |   |        
|Income tax benefit credited to additional paid-in capital in connection with stock option exercises and other |  | $                       | 5,459    |   |      | $ | 2,997    |      |  | $ | 3,489  
|                                                                                                              |  |                         |          |   |      |   |          |      |  |   |        
|Net consolidation of assets and liabilities of previously unconsolidated joint ventures                       |  | $                       |         |   |      | $ |         |      |  | $ | 113,440
|                                                                                                              |  |                         |          |   |      |   |          |      |  |   |        



See accompanying notes.



86



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



Note 1  Summary of Significant
Accounting Policies



Operations



William Lyon Homes, a Delaware corporation, 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 and controlled subsidiaries and joint ventures, and
certain joint ventures and other entities which have been determined to be variable interest entities in which the Company is considered the primary beneficiary (see Note 2). Investments in joint ventures which have not been determined to be
variable interest entities in which the Company is considered the primary beneficiary are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the
Company). The accounting policies of the joint ventures are substantially the same as those of the Company. All significant intercompany accounts and transactions have been 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, 2006, 2005 and 2004, 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 operating revenue less operating costs plus equity in (loss) income of unconsolidated joint ventures less minority equity in income of consolidated entities. Accordingly, operating
income excludes certain expenses included in the determination of net income. Operating income from home building operations totaled $121.3 million, $314.8 million and $279.6 million for the years ended December 31, 2006, 2005 and 2004,
respectively.



Substantially all revenues are from external
customers. There were no customers that contributed 10% or more of the Companys total revenues during the years ended December 31, 2006, 2005 or 2004.



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 deposits, raw land, lots under
development, homes under construction and completed homes of real estate projects. 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. The Company relieves its accumulated real estate inventories through cost of sales for the cost of homes
sold. Selling expenses and other marketing costs are expensed in the period incurred. A provision



87



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



for warranty costs relating to the Companys limited warranty plans is included in cost of sales and accrued expenses at the time the sale of a home is
recorded. The Company generally 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. Factors that affect the Companys warranty
liability include the number of homes under warranty, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary.
Changes in the Companys warranty liability during the years ended December 31 are as follows (in thousands):



|                                                                            |  |              |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                            |  | December 31, |        
|                                                                            |  | 2006         |         |   | 2005 |   |         | 2004 | 
|                                                                            |  |              |         |   |      |   |         |      | 
|Warranty liability, beginning of year                                       |  | $            | 20,219  |   |      | $ | 14,308  |      |  | $ | 7,267   |  
|Warranty liability from consolidated entities as ofJanuary 1, 2004  Note 2 |  |              |        |   |      |   |        |      |  |   | 1,664   |  
|Warranty provision during year                                              |  |              | 14,679  |   |      |   | 16,647  |      |  |   | 14,228  |  
|Warranty payments during year                                               |  |              | (17,582 | ) |      |   | (16,294 | )    |  |   | (12,578 | )
|Warranty charges related to pre-existing warranties during year             |  |              | 6,048   |   |      |   | 5,558   |      |  |   | 3,727   |  
|                                                                            |  |              |         |   |      |   |         |      |  |   |         |  
|Warranty liability, end of year                                             |  | $            | 23,364  |   |      | $ | 20,219  |      |  | $ | 14,308  |  
|                                                                            |  |              |         |   |      |   |         |      |  |   |         |  



Interest incurred under the Revolving Credit Facilities, the 75/8% Senior Notes,
the 103/4% Senior Notes, the 71/2% Senior Notes and other notes payable, as more fully discussed in Note 6, is capitalized to qualifying real estate projects under development. Any additional interest charges
related to real estate projects not under development are expensed in the period incurred.



The Company accounts for its real estate inventories under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (Statement No. 144). Statement No. 144 requires impairment losses to be recorded on real estate inventories when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by real estate inventories are less than the carrying amount of such assets. When an impairment loss is required for real estate inventories, 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 those estimated.



The results of operations for
the year ended December 31, 2006, include a non-cash charge of $39,895,000 to record an impairment loss on real estate assets held by the Company at certain of its homebuilding projects. The impairment was primarily attributable to slower than
anticipated home sales and lower than anticipated net revenue due to softening market conditions. As a result, the future undiscounted cash flows estimated to be generated were determined to be less than the carrying amount of the assets.
Accordingly, the related real estate assets were written-down to their estimated fair value. The non-cash charge is reflected in impairment loss on real estate assets in the accompanying consolidated statements of income.



88



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The results of operations for the year ended December 31, 2005 included a non-cash charge of
$4,600,000 to record an impairment loss related to a golf course in the Companys San Diego Division. The impairment loss was primarily attributable to lower than expected cash flows and continued net operating losses since the golf course
opened in 2002. As a result, the future undiscounted cash flows estimated to be generated were determined to be less than the assets carrying amount. Accordingly, the golf course asset was written-down to its estimated fair value. The non-cash
charge had been previously reflected in other operating costs in the consolidated statement of income for the year ended December 31, 2005. However, such amount has been reclassified to loss on impairment of real estate assets to be consistent with
the financial statement presentation for the year ended December 31, 2006.



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 fifteen 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. As more fully discussed in Note 9, the Company owns an aircraft which is being depreciated using the straight-line method over an estimated useful
life of fifteen years.



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



The amount paid for business
acquisitions over the net fair value of assets acquired and liabilities assumed is reflected as goodwill, which is subject to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement
No. 142). Under Statement No. 142, goodwill is subject to impairment tests. The Company performed its annual impairment tests of goodwill as of December 31, 2006 and 2005 and determined that there have been no indicators of impairment related
to the Companys goodwill.



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 of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate (Statement No. 66). When it is determined that the earnings process is not complete, profit
is deferred for recognition in future periods.



Income Taxes



Income taxes are accounted for
under the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. 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 additional
paid-in capital.



89



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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 of Financial
Accounting Standards 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, 2006, except for the 103/4% Senior Notes, 71/2% Senior Notes and 75/8% Senior Notes as described in Note 6.



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 more detail in Note 11.



Cash and Cash Equivalents



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



Management Fees



Management fees represent fees earned from unconsolidated
joint ventures in accordance with joint venture and/or operating agreements. Effective January 1, 2004, upon consolidation of certain joint ventures in connection with interpretation No. 46 (See Note 2), management fees are eliminated with the
related cost of sales.



Earnings Per Common Share



On July 25, 2006, WLH Acquisition Corp., a corporation
owned by General William Lyon, Chairman of the Board and Chief Executive Officer of the Company, The William Harwell Lyon 1987 Trust and The William Harwell Lyon Separate Property Trust, was merged with and into the Company, with the Company
continuing as the surviving corporation of the merger. Prior to the completion of the merger, General Lyon and the two trusts contributed all the shares of the Company owned by them, which constituted more than 90% of the outstanding shares, to WLH
Acquisition Corp. WLH Acquisition Corp. was then merged with and into the Company pursuant to the short-form merger provisions of Delaware law. After the merger, the Companys capital structure consisted of common stock, par value $.01 per
share, 3,000 shares authorized, and 1,000 shares outstanding. The Company will continue as a privately held company, wholly owned by General Lyon and the two trusts. Because the Company is now a privately held company, no earnings per share
information is presented. See Note 7  Tender Offer and Merger for additional information.



Use of Estimates



The preparation of the Companys financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 2006 and 2005 and revenues and expenses for each of the three years in the period ended December 31, 2006. Accordingly, actual results could
differ from those estimates.



90



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Impact of New Accounting Pronouncements



In September 2006, the Financial Accounting Standards Board (the
FASB) issued SFAS No. 157, Fair Value Measurements, (FAS 157), FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair
value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. FAS 157 is not expected to materially affect how we determine fair value.



In September 2006, the Securities and Exchange Commission
Staff issued Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, (SAB 108). SAB 108 addresses how the effects of prior year
uncorrected financial statement misstatements should be considered in current year financial statements. SAB 108 requires registrants to quantify misstatements using both balance sheet and income statement approaches and to evaluate whether either
approach results in quantifying an error that is material in light of relative quantitative and qualitative factors. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. SAB
108 did not have an effect on our consolidated financial statements.



In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). This interpretation, among other things, creates a two step approach for evaluating uncertain tax
positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that
more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being
sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements. FIN 48 is effective for fiscal years beginning after
December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. The Company is evaluating the provisions of FIN 48 and has not yet determined the
impact on the Companys financial statements.



On June 29,
2005, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 04-05, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights (EITF 04-05). The scope of EITF 04-05 is limited to limited partnerships or similar entities (such as limited liability companies that have governing provisions that are the functional equivalent of a
limited partnership) that are not variable interest entities under Interpretation No. 46 and provides a new framework for addressing when a general partner in a limited partnership, or managing member in the case of a limited liability company,
controls the entity. Under EITF 04-05, the Company may be required to consolidate certain investments in which the Company holds a general partner or managing member interest. EITF 04-05 is effective after June 29, 2005 for new entities formed after
such date and for existing entities for which the agreements are subsequently modified and is effective for the Companys fiscal year beginning January 1, 2006 for all other entities. The adoption of EITF 04-05 did not have any impact on the
Companys financial statements as of December 31, 2006.



Reclassifications



Certain balances have been
reclassified in order to conform to current year presentation.



91



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 2  Consolidation of Variable Interest Entities



In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (Interpretation No. 46) which addresses the consolidation of variable interest entities (VIEs). Under Interpretation No. 46,
arrangements that are not controlled through voting or similar rights are accounted for as VIEs. An enterprise is required to consolidate a VIE if it is the primary beneficiary of the VIE.



Under Interpretation No. 46, a VIE is created when (i) the equity investment
at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity
through voting or similar rights, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE, pursuant to
Interpretation No. 46, an enterprise that absorbs a majority of the expected losses or residual returns of the VIE is considered the primary beneficiary and must consolidate the VIE.



Based on the provisions of Interpretation No. 46, the Company has concluded that under certain circumstances when the
Company (i) enters into option agreements for the purchase of land or lots from an entity and pays a non-refundable deposit, (ii) enters into land banking arrangements (see Note 10) or (iii) enters into arrangements with a financial partner for the
formation of joint ventures which engage in homebuilding and land development activities, a VIE may be created under condition (ii) (b) or (c) of the previous paragraph. The Company may be deemed to have provided subordinated financial support,
which refers to variable interests that will absorb some or all of an entitys expected losses if they occur. For each VIE created, the Company has computed expected losses and residual returns based on the probability of future cash flows as
outlined in Interpretation No. 46. If the Company is determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE are consolidated with the Companys financial statements.



At December 31, 2006, 2005 and 2004, certain joint ventures, lot option
agreements and land banking arrangements have been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of all of these joint ventures, lot
option agreements and land banking arrangements have been consolidated with the Companys financial statements as of December 31, 2006 and 2005, and for the three years in the period ended December 31, 2006. Supplemental consolidating financial
information of the Company, specifically including information for the joint ventures, lot option arrangements and land banking arrangements consolidated under Interpretation No. 46, is presented below to allow investors to determine the nature of
assets held and the operations of the consolidated entities. Investments in consolidated entities in the financial statements of wholly-owned entities presented below use the equity method of accounting. Consolidated real estate inventories-owned
include land deposits under option agreements or land banking arrangements (see Note 11) of $34,517,000,000 and $77,956,000 at December 31, 2006 and 2005, respectively. As of December 31, 2006, the Companys remaining total contractual
obligations for land purchases and option commitments was approximately $407,665,000.



The joint ventures which have been determined to be VIEs are each engaged in homebuilding and land development activities. Certain of these joint ventures have not obtained construction financing from outside lenders,
but are financing their activities through equity contributions from each of the joint venture partners. Creditors of these VIEs have no recourse against the general credit of the Company. Income allocations and cash distributions to the
Company are based on predetermined formulas between the Company and the joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners priority returns and return of
partners capital, approximately 50% of the profits and cash flows from the joint ventures.



92



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)



|                                                             |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|------------------------------------------------------------ |  | ----------------- | --------- | ----------------------------------------------------- | - | ------------------- |  | - | ------------------ | - |  | - | ---------
|                                                             |  | December 31, 2006
|                                                             |  | Wholly-Owned      |           | Variable InterestEntities Under Interpretation No. 46 |   | Eliminating Entries |  |   | Consolidated Total
|                                                            
|ASSETS                                                      
|                                                             |  |                   |           |                                                      
|Cash and cash equivalents                                    |  | $                 | 24,123    |                                                       | $ | 14,609              |  | $ |                   |   |  | $ | 38,732   
|Receivables                                                  |  |                   | 118,260   |                                                       |   | 1,231               |  |   |                   |   |  | $ | 119,491  
|Real estate inventories                                      |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|Owned                                                        |  |                   | 1,248,735 |                                                       |   | 183,018             |  |   |                   |   |  |   | 1,431,753
|Not owned                                                    |  |                   | 131,564   |                                                       |   | 69,103              |  |   |                   |   |  |   | 200,667  
|Investments in and advances to unconsolidated joint ventures |  |                   | 3,560     |                                                       |   |                    |  |   |                   |   |  |   | 3,560    
|Investments in consolidated entities                         |  |                   | 76,833    |                                                       |   |                    |  |   | (76,833            | ) |  |   |         
|Other assets                                                 |  |                   | 84,392    |                                                       |   |                    |  |   |                   |   |  |   | 84,392   
|Intercompany receivables                                     |  |                   |          |                                                       |   | 3,367               |  |   | (3,367             | ) |  |   |         
|                                                             |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|                                                             |  | $                 | 1,687,467 |                                                       | $ | 271,328             |  | $ | (80,200            | ) |  | $ | 1,878,595
|                                                             |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY                        
|                                                             |  |                   |           |                                                      
|Accounts payable and accrued expenses                        |  | $                 | 146,286   |                                                       | $ | 14,177              |  | $ |                   |   |  | $ | 160,463  
|Liabilities from inventories not owned                       |  |                   | 131,564   |                                                       |   |                    |  |   |                   |   |  |   | 131,564  
|Notes payable                                                |  |                   | 233,688   |                                                       |   | 70,408              |  |   |                   |   |  |   | 304,096  
|75/8%
Senior Notes due December 15, 2012                     |  |                   | 150,000   |                                                       |   |                    |  |   |                   |   |  |   | 150,000  
|103/4% Senior Notes due April 1, 2013                        |  |                   | 247,218   |                                                       |   |                    |  |   |                   |   |  |   | 247,218  
|71/2%
Senior Notes due February 15, 2014                     |  |                   | 150,000   |                                                       |   |                    |  |   |                   |   |  |   | 150,000  
|Intercompany payables                                        |  |                   | 3,316     |                                                       |   | 51                  |  |   | (3,367             | ) |  |   |         
|                                                             |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|Total liabilities                                            |  |                   | 1,062,072 |                                                       |   | 84,636              |  |   | (3,367             | ) |  |   | 1,143,341
|Minority interest in consolidated entities                   |  |                   |          |                                                       |   |                    |  |   | 109,859            |   |  |   | 109,859  
|Owners capital                                              |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|William Lyon Homes                                           |  |                   |          |                                                       |   | 76,833              |  |   | (76,833            | ) |  |   |         
|Others                                                       |  |                   |          |                                                       |   | 109,859             |  |   | (109,859           | ) |  |   |         
|Stockholders equity                                         |  |                   | 625,395   |                                                       |   |                    |  |   |                   |   |  |   | 625,395  
|                                                             |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|                                                             |  | $                 | 1,687,467 |                                                       | $ | 271,328             |  | $ | (80,200            | ) |  | $ | 1,878,595
|                                                             |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          



93



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)



|                                                             |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|------------------------------------------------------------ |  | ----------------- | --------- | ----------------------------------------------------- | - | ------------------- |  | - | ------------------ | - |  | - | ---------
|                                                             |  | December 31, 2005
|                                                             |  | Wholly-Owned      |           | Variable InterestEntities Under Interpretation No. 46 |   | Eliminating Entries |  |   | Consolidated Total
|                                                            
|ASSETS                                                      
|                                                             |  |                   |           |                                                      
|Cash and cash equivalents                                    |  | $                 | 26,271    |                                                       | $ | 26,098              |  | $ |                   |   |  | $ | 52,369   
|Receivables                                                  |  |                   | 128,074   |                                                       |   | 15,407              |  |   |                   |   |  |   | 143,481  
|Real estate inventories                                      |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|Owned                                                        |  |                   | 1,119,127 |                                                       |   | 184,349             |  |   |                   |   |  |   | 1,303,476
|Not owned                                                    |  |                   |          |                                                       |   | 115,772             |  |   |                   |   |  |   | 115,772  
|Investments in and advances to unconsolidated joint ventures |  |                   | 397       |                                                       |   |                    |  |   |                   |   |  |   | 397      
|Investments in consolidated entities                         |  |                   | 88,197    |                                                       |   |                    |  |   | (88,197            | ) |  |   |         
|Other assets                                                 |  |                   | 67,103    |                                                       |   | 8,404               |  |   |                   |   |  |   | 75,507   
|Intercompany receivables                                     |  |                   |          |                                                       |   | 6,583               |  |   | (6,583             | ) |  |   |         
|                                                             |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|                                                             |  | $                 | 1,429,169 |                                                       | $ | 356,613             |  | $ | (94,780            | ) |  | $ | 1,691,002
|                                                             |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY                        
|                                                             |  |                   |           |                                                      
|Accounts payable and accrued expenses                        |  | $                 | 223,306   |                                                       | $ | 25,088              |  | $ |                   |   |  | $ | 248,394  
|Notes payable                                                |  |                   | 109,469   |                                                       |   | 16,150              |  |   |                   |   |  |   | 125,619  
|75/8%
Senior Notes due December 15, 2012                     |  |                   | 150,000   |                                                       |   |                    |  |   |                   |   |  |   | 150,000  
|103/4% Senior Notes due April 1, 2013                        |  |                   | 246,917   |                                                       |   |                    |  |   |                   |   |  |   | 246,917  
|71/2%
Senior Notes due February 15, 2014                     |  |                   | 150,000   |                                                       |   |                    |  |   |                   |   |  |   | 150,000  
|Intercompany payables                                        |  |                   | 6,583     |                                                       |   |                    |  |   | (6,583             | ) |  |   |         
|                                                             |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|Total liabilities                                            |  |                   | 886,275   |                                                       |   | 41,238              |  |   | (6,583             | ) |  |   | 920,930  
|Minority interest in consolidated entities                   |  |                   |          |                                                       |   |                    |  |   | 227,178            |   |  |   | 227,178  
|Owners capital                                              |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|William Lyon Homes                                           |  |                   |          |                                                       |   | 88,197              |  |   | (88,197            | ) |  |   |         
|Others                                                       |  |                   |          |                                                       |   | 227,178             |  |   | (227,178           | ) |  |   |         
|Stockholders equity                                         |  |                   | 542,894   |                                                       |   |                    |  |   |                   |   |  |   | 542,894  
|                                                             |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          
|                                                             |  | $                 | 1,429,169 |                                                       | $ | 356,613             |  | $ | (94,780            | ) |  | $ | 1,691,002
|                                                             |  |                   |           |                                                       |   |                     |  |   |                    |   |  |   |          



94



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





CONDENSED
CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP

(in thousands)



|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|-------------------------------------------------- |  | ---------------------------- | ---------- | - | --------------------------------------------------- | - | -------- | ------------------ |  | - | ----------------- | - |  | - | ---------- | -
|                                                   |  | Year Ended December 31, 2006 |           
|                                                   |  | Wholly-Owned                 |            |   | Variable InterestEntities UnderInterpretationNo. 46 |   |          | EliminatingEntries |  |   | ConsolidatedTotal |  
|Operating revenue                                  |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Sales                                              |  | $                            | 1,289,338  |   |                                                     | $ | 202,883  |                    |  | $ |                  |   |  | $ | 1,492,221  |  
|Management fees                                    |  |                              | 5,011      |   |                                                     |   |         |                    |  |   | (5,011            | ) |  |   |           |  
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|                                                   |  |                              | 1,294,349  |   |                                                     |   | 202,883  |                    |  |   | (5,011            | ) |  |   | 1,492,221  |  
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Operating costs                                    |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Cost of sales                                      |  |                              | (1,022,443 | ) |                                                     |   | (159,706 | )                  |  |   | 5,011             |   |  |   | (1,177,138 | )
|Impairment loss on real estate assets              |  |                              | (39,895    | ) |                                                     |   |         |                    |  |   |                  |   |  |   | (39,895    | )
|Sales and marketing                                |  |                              | (64,073    | ) |                                                     |   | (8,276   | )                  |  |   |                  |   |  |   | (72,349    | )
|General and administrative                         |  |                              | (61,367    | ) |                                                     |   | (23      | )                  |  |   |                  |   |  |   | (61,390    | )
|Other                                              |  |                              | (6,502     | ) |                                                     |   |         |                    |  |   |                  |   |  |   | (6,502     | )
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|                                                   |  |                              | (1,194,280 | ) |                                                     |   | (168,005 | )                  |  |   | 5,011             |   |  |   | (1,357,274 | )
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Equity in income of unconsolidated joint ventures  |  |                              | 3,242      |   |                                                     |   |         |                    |  |   |                  |   |  |   | 3,242      |  
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Equity in income of consolidated entities          |  |                              | 18,491     |   |                                                     |   |         |                    |  |   | (18,491           | ) |  |   |           |  
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Minority equity in income of consolidated entities |  |                              |           |   |                                                     |   |         |                    |  |   | (16,914           | ) |  |   | (16,914    | )
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Operating income                                   |  |                              | 121,802    |   |                                                     |   | 34,878   |                    |  |   | (35,405           | ) |  |   | 121,275    |  
|Financial advisory expenses                        |  |                              | (3,165     | ) |                                                     |   |         |                    |  |   |                  |   |  |   | (3,165     | )
|Other income, net                                  |  |                              | 5,072      |   |                                                     |   | 527      |                    |  |   |                  |   |  |   | 5,599      |  
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Income before provision for income taxes           |  |                              | 123,709    |   |                                                     |   | 35,405   |                    |  |   | (35,405           | ) |  |   | 123,709    |  
|Provision for income taxes                         |  |                              | (48,931    | ) |                                                     |   |         |                    |  |   |                  |   |  |   | (48,931    | )
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Net income                                         |  | $                            | 74,778     |   |                                                     | $ | 35,405   |                    |  | $ | (35,405           | ) |  | $ | 74,778     |  
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  



95



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP

(in thousands)



|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|-------------------------------------------------- |  | ---------------------------- | ---------- | - | --------------------------------------------------- | - | -------- | ------------------ |  | - | ----------------- | - |  | - | ---------- | -
|                                                   |  | Year Ended December 31, 2005 |           
|                                                   |  | Wholly-Owned                 |            |   | Variable InterestEntities UnderInterpretationNo. 46 |   |          | EliminatingEntries |  |   | ConsolidatedTotal |  
|Operating revenue                                  |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Sales                                              |  | $                            | 1,449,524  |   |                                                     | $ | 406,859  |                    |  | $ |                  |   |  | $ | 1,856,383  |  
|Management fees                                    |  |                              | 12,658     |   |                                                     |   |         |                    |  |   | (12,658           | ) |  |   |           |  
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|                                                   |  |                              | 1,462,182  |   |                                                     |   | 406,859  |                    |  |   | (12,658           | ) |  |   | 1,856,383  |  
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Operating costs                                    |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Cost of sales                                      |  |                              | (1,057,535 | ) |                                                     |   | (306,924 | )                  |  |   | 12,658            |   |  |   | (1,351,801 | )
|Impairment loss on real estate assets              |  |                              | (4,600     | ) |                                                     |   |         |                    |  |   |                  |   |  |   | (4,600     | )
|Sales and marketing                                |  |                              | (46,480    | ) |                                                     |   | (12,942  | )                  |  |   |                  |   |  |   | (59,422    | )
|General and administrative                         |  |                              | (90,045    | ) |                                                     |   |         |                    |  |   |                  |   |  |   | (90,045    | )
|Other                                              |  |                              | (2,450     | ) |                                                     |   |         |                    |  |   |                  |   |  |   | (2,450     | )
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|                                                   |  |                              | (1,201,110 | ) |                                                     |   | (319,866 | )                  |  |   | 12,658            |   |  |   | (1,508,318 | )
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Equity in income of unconsolidated joint ventures  |  |                              | 4,301      |   |                                                     |   |         |                    |  |   |                  |   |  |   | 4,301      |  
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Equity in income of consolidated entities          |  |                              | 50,009     |   |                                                     |   |         |                    |  |   | (50,009           | ) |  |   |           |  
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Minority equity in income of consolidated entities |  |                              |           |   |                                                     |   |         |                    |  |   | (37,571           | ) |  |   | (37,571    | )
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Operating income                                   |  |                              | 315,382    |   |                                                     |   | 86,993   |                    |  |   | (87,580           | ) |  |   | 314,795    |  
|Financial advisory expenses                        |  |                              | (2,191     | ) |                                                     |   |         |                    |  |   |                  |   |  |   | (2,191     | )
|Other income, net                                  |  |                              | 1,589      |   |                                                     |   | 587      |                    |  |   |                  |   |  |   | 2,176      |  
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Income before provision for income taxes           |  |                              | 314,780    |   |                                                     |   | 87,580   |                    |  |   | (87,580           | ) |  |   | 314,780    |  
|Provision for income taxes                         |  |                              | (124,149   | ) |                                                     |   |         |                    |  |   |                  |   |  |   | (124,149   | )
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  
|Net income                                         |  | $                            | 190,631    |   |                                                     | $ | 87,580   |                    |  | $ | (87,580           | ) |  | $ | 190,631    |  
|                                                   |  |                              |            |   |                                                     |   |          |                    |  |   |                   |   |  |   |            |  



96



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP

(in thousands)



|                                                   |  |                              |            |   |                                                       |   |          |                                      |  |   |                     |   |  |                    |          |   |  |   |            |  
|-------------------------------------------------- |  | ---------------------------- | ---------- | - | ----------------------------------------------------- | - | -------- | ------------------------------------ |  | - | ------------------- | - |  | ------------------ | -------- | - |  | - | ---------- | -
|                                                   |  | Year Ended December 31, 2004 |           
|                                                   |  |                              |            |   | Consolidated Entities                                 |   |          |                                      |  |   |                     |  
|                                                   |  | Wholly-Owned                 |            |   | Variable InterestEntities Under Interpretation No. 46 |   |          | JointVenturesPreviously Consolidated |  |   | Elimination Entries |   |  | Consolidated Total |         
|Operating revenue                                  |  |                              |            |   |                                                       |   |          |                                      |  |   |                     |   |  |                    |          |   |  |   |            |  
|Sales                                              |  | $                            | 1,282,535  |   |                                                       | $ | 539,312  |                                      |  | $ | 33,655              |   |  | $                  | (33,655  | ) |  | $ | 1,821,847  |  
|Management fees                                    |  |                              | 16,188     |   |                                                       |   |         |                                      |  |   |                    |   |  |                    | (16,188  | ) |  |   |           |  
|                                                   |  |                              |            |   |                                                       |   |          |                                      |  |   |                     |   |  |                    |          |   |  |   |            |  
|                                                   |  |                              | 1,298,723  |   |                                                       |   | 539,312  |                                      |  |   | 33,655              |   |  |                    | (49,843  | ) |  |   | 1,821,847  |  
|                                                   |  |                              |            |   |                                                       |   |          |                                      |  |   |                     |   |  |                    |          |   |  |   |            |  
|Operating costs                                    |  |                              |            |   |                                                       |   |          |                                      |  |   |                     |   |  |                    |          |   |  |   |            |  
|Cost of sales                                      |  |                              | (964,398   | ) |                                                       |   | (402,020 | )                                    |  |   | (33,655             | ) |  |                    | 49,843   |   |  |   | (1,350,230 | )
|Sales and marketing                                |  |                              | (41,381    | ) |                                                       |   | (17,411  | )                                    |  |   |                    |   |  |                    |         |   |  |   | (58,792    | )
|General and administrative                         |  |                              | (80,784    | ) |                                                       |   |         |                                      |  |   |                    |   |  |                    |         |   |  |   | (80,784    | )
|Other                                              |  |                              | (2,105     | ) |                                                       |   |         |                                      |  |   |                    |   |  |                    |         |   |  |   | (2,105     | )
|                                                   |  |                              |            |   |                                                       |   |          |                                      |  |   |                     |   |  |                    |          |   |  |   |            |  
|                                                   |  |                              | (1,088,668 | ) |                                                       |   | (419,431 | )                                    |  |   | (33,655             | ) |  |                    | 49,843   |   |  |   | (1,491,911 | )
|                                                   |  |                              |            |   |                                                       |   |          |                                      |  |   |                     |   |  |                    |          |   |  |   |            |  
|Equity in loss of unconsolidated joint ventures    |  |                              | (699       | ) |                                                       |   |         |                                      |  |   |                    |   |  |                    |         |   |  |   | (699       | )
|                                                   |  |                              |            |   |                                                       |   |          |                                      |  |   |                     |   |  |                    |          |   |  |   |            |  
|Equity in income of consolidated entities          |  |                              | 70,394     |   |                                                       |   |         |                                      |  |   |                    |   |  |                    | (70,394  | ) |  |   |           |  
|                                                   |  |                              |            |   |                                                       |   |          |                                      |  |   |                     |   |  |                    |          |   |  |   |            |  
|Minority equity in income of consolidated entities |  |                              |           |   |                                                       |   |         |                                      |  |   |                    |   |  |                    | (49,661  | ) |  |   | (49,661    | )
|                                                   |  |                              |            |   |                                                       |   |          |                                      |  |   |                     |   |  |                    |          |   |  |   |            |  
|Operating income                                   |  |                              | 279,750    |   |                                                       |   | 119,881  |                                      |  |   |                    |   |  |                    | (120,055 | ) |  |   | 279,576    |  
|Other income, net                                  |  |                              | 5,398      |   |                                                       |   | 174      |                                      |  |   |                    |   |  |                    |         |   |  |   | 5,572      |  
|                                                   |  |                              |            |   |                                                       |   |          |                                      |  |   |                     |   |  |                    |          |   |  |   |            |  
|Income before provision for income taxes           |  |                              | 285,148    |   |                                                       |   | 120,055  |                                      |  |   |                    |   |  |                    | (120,055 | ) |  |   | 285,148    |  
|Provision for income taxes                         |  |                              | (113,499   | ) |                                                       |   |         |                                      |  |   |                    |   |  |                    |         |   |  |   | (113,499   | )
|                                                   |  |                              |            |   |                                                       |   |          |                                      |  |   |                     |   |  |                    |          |   |  |   |            |  
|Net income                                         |  | $                            | 171,649    |   |                                                       | $ | 120,055  |                                      |  | $ |                    |   |  | $                  | (120,055 | ) |  | $ | 171,649    |  
|                                                   |  |                              |            |   |                                                       |   |          |                                      |  |   |                     |   |  |                    |          |   |  |   |            |  



97



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 3  Receivables



Receivables consist of the following (in thousands):



|                                                                                                                   |  |              |         |      |   |        
|------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | ---- | - | -------
|                                                                                                                   |  | December 31,
|                                                                                                                   |  | 2006         |         | 2005
|First trust deed mortgage notes receivable, pledged as collateral for revolving mortgage warehouse credit facility |  | $            | 59,734  |      | $ | 47,816 
|Other receivables  primarily escrow proceeds                                                                      |  |              | 59,757  |      |   | 95,665 
|                                                                                                                   |  |              |         |      |   |        
|                                                                                                                   |  | $            | 119,491 |      | $ | 143,481
|                                                                                                                   |  |              |         |      |   |        



Note 4  Real Estate
Inventories



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



|                                                      |  |              |           |      |   |          
|----------------------------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                                      |  | December 31,
|                                                      |  | 2006         |           | 2005
|Inventories owned:                                    |  |              |           |      |   |          
|Deposits                                              |  | $            | 34,517    |      | $ | 77,956   
|Land                                                  |  |              | 676,274   |      |   | 520,884  
|Construction in progress                              |  |              | 548,762   |      |   | 578,603  
|Completed inventory, including model homes            |  |              | 172,200   |      |   | 126,033  
|                                                      |  |              |           |      |   |          
|Total                                                 |  |              | 1,431,753 |      | $ | 1,303,476
|                                                      |  |              |           |      |   |          
|Inventories not owned: (1)                            |  |              |           |      |   |          
|Variable interest entities  lot options agreements   |  | $            |          |      | $ | 44,786   
|Variable interest entities  land banking arrangement |  |              | 69,103    |      |   | 70,986   
|Other land options contracts                          |  |              | 131,564   |      |   |         
|                                                      |  |              |           |      |   |          
|Total inventories not owned                           |  | $            | 200,667   |      | $ | 115,772  
|                                                      |  |              |           |      |   |          

---

|(1) |  | Includes the consolidation of certain lot option arrangements and land banking arrangements determined to be VIEs under Interpretation No. 46 in which the company is considered the
primary beneficiary (See Note 2 above) and the consolidation of a certain land banking arrangement recorded as a product financing arrangement. Amounts are net of deposits.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



98



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 5  Investments in and Advances to Unconsolidated Joint Ventures



The Company and certain of its subsidiaries are general partners or members
in joint ventures involved in the development and sale of residential projects. The consolidated financial statements of the Company include the accounts of the Company, all majority-owned and controlled subsidiaries and certain joint ventures which
have been determined to be variable interest entities in which the Company is considered the primary beneficiary (see Note 2). The financial statements of joint ventures which have not been determined to be variable interest entities in which the
Company is considered the primary beneficiary are not consolidated with the Companys financial statements. The Companys investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50%
or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Condensed combined financial information of these unconsolidated joint ventures as of December 31, 2006 and 2005, and for each of the three years
in the period ended December 31, 2006 are summarized as follows:



CONDENSED COMBINED BALANCE SHEETS

(In thousands)



|                                           |  |              |        |      |   |       
|------------------------------------------ |  | ------------ | ------ | ---- | - | ------
|                                           |  | December 31,
|                                           |  | 2006         |        | 2005
|ASSETS                                    
|Cash and cash equivalents                  |  | $            | 328    |      | $ | 2,580 
|Receivables                                |  |              | 309    |      |   | 3,253 
|Real estate inventories                    |  |              | 40,913 |      |   | 31,279
|Investment in unconsolidated joint venture |  |              | 2,048  |      |   |      
|Property and equipment                     |  |              | 985    |      |   | 956   
|                                           |  |              |        |      |   |       
|                                           |  | $            | 44,583 |      | $ | 38,068
|                                           |  |              |        |      |   |       
|LIABILITIES AND OWNERS CAPITAL           
|Accounts payable                           |  | $            | 765    |      | $ | 5,127 
|Notes payable                              |  |              | 38,525 |      |   | 32,377
|Advances from William Lyon Homes           |  |              | 1,825  |      |   | 181   
|                                           |  |              |        |      |   |       
|                                           |  |              | 41,115 |      |   | 37,685
|                                           |  |              |        |      |   |       
|Owners Capital                            |  |              |        |      |   |       
|William Lyon Homes                         |  |              | 1,735  |      |   | 216   
|Others                                     |  |              | 1,733  |      |   | 167   
|                                           |  |              |        |      |   |       
|                                           |  |              | 3,468  |      |   | 383   
|                                           |  |              |        |      |   |       
|                                           |  | $            | 44,583 |      | $ | 38,068
|                                           |  |              |        |      |   |       



99



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED COMBINED STATEMENTS OF INCOME

(In thousands)



|                                                         |  |                         |         |   |      |   |         |      |  |   |        |  
|-------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                         |  | Year Ended December 31, |        
|                                                         |  | 2006                    |         |   | 2005 |   |         | 2004 | 
|Operating revenue                                        |  |                         |         |   |      |   |         |      |  |   |        |  
|Land sales                                               |  | $                       | 17,046  |   |      | $ | 26,091  |      |  | $ |       |  
|                                                         |  |                         |         |   |      |   |         |      |  |   |        |  
|                                                         |  |                         | 17,046  |   |      |   | 26,091  |      |  |   |       |  
|Operating costs                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|Cost of sales  land                                     |  |                         | (13,315 | ) |      |   | (23,338 | )    |  |   |       |  
|Sales and marketing                                      |  |                         |        |   |      |   | (342    | )    |  |   |       |  
|General and administrative                               |  |                         |        |   |      |   | (17     | )    |  |   |       |  
|Other                                                    |  |                         | (1,579  | ) |      |   | (1,380  | )    |  |   | (694   | )
|                                                         |  |                         |         |   |      |   |         |      |  |   |        |  
|                                                         |  |                         | (14,894 | ) |      |   | (25,077 | )    |  |   | (694   | )
|                                                         |  |                         |         |   |      |   |         |      |  |   |        |  
|Equity in income (loss) of unconsolidated joint ventures |  |                         | 5,037   |   |      |   | 19,687  |      |  |   | (705   | )
|                                                         |  |                         |         |   |      |   |         |      |  |   |        |  
|Operating income (loss)                                  |  |                         | 7,189   |   |      |   | 20,701  |      |  |   | (1,399 | )
|Other income, net                                        |  |                         | 384     |   |      |   |        |      |  |   |       |  
|                                                         |  |                         |         |   |      |   |         |      |  |   |        |  
|Net income (loss)                                        |  | $                       | 7,573   |   |      | $ | 20,701  |      |  | $ | (1,399 | )
|                                                         |  |                         |         |   |      |   |         |      |  |   |        |  
|Allocation to owners                                     |  |                         |         |   |      |   |         |      |  |   |        |  
|William Lyon Homes                                       |  | $                       | 3,786   |   |      | $ | 10,350  |      |  | $ | (699   | )
|Others                                                   |  |                         | 3,787   |   |      |   | 10,351  |      |  |   | (700   | )
|                                                         |  |                         |         |   |      |   |         |      |  |   |        |  
|                                                         |  | $                       | 7,573   |   |      | $ | 20,701  |      |  | $ | (1,399 | )
|                                                         |  |                         |         |   |      |   |         |      |  |   |        |  



Income allocations and
cash distributions to the Company are based on predetermined formulas between the Company and the joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners
priority returns and return of partners capital, approximately 50% of the profits and cash flows from joint ventures.



Certain joint ventures have obtained financing from construction lenders which amounted to $38,525,000 at December 31, 2006. As common practice required
by commercial lenders, all of the joint ventures that have obtained financing are obligated to repay loans to a level such that they do not exceed certain required loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by
appraising the property securing the loan at the time. Either a decrease in the value of the property securing the loan or an increase in the construction costs could trigger this pay down obligation. The term of the obligation corresponds with the
term of the loan and is limited to the outstanding loan balance.



The Company is a member in an unconsolidated joint venture limited liability company formed for the purpose of acquiring and developing land in Nevada. At December 31, 2006, the unconsolidated joint venture had outstanding land acquisition
and development debt of $36,775,000, of which the Company guaranteed $18,387,500. If the unconsolidated joint venture liability company were to default on its obligation to repay the debt, the Company would be obligated to pay one-half of the
outstanding balance, together with one-half of the accrued but unpaid interest thereon. The current maturity date of the debt is June 30, 2007, but such maturity date may be extended under certain circumstances to June 30, 2008. The debt bears
interest at prime plus 0.5% (8.75% at December 31, 2006) and is secured by the real estate inventories of the unconsolidated joint venture limited liability company in the book amount of $38,260,000 at December 31, 2006.



100



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





During the year ended December 31, 2003, the Companys wholly-owned subsidiary William Lyon Homes, Inc., a California corporation, (California Lyon), and two unaffiliated parties formed a series of
limited liability companies (Development LLCs) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into
1,910 residential homesites. As of December 31, 2005, the Development LLCs sold substantially all of the lots. During the year ended December 31, 2005, California Lyon purchased 829 lots from the Development LLCs for a purchase price of
$183,626,000, of which 267 lots were purchased through three land banking arrangements for a purchase price of $84,085,000 (see Note 2 for additional information regarding the Companys land banking arrangements). California Lyon has a 121/2% indirect, minority interest in the Development LLCs and during the year ended December 31, 2005 earned income of
$9,843,000 from the sale of lots by the Development LLCs, of which $5,159,000 of income was deferred as a reduction to the cost basis of the lots purchased by California Lyon and will be recognized when homes are constructed on the lots and sold to
third parties.



Note 6  Notes Payable and Senior Notes



Notes payable and Senior Notes consist of the following
(in thousands):



|                                                                                                                                                |  |              |         |      |   |        
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                                                                                                                                |  | December 31,
|                                                                                                                                                |  | 2006         |         | 2005
|Notes payable:                                                                                                                                  |  |              |         |      |   |        
|Revolving credit facilities                                                                                                                     |  | $            | 145,990 |      | $ | 49,967 
|Construction notes payable                                                                                                                      |  |              | 70,408  |      |   | 16,150 
|Seller financing                                                                                                                                |  |              | 28,339  |      |   | 11,686 
|Collateralized mortgage obligations under revolving mortgage warehouse credit facilities, secured by first trust deed mortgage notes
receivable |  |              | 59,359  |      |   | 47,816 
|                                                                                                                                                |  |              |         |      |   |        
|                                                                                                                                                |  |              | 304,096 |      |   | 125,619
|Senior Notes:                                                                                                                                   |  |              |         |      |   |        
|75/8%
Senior Notes due December 15, 2012                                                                                                        |  |              | 150,000 |      |   | 150,000
|103/4% Senior Notes due April 1, 2013                                                                                                           |  |              | 247,218 |      |   | 246,917
|71/2%
Senior Notes due February 15, 2014                                                                                                        |  |              | 150,000 |      |   | 150,000
|                                                                                                                                                |  |              |         |      |   |        
|                                                                                                                                                |  |              | 547,218 |      |   | 546,917
|                                                                                                                                                |  |              |         |      |   |        
|                                                                                                                                                |  | $            | 851,314 |      | $ | 672,536
|                                                                                                                                                |  |              |         |      |   |        



During the years ended
December 31, 2006, 2005 and 2004, the Company incurred and capitalized interest relating to the above debt of $80,173,000, $73,209,000 and $59,024,000, respectively.



Maturities of the notes payable and Senior Notes are as follows as of
December 31, 2006:



|                        |  |                |        
|----------------------- |  | -------------- | -------
|Year Ended December 31, |  | (in thousands)
|2007                    |  | $              | 177,149
|2008                    |  |                | 126,947
|2009                    |  |                |       
|2010                    |  |                |       
|2011                    |  |                |       
|Thereafter              |  |                | 547,218
|                        |  |                |        
|                        |  | $              | 851,314
|                        |  |                |        



101



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



75/8% Senior Notes



On November 22, 2004, the Companys 100% owned subsidiary, William Lyon Homes, Inc., a
California corporation, (California Lyon) closed its offering of $150,000,000 principal amount of 75/8% Senior Notes due 2012 (the 75/8% Senior Notes). The notes were sold pursuant to
Rule 144A. The notes were issued at par, resulting in net proceeds to the Company of approximately $148,500,000. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the
notes for publicly tradeable notes having substantially identical terms. On January 12, 2005, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an offer to exchange any and all of its
outstanding $150,000,000 aggregate principal amount of 75/8% Senior Notes due 2012, which are not registered
under the Securities Act of 1933, for a like amount of its new 75/8% Senior Notes due 2012, which are registered
under the Securities Act of 1933, upon the terms and subject to the conditions set forth in the prospectus dated January 12, 2005. The exchange offer was completed for $146,500,000 principal amount of the 75/8% Senior Notes on February 18, 2005. The remaining $3,500,000 principal amount of the old notes remains
outstanding. The terms of the new notes are identical in all material respects to those of the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. Interest on the
75/8% Senior Notes is payable semi-annually on December 15 and June 15 of each year. Based on the current
outstanding principal amount of the 75/8% Senior Notes, the Companys semi-annual interest payments are
$5,700,000.



Except as set forth in the Indenture governing the 75/8% Senior Notes (75/8% Senior Notes Indenture), the 75/8% Senior Notes are not redeemable prior to December 15,
2008. Thereafter, the 75/8% Senior Notes will be redeemable at the option of California Lyon, in whole or in
part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before December 15, 2007, California Lyon may redeem up to 35% of the aggregate
principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 107.625% of the principal amount, plus accrued and unpaid interest, if any.



As of December 31,
2006, the outstanding 75/8% Senior Notes with a face value of $150,000,000 had a fair value of approximately
$127,875,000 based on quotes from industry sources.



103/4% Senior Notes



California Lyon filed a Registration Statement on Form S-3 with the Securities and Exchange
Commission for the sale of $250,000,000 of Senior Notes due 2013 (the 103/4% Senior Notes) which
became effective on March 12, 2003. The offering closed on March 17, 2003 and was fully subscribed and issued. The notes were issued at a price of 98.493% to the public, resulting in net proceeds to the Company of approximately
$246,233,000. The purchase price reflected a discount to yield 11% under the effective interest method and the notes have been reflected net of the unamortized discount in the accompanying consolidated balance sheet. Interest on the 103/4% Senior Notes is payable on April 1 and October 1 of each year. Based on the current outstanding
principal amount of the 103/4% Senior Notes, the Companys semi-annual interest payments are $13,400,000.



Except as set forth in the Indenture governing the 103/4% Senior Notes
(103/4% Senior Notes Indenture), the 103/4% Senior Notes are not redeemable prior to April 1, 2008. Thereafter, the 103/4% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining
ratably to par, plus accrued and unpaid interest, if any. In addition, on or before April 1, 2006, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption
price equal to 110.75% of the principal amount, plus accrued and unpaid interest, if any.



102



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



As of December 31, 2006, the outstanding
103/4% Senior Notes with a face value of $247,218,000 had a fair value of approximately $240,000,000 based on
quotes from industry sources.



71/2% Senior Notes



On February 6, 2004,
California Lyon closed its offering of $150,000,000 principal amount of 71/2% Senior Notes due 2014 (the
71/2% Senior Notes). The notes were sold pursuant to Rule 144A and outside the United States to
non-U.S. persons in reliance on Regulation S. The notes were issued at par, resulting in net proceeds to the Company of approximately $147,600,000. California Lyon agreed to file a registration statement with the Securities and Exchange Commission
relating to an offer to exchange the notes for publicly tradeable notes having substantially identical terms. On July 16, 2004, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an
offer to exchange any and all of its outstanding $150,000,000 aggregate principal amount of 71/2% Senior Notes
due 2014, which are not registered under the Securities Act of 1933, for a like amount of its new 71/2% Senior
Notes due 2014, which are registered under the Securities Act of 1933, upon the terms and subject to the conditions set forth in the prospectus dated July 16, 2004. The exchange offer was completed for the full principal amount of the 71/2% Senior Notes on August 17, 2004. The terms of the new notes are identical in all material respects to those of
the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. The new notes have been listed on the New York Stock Exchange. Interest on the 71/2% Senior Notes is payable on February 15 and August 15 of each year. Based on the current outstanding principal
amount of 71/2% Senior Notes the Companys semi-annual interest payments are $5,600,000.



Except as set forth in the Indenture governing the 71/2% Senior Notes (71/2% Senior Notes Indenture), the 71/2% Senior Notes are not redeemable prior to February 15,
2009. Thereafter, the 71/2% Senior Notes will be redeemable at the option of California Lyon, in whole or in
part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before February 15, 2007, California Lyon may redeem up to 35% of the aggregate
principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 107.50% of the principal amount, plus accrued and unpaid interest, if any.



As of December 31,
2006, the outstanding 71/2% Senior Notes with a face value of $150,000,000 had a fair value of approximately
$124,875,000 based on quotes from industry sources.



* *
* * *



The 75/8% Senior Notes, the 103/4% Senior Notes and the 71/2% Senior Notes
(collectively, the Senior Notes) are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation (Delaware Lyon), which is the
parent company of California Lyon, and all of Delaware Lyons existing and certain of its future restricted subsidiaries. The Senior Notes and the guarantees rank senior to all of the Companys and the guarantors debt that is
expressly subordinated to the Senior Notes and the guarantees, but are effectively subordinated to all of the Companys and the guarantors senior secured indebtedness to the extent of the value of the assets securing that indebtedness.



Upon a change of control as described in
the respective Indentures governing the Senior Notes (the Senior Notes Indentures), California Lyon will be required to offer to purchase the Senior Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid
interest, if any.



103



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



If the Companys consolidated tangible net worth falls below $75.0 million for any two
consecutive fiscal quarters, California Lyon will be required to make an offer to purchase up to 10% of each class of Senior Notes originally issued at a purchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if any.



California Lyon is 100% owned by Delaware Lyon. Each
subsidiary guarantor is 100% owned by California Lyon or Delaware Lyon. All guarantees of the Senior Notes are full and unconditional and all guarantees are joint and several. There are no significant restrictions on the ability of Delaware Lyon or
any guarantor to obtain funds from subsidiaries by dividend or loan.



The Senior Notes Indentures contain covenants that limit the ability of Delaware Lyon and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions; (iii) make
investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of Delaware Lyons restricted subsidiaries (other than California Lyon) to pay dividends; (vii) enter into transactions with affiliates; and
(viii) consolidate, merge or sell all or substantially all of Delaware Lyons and California Lyons assets. These covenants are subject to a number of important exceptions and qualifications as described in the Senior Notes Indentures.



The foregoing summary is not a complete description of the
Senior Notes and is qualified in its entirety by reference to the Senior Notes Indentures.



The net proceeds of the offerings were used to repay amounts outstanding under revolving credit facilities and other indebtedness. The remaining proceeds were used to pay fees and commissions related to the offering
and for other general corporate purposes.



At December 31,
2006, the Company had approximately $233,688,000 million of secured indebtedness, (excluding approximately $70,408,000 million of secured indebtedness of consolidated entities) and approximately $305,779,000 million of additional secured
indebtedness available to be borrowed under the Companys credit facilities, as limited by the Companys borrowing base formulas.



Supplemental consolidating financial information of the Company, specifically including information
for California Lyon, the issuer of the Senior Notes, and Delaware Lyon and the guarantor subsidiaries is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of California
Lyon and the guarantor subsidiaries 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.



104



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING BALANCE SHEET



December 31, 2006

(in thousands)



|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|------------------------------------------------------------ |  | -------------- | ------- | -------------- | - | --------------------- |  | ------------------------- | ------- | ------------------ | - | ------- | ------------------- | - | -------- | - |  | - | ---------
|                                                             |  | Unconsolidated |         |                |   |                       | 
|                                                             |  | DelawareLyon   |         | CaliforniaLyon |   | GuarantorSubsidiaries |  | Non-GuarantorSubsidiaries |         | EliminatingEntries |   |         | ConsolidatedCompany
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                    
|ASSETS                                                       |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|Cash and cash equivalents                                    |  | $              |        |                | $ | 12,253                |  | $                         | 11,222  |                    | $ | 15,257  |                     | $ |         |   |  | $ | 38,732   
|Receivables                                                  |  |                |        |                |   | 56,084                |  |                           | 62,174  |                    |   | 1,233   |                     |   |         |   |  |   | 119,491  
|Real estate inventories                                      |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|Owned                                                        |  |                |        |                |   | 1,246,889             |  |                           | 1,846   |                    |   | 183,018 |                     |   |         |   |  |   | 1,431,753
|Not owned                                                    |  |                |        |                |   | 200,667               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 200,667  
|Investments in and advances to unconsolidated joint ventures |  |                |        |                |   | 3,560                 |  |                           |        |                    |   |        |                     |   |         |   |  |   | 3,560    
|Property and equipment, net                                  |  |                |        |                |   | 2,493                 |  |                           | 14,335  |                    |   |        |                     |   |         |   |  |   | 16,828   
|Deferred loan costs                                          |  |                |        |                |   | 11,258                |  |                           |        |                    |   |        |                     |   |         |   |  |   | 11,258   
|Goodwill                                                     |  |                |        |                |   | 5,896                 |  |                           |        |                    |   |        |                     |   |         |   |  |   | 5,896    
|Other assets                                                 |  |                |        |                |   | 47,724                |  |                           | 2,686   |                    |   |        |                     |   |         |   |  |   | 50,410   
|Investments in subsidiaries                                  |  |                | 625,395 |                |   | 77,281                |  |                           | 8,502   |                    |   |        |                     |   | (711,178 | ) |  |   |         
|Intercompany receivables                                     |  |                |        |                |   | 1,138                 |  |                           | 169,983 |                    |   | 3,367   |                     |   | (174,488 | ) |  |   |         
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|                                                             |  | $              | 625,395 |                | $ | 1,665,243             |  | $                         | 270,748 |                    | $ | 202,875 |                     | $ | 885,666  |   |  | $ | 1,878,595
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|                                                             |  |                |         |               
|LIABILITIES AND STOCKHOLDERS EQUITY                         |  |                |         |                |   |                       |  |                           |         |                    |   |         |                    
|Accounts payable                                             |  | $              |        |                | $ | 33,301                |  | $                         | 1,084   |                    | $ | 14,207  |                     | $ |         |   |  | $ | 48,592   
|Accrued expenses                                             |  |                |        |                |   | 104,501               |  |                           | 7,198   |                    |   | 172     |                     |   |         |   |  |   | 111,871  
|Liabilities from inventories not owned                       |  |                |        |                |   | 131,564               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 131,564  
|Notes payable                                                |  |                |        |                |   | 174,329               |  |                           | 59,359  |                    |   | 70,408  |                     |   |         |   |  |   | 304,096  
|75/8%
Senior Notes                                           |  |                |        |                |   | 150,000               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 150,000  
|103/4% Senior Notes                                          |  |                |        |                |   | 247,218               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 247,218  
|71/2%
Senior Notes                                           |  |                |        |                |   | 150,000               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 150,000  
|Intercompany payables                                        |  |                |        |                |   | 173,299               |  |                           | 1,138   |                    |   | 51      |                     |   | (174,488 | ) |  |   |         
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|Total liabilities                                            |  |                |        |                |   | 1,164,212             |  |                           | 68,779  |                    |   | 84,838  |                     |   | (174,488 | ) |  |   | 1,143,341
|Minority interest in consolidated entities                   |  |                |        |                |   |                      |  |                           |        |                    |   |        |                     |   | 109,859  |   |  |   | 109,859  
|Stockholders equity                                         |  |                | 625,395 |                |   | 501,031               |  |                           | 201,969 |                    |   | 118,037 |                     |   | (821,037 | ) |  |   | 625,395  
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|                                                             |  | $              | 625,395 |                | $ | 1,665,243             |  | $                         | 270,748 |                    | $ | 202,875 |                     | $ | 885,666  |   |  | $ | 1,878,595
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          



105



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING BALANCE SHEET



December 31, 2005

(in thousands)



|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|------------------------------------------------------------ |  | -------------- | ------- | -------------- | - | --------------------- |  | ------------------------- | ------- | ------------------ | - | ------- | ------------------- | - | -------- | - |  | - | ---------
|                                                             |  | Unconsolidated |         |                |   |                       | 
|                                                             |  | DelawareLyon   |         | CaliforniaLyon |   | GuarantorSubsidiaries |  | Non-GuarantorSubsidiaries |         | EliminatingEntries |   |         | ConsolidatedCompany
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                    
|ASSETS                                                       |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|Cash and cash equivalents                                    |  | $              |        |                | $ | 18,934                |  | $                         | 6,687   |                    | $ | 26,748  |                     | $ |         |   |  | $ | 52,369   
|Receivables                                                  |  |                |        |                |   | 75,505                |  |                           | 52,567  |                    |   | 15,409  |                     |   |         |   |  |   | 143,481  
|Real estate inventories                                      |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|Owned                                                        |  |                |        |                |   | 1,111,144             |  |                           | 2,090   |                    |   | 190,242 |                     |   |         |   |  |   | 1,303,476
|Not owned                                                    |  |                |        |                |   | 115,772               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 115,772  
|Investments in and advances to unconsolidated joint ventures |  |                |        |                |   | 397                   |  |                           |        |                    |   |        |                     |   |         |   |  |   | 397      
|Property and equipment, net                                  |  |                |        |                |   | 2,128                 |  |                           | 16,425  |                    |   |        |                     |   |         |   |  |   | 18,553   
|Deferred loan costs                                          |  |                |        |                |   | 12,323                |  |                           |        |                    |   |        |                     |   |         |   |  |   | 12,323   
|Goodwill                                                     |  |                |        |                |   | 5,896                 |  |                           |        |                    |   |        |                     |   |         |   |  |   | 5,896    
|Other assets                                                 |  |                |        |                |   | 36,472                |  |                           | 2,263   |                    |   |        |                     |   |         |   |  |   | 38,735   
|Investments in subsidiaries                                  |  |                | 542,894 |                |   | 88,254                |  |                           | 10,332  |                    |   |        |                     |   | (641,480 | ) |  |   |         
|Intercompany receivables                                     |  |                |        |                |   | 1,667                 |  |                           | 113,530 |                    |   | 6,583   |                     |   | (121,780 | ) |  |   |         
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|                                                             |  | $              | 542,894 |                | $ | 1,468,492             |  | $                         | 203,894 |                    | $ | 238,982 |                     | $ | (763,260 | ) |  | $ | 1,691,002
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|                                                             |  |                |         |               
|LIABILITIES AND STOCKHOLDERS EQUITY                         |  |                |         |                |   |                       |  |                           |         |                    |   |         |                    
|Accounts payable                                             |  | $              |        |                | $ | 46,184                |  | $                         | 756     |                    | $ | 20,386  |                     | $ |         |   |  | $ | 67,326   
|Accrued expenses                                             |  |                |        |                |   | 169,884               |  |                           | 6,250   |                    |   | 4,934   |                     |   |         |   |  |   | 181,068  
|Notes payable                                                |  |                |        |                |   | 61,653                |  |                           | 47,816  |                    |   | 16,150  |                     |   |         |   |  |   | 125,619  
|75/8%
Senior Notes                                           |  |                |        |                |   | 150,000               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 150,000  
|103/4% Senior Notes                                          |  |                |        |                |   | 246,917               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 246,917  
|71/2%
Senior Notes                                           |  |                |        |                |   | 150,000               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 150,000  
|Intercompany payables                                        |  |                |        |                |   | 120,113               |  |                           | 1,667   |                    |   |        |                     |   | (121,780 | ) |  |   |         
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|Total liabilities                                            |  |                |        |                |   | 944,751               |  |                           | 56,489  |                    |   | 41,470  |                     |   | (121,780 | ) |  |   | 920,930  
|Minority interest in consolidated entities                   |  |                |        |                |   |                      |  |                           |        |                    |   |        |                     |   | 227,178  |   |  |   | 227,178  
|Stockholders equity                                         |  |                | 542,894 |                |   | 523,741               |  |                           | 147,405 |                    |   | 197,512 |                     |   | (868,658 | ) |  |   | 542,894  
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|                                                             |  | $              | 542,894 |                | $ | 1,468,492             |  | $                         | 203,894 |                    | $ | 238,982 |                     | $ | (763,260 | ) |  | $ | 1,691,002
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          



106



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF INCOME



Year Ended December 31, 2006

(in thousands)



|                                                         |  |                |        |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|-------------------------------------------------------- |  | -------------- | ------ | -------------- | - | ---------- | --------------------- |  | - | ------------------------- | - |  | ------------------ | -------- | - | ------------------- | - | -------- | - |  | - | ---------- | -
|                                                         |  | Unconsolidated |        |                |   |            |                       |  |  
|                                                         |  | DelawareLyon   |        | CaliforniaLyon |   |            | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |          |   | ConsolidatedCompany |  
|Operating revenue                                        |  |                |        |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Sales                                                    |  | $              |       |                | $ | 1,127,624  |                       |  | $ | 206,230                   |   |  | $                  | 202,883  |   |                     | $ | (44,516  | ) |  | $ | 1,492,221  |  
|Management fees                                          |  |                |       |                |   | 5,011      |                       |  |   |                          |   |  |                    |         |   |                     |   | (5,011   | ) |  |   |           |  
|                                                         |  |                |        |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|                                                         |  |                |       |                | $ | 1,132,635  |                       |  |   | 206,230                   |   |  |                    | 202,883  |   |                     |   | (49,527  | ) |  |   | 1,492,221  |  
|                                                         |  |                |        |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Operating costs                                          |  |                |        |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Cost of sales                                            |  |                |       |                |   | (927,090   | )                     |  |   | (139,869                  | ) |  |                    | (159,706 | ) |                     |   | 49,527   |   |  |   | (1,177,138 | )
|Impairment loss on real estate assets                    |  |                |       |                |   | (39,895    | )                     |  |   |                          |   |  |                    |         |   |                     |   |         |   |  |   | (39,895    | )
|Sales and marketing                                      |  |                |       |                |   | (54,732    | )                     |  |   | (9,341                    | ) |  |                    | (8,276   | ) |                     |   |         |   |  |   | (72,349    | )
|General and administrative                               |  |                |       |                |   | (61,252    | )                     |  |   | (115                      | ) |  |                    | (23      | ) |                     |   |         |   |  |   | (61,390    | )
|Other                                                    |  |                |       |                |   |           |                       |  |   | (6,502                    | ) |  |                    |         |   |                     |   |         |   |  |   | (6,502     | )
|                                                         |  |                |        |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|                                                         |  |                |       |                |   | (1,082,969 | )                     |  |   | (155,827                  | ) |  |                    | (168,005 | ) |                     |   | 49,527   |   |  |   | (1,357,274 | )
|                                                         |  |                |        |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Equity in income (loss) of unconsolidated joint ventures |  |                |       |                |   | 4,032      |                       |  |   | (790                      | ) |  |                    |         |   |                     |   |         |   |  |   | 3,242      |  
|                                                         |  |                |        |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Income (loss) from subsidiaries                          |  |                | 74,778 |                |   | 66,411     |                       |  |   | (40                       | ) |  |                    |         |   |                     |   | (141,149 | ) |  |   |           |  
|                                                         |  |                |        |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Minority equity in income of consolidated entities       |  |                |       |                |   |           |                       |  |   |                          |   |  |                    |         |   |                     |   | (16,914  | ) |  |   | (16,914    | )
|                                                         |  |                |        |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Operating income                                         |  |                | 74,778 |                |   | 120,109    |                       |  |   | 49,573                    |   |  |                    | 34,878   |   |                     |   | (158,063 | ) |  |   | 121,275    |  
|Financial advisory expenses                              |  |                |       |                |   | (3,165     | )                     |  |   |                          |   |  |                    |         |   |                     |   |         |   |  |   | (3,165     | )
|Other income, net                                        |  |                |       |                |   | 777        |                       |  |   | 4,265                     |   |  |                    | 557      |   |                     |   |         |   |  |   | 5,599      |  
|                                                         |  |                |        |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Income before provision for income taxes                 |  |                | 74,778 |                |   | 117,721    |                       |  |   | 53,838                    |   |  |                    | 35,435   |   |                     |   | (158,063 | ) |  |   | 123,709    |  
|Provision for income taxes                               |  |                |       |                |   | (48,921    | )                     |  |   |                          |   |  |                    | (10      | ) |                     |   |         |   |  |   | (48,931    | )
|                                                         |  |                |        |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net income                                               |  | $              | 74,778 |                | $ | 68,800     |                       |  | $ | 53,838                    |   |  | $                  | 35,425   |   |                     | $ | (158,063 | ) |  | $ | 74,778     |  
|                                                         |  |                |        |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  



107



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF INCOME



Year Ended December 31, 2005

(in thousands)



|                                                         |  |                |         |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|-------------------------------------------------------- |  | -------------- | ------- | -------------- | - | ---------- | --------------------- |  | - | ------------------------- | - |  | ------------------ | -------- | - | ------------------- | - | -------- | - |  | - | ---------- | -
|                                                         |  | Unconsolidated |         |                |   |            |                       |  |  
|                                                         |  | DelawareLyon   |         | CaliforniaLyon |   |            | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |          |   | ConsolidatedCompany |  
|Operating revenue                                        |  |                |         |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Sales                                                    |  | $              |        |                | $ | 1,246,082  |                       |  | $ | 203,442                   |   |  | $                  | 406,859  |   |                     | $ |         |   |  | $ | 1,856,383  |  
|Management fees                                          |  |                |        |                |   | 12,658     |                       |  |   |                          |   |  |                    |         |   |                     |   | (12,658  | ) |  |   |           |  
|                                                         |  |                |         |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|                                                         |  |                |        |                |   | 1,258,740  |                       |  |   | 203,442                   |   |  |                    | 406,859  |   |                     |   | (12,658  | ) |  |   | 1,856,383  |  
|                                                         |  |                |         |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Operating costs                                          |  |                |         |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Cost of sales                                            |  |                |        |                |   | (908,897   | )                     |  |   | (148,638                  | ) |  |                    | (306,924 | ) |                     |   | 12,658   |   |  |   | (1,351,801 | )
|Impairment loss on real estate assets                    |  |                |        |                |   |           |                       |  |   | (4,600                    | ) |  |                    |         |   |                     |   |         |   |  |   | (4,600     | )
|Sales and marketing                                      |  |                |        |                |   | (38,333    | )                     |  |   | (8,147                    | ) |  |                    | (12,942  | ) |                     |   |         |   |  |   | (59,422    | )
|General and administrative                               |  |                |        |                |   | (89,977    | )                     |  |   | (68                       | ) |  |                    |         |   |                     |   |         |   |  |   | (90,045    | )
|Other                                                    |  |                |        |                |   |           |                       |  |   | (2,450                    | ) |  |                    |         |   |                     |   |         |   |  |   | (2,450     | )
|                                                         |  |                |         |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|                                                         |  |                |        |                |   | (1,037,207 | )                     |  |   | (163,903                  | ) |  |                    | (319,866 | ) |                     |   | 12,658   |   |  |   | (1,508,318 | )
|                                                         |  |                |         |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Equity in income (loss) of unconsolidated joint ventures |  |                |        |                |   | 4,991      |                       |  |   | (690                      | ) |  |                    |         |   |                     |   |         |   |  |   | 4,301      |  
|                                                         |  |                |         |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Income (loss) from subsidiaries                          |  |                | 190,631 |                |   | 87,255     |                       |  |   | (217                      | ) |  |                    |         |   |                     |   | (277,669 | ) |  |   |           |  
|                                                         |  |                |         |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Minority equity in income of consolidated entities       |  |                |        |                |   |           |                       |  |   |                          |   |  |                    |         |   |                     |   | (37,571  | ) |  |   | (37,571    | )
|                                                         |  |                |         |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Operating income                                         |  |                | 190,631 |                |   | 313,779    |                       |  |   | 38,632                    |   |  |                    | 86,993   |   |                     |   | (315,240 | ) |  |   | 314,795    |  
|Financial advisory expenses                              |  |                |        |                |   | (2,191     | )                     |  |   |                          |   |  |                    |         |   |                     |   |         |   |  |   | (2,191     | )
|Other income, net                                        |  |                |        |                |   | 488        |                       |  |   | 1,052                     |   |  |                    | 636      |   |                     |   |         |   |  |   | 2,176      |  
|                                                         |  |                |         |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Income before provision for income taxes                 |  |                | 190,631 |                |   | 312,076    |                       |  |   | 39,684                    |   |  |                    | 87,629   |   |                     |   | (315,240 | ) |  |   | 314,780    |  
|Provision for income taxes                               |  |                |        |                |   | (124,132   | )                     |  |   |                          |   |  |                    | (17      | ) |                     |   |         |   |  |   | (124,149   | )
|                                                         |  |                |         |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net income                                               |  | $              | 190,631 |                | $ | 187,944    |                       |  | $ | 39,684                    |   |  | $                  | 87,612   |   |                     | $ | (315,240 | ) |  | $ | 190,631    |  
|                                                         |  |                |         |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  



108



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF INCOME



Year Ended December 31, 2004

(in thousands)



|                                                   |  |                |         |                 |   |            |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|-------------------------------------------------- |  | -------------- | ------- | --------------- | - | ---------- | ---------------------- |  | - | ------------------------- | - |  | ------------------ | -------- | - | ------------------- | - | -------- | - |  | - | ---------- | -
|                                                   |  | Unconsolidated |         |                 |   |            |                        |  |  
|                                                   |  | Delaware Lyon  |         | California Lyon |   |            | Guarantor Subsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |          |   | ConsolidatedCompany |  
|Operating revenue                                  |  |                |         |                 |   |            |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Sales                                              |  | $              |        |                 | $ | 1,219,155  |                        |  | $ | 97,035                    |   |  | $                  | 539,312  |   |                     | $ | (33,655  | ) |  | $ | 1,821,847  |  
|Management fees                                    |  |                |        |                 |   | 16,188     |                        |  |   |                          |   |  |                    |         |   |                     |   | (16,188  | ) |  |   |           |  
|                                                   |  |                |         |                 |   |            |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|                                                   |  |                |        |                 |   | 1,235,343  |                        |  |   | 97,035                    |   |  |                    | 539,312  |   |                     |   | (49,843  | ) |  |   | 1,821,847  |  
|                                                   |  |                |         |                 |   |            |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Operating costs                                    |  |                |         |                 |   |            |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Cost of sales                                      |  |                |        |                 |   | (933,472   | )                      |  |   | (64,581                   | ) |  |                    | (402,020 | ) |                     |   | 49,843   |   |  |   | (1,350,230 | )
|Sales and marketing                                |  |                |        |                 |   | (36,850    | )                      |  |   | (4,531                    | ) |  |                    | (17,411  | ) |                     |   |         |   |  |   | (58,792    | )
|General and administrative                         |  |                |        |                 |   | (80,570    | )                      |  |   | (214                      | ) |  |                    |         |   |                     |   |         |   |  |   | (80,784    | )
|Other                                              |  |                |        |                 |   |           |                        |  |   | (2,105                    | ) |  |                    |         |   |                     |   |         |   |  |   | (2,105     | )
|                                                   |  |                |         |                 |   |            |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|                                                   |  |                |        |                 |   | (1,050,892 | )                      |  |   | (71,431                   | ) |  |                    | (419,431 | ) |                     |   | 49,843   |   |  |   | (1,491,911 | )
|                                                   |  |                |         |                 |   |            |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Equity in loss of unconsolidated joint ventures    |  |                |        |                 |   | (352       | )                      |  |   | (347                      | ) |  |                    |         |   |                     |   |         |   |  |   | (699       | )
|                                                   |  |                |         |                 |   |            |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Income from subsidiaries                           |  |                | 171,649 |                 |   | 90,478     |                        |  |   | 6,048                     |   |  |                    |         |   |                     |   | (268,175 | ) |  |   |           |  
|                                                   |  |                |         |                 |   |            |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Minority equity in income of consolidated entities |  |                |        |                 |   |           |                        |  |   |                          |   |  |                    |         |   |                     |   | (49,661  | ) |  |   | (49,661    | )
|                                                   |  |                |         |                 |   |            |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Operating income                                   |  |                | 171,649 |                 |   | 274,577    |                        |  |   | 31,305                    |   |  |                    | 119,881  |   |                     |   | (317,836 | ) |  |   | 279,576    |  
|Other income, net                                  |  |                |        |                 |   | 270        |                        |  |   | 3,497                     |   |  |                    | 1,805    |   |                     |   |         |   |  |   | 5,572      |  
|                                                   |  |                |         |                 |   |            |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Income before provision for income taxes           |  |                | 171,649 |                 |   | 274,847    |                        |  |   | 34,802                    |   |  |                    | 121,686  |   |                     |   | (317,836 | ) |  |   | 285,148    |  
|Provision for income taxes                         |  |                |        |                 |   | (112,919   | )                      |  |   |                          |   |  |                    | (580     | ) |                     |   |         |   |  |   | (113,499   | )
|                                                   |  |                |         |                 |   |            |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net income                                         |  | $              | 171,649 |                 | $ | 161,928    |                        |  | $ | 34,802                    |   |  | $                  | 121,106  |   |                     | $ | (317,836 | ) |  | $ | 171,649    |  
|                                                   |  |                |         |                 |   |            |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |            |  



109



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF CASH FLOWS



Year Ended December 31, 2006

(in thousands)



|                                                                                            |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | --------------- | - | ---------- | --------------------- |  | - | ----------------------------- | - |  | ------------------ | -------- | - | ------------------- | - | -------- | - |  | - | ---------- | -
|                                                                                            |  | Unconsolidated |         |   |                 |   |            |                       | 
|                                                                                            |  | DelawareLyon   |         |   | California Lyon |   |            | GuarantorSubsidiaries |  |   | Non-Guarantor    Subsidiaries |   |  | EliminatingEntries |          |   | ConsolidatedCompany |  
|                                                                                            |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |  
|Operating activities:                                                                       |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net income                                                                                  |  | $              | 74,778  |   |                 | $ | 68,800     |                       |  | $ | 53,838                        |   |  | $                  | 35,425   |   |                     | $ | (158,063 | ) |  | $ | 74,778     |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Depreciation and amortization                                                               |  |                |        |   |                 |   | 881        |                       |  |   | 1,648                         |   |  |                    |         |   |                     |   |         |   |  |   | 2,529      |  
|Equity in (income) loss of unconsolidated joint ventures                                    |  |                |        |   |                 |   | (4,032     | )                     |  |   | 790                           |   |  |                    |         |   |                     |   |         |   |  |   | (3,242     | )
|Distributions of income from unconsolidated joint ventures                                  |  |                |        |   |                 |   | 841        |                       |  |   | 1,758                         |   |  |                    |         |   |                     |   |         |   |  |   | 2,599      |  
|Minority equity in income of consolidated entities                                          |  |                |        |   |                 |   |           |                       |  |   |                              |   |  |                    |         |   |                     |   | 16,914   |   |  |   | 16,914     |  
|Equity in (earnings) loss of subsidiaries                                                   |  |                | (74,778 | ) |                 |   | (66,411    | )                     |  |   | 40                            |   |  |                    |         |   |                     |   | 141,149  |   |  |   |           |  
|Impairment loss on real estate asset                                                        |  |                |        |   |                 |   | 39,895     |                       |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | 39,895     |  
|State income tax refund credited to additional paid in capital                              |  |                |        |   |                 |   | 10         |                       |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | 10         |  
|Federal income tax refund credited to additional paid in capital                            |  |                |        |   |                 |   | 1,820      |                       |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | 1,820      |  
|Provision for income taxes                                                                  |  |                |        |   |                 |   | 48,921     |                       |  |   |                              |   |  |                    | 10       |   |                     |   |         |   |  |   | 48,931     |  
|Net changes in operating assets and liabilities:                                            |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Receivables                                                                                 |  |                |        |   |                 |   | 19,421     |                       |  |   | (9,607                        | ) |  |                    | 14,176   |   |                     |   |         |   |  |   | 23,990     |  
|Intercompany receivables/payables                                                           |  |                |        |   |                 |   |           |                       |  |   | (56,453                       | ) |  |                    | 3,267    |   |                     |   | 53,186   |   |  |   |           |  
|Real estate inventories owned                                                               |  |                |        |   |                 |   | (153,824   | )                     |  |   | (1,190                        | ) |  |                    | 7,224    |   |                     |   |         |   |  |   | (147,790   | )
|Real estate inventories not owned                                                           |  |                |        |   |                 |   | 67,793     |                       |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | 67,793     |  
|Deferred loan costs                                                                         |  |                |        |   |                 |   | 1,065      |                       |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | 1,065      |  
|Other assets                                                                                |  |                |        |   |                 |   | (19,656    | )                     |  |   | (423                          | ) |  |                    |         |   |                     |   |         |   |  |   | (20,079    | )
|Accounts payable                                                                            |  |                |        |   |                 |   | (12,883    | )                     |  |   | 328                           |   |  |                    | (6,179   | ) |                     |   |         |   |  |   | (18,734    | )
|Accrued expenses                                                                            |  |                |        |   |                 |   | (108,845   | )                     |  |   | 948                           |   |  |                    | (4,772   | ) |                     |   |         |   |  |   | (112,669   | )
|                                                                                            |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net cash (used in) provided by operating activities                                         |  |                |        |   |                 |   | (116,204   | )                     |  |   | (8,323                        | ) |  |                    | 49,151   |   |                     |   | 53,186   |   |  |   | (22,190    | )
|                                                                                            |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Investing activities:                                                                       |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net change in investment in unconsolidated joint ventures                                   |  |                |        |   |                 |   | (862       | )                     |  |   | (1,114                        | ) |  |                    |         |   |                     |   |         |   |  |   | (1,976     | )
|Purchases of property and equipment                                                         |  |                |        |   |                 |   | (1,246     | )                     |  |   | 442                           |   |  |                    |         |   |                     |   |         |   |  |   | (804       | )
|Investments in subsidiaries                                                                 |  |                |        |   |                 |   | 77,384     |                       |  |   | 1,790                         |   |  |                    |         |   |                     |   | (79,174  | ) |  |   |           |  
|Advances (to) from affiliates                                                               |  |                | (434    | ) |                 |   | (45,084    | )                     |  |   |                              |   |  |                    |         |   |                     |   | 45,518   |   |  |   |           |  
|                                                                                            |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net cash (used in) provided by investing activities                                         |  |                | (434    | ) |                 |   | 30,192     |                       |  |   | 1,118                         |   |  |                    |         |   |                     |   | (33,656  | ) |  |   | (2,780     | )
|                                                                                            |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Financing activities:                                                                       |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Proceeds from borrowings on notes payable                                                   |  |                |        |   |                 |   | 1,262,858  |                       |  |   | 822,673                       |   |  |                    | 54,258   |   |                     |   |         |   |  |   | 2,139,789  |  
|Principal payments on notes payable                                                         |  |                |        |   |                 |   | (1,170,807 | )                     |  |   | (811,130                      | ) |  |                    |         |   |                     |   |         |   |  |   | (1,981,937 | )
|Minority interest distributions, net                                                        |  |                |        |   |                 |   | (12,720    | )                     |  |   |                              |   |  |                    | (134,233 | ) |                     |   |         |   |  |   | (146,953   | )
|Common stock issued for exercised stock options                                             |  |                | 434     |   |                 |   |           |                       |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | 434        |  
|Advances (to) from affiliates                                                               |  |                |        |   |                 |   |           |                       |  |   | 197                           |   |  |                    | 19,333   |   |                     |   | (19,530  | ) |  |   |           |  
|                                                                                            |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net cash provided by (used in) financing activities                                         |  |                | 434     |   |                 |   | 79,331     |                       |  |   | 11,740                        |   |  |                    | (60,642  | ) |                     |   | (19,530  | ) |  |   | 11,333     |  
|                                                                                            |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net (decrease) increase in cash and cash equivalents                                        |  |                |        |   |                 |   | (6,681     | )                     |  |   | 4,535                         |   |  |                    | (11,491  | ) |                     |   |         |   |  |   | (13,637    | )
|Cash and cash equivalents at beginning of year                                              |  |                |        |   |                 |   | 18,934     |                       |  |   | 6,687                         |   |  |                    | 26,748   |   |                     |   |         |   |  |   | 52,369     |  
|                                                                                            |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Cash and cash equivalents at end of year                                                    |  | $              |        |   |                 | $ | 12,253     |                       |  | $ | 11,222                        |   |  | $                  | 15,257   |   |                     | $ |         |   |  | $ | 38,732     |  
|                                                                                            |  |                |         |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  



110



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF CASH FLOWS



Year Ended December 31, 2005

(in thousands)



|                                                                                            |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | --------------- | - | ---------- | --------------------- |  | - | ----------------------------- | - |  | ------------------ | -------- | - | ------------------- | - | -------- | - |  | - | ---------- | -
|                                                                                            |  | Unconsolidated |          |   |                 |   |            |                       | 
|                                                                                            |  | DelawareLyon   |          |   | California Lyon |   |            | GuarantorSubsidiaries |  |   | Non-Guarantor    Subsidiaries |   |  | EliminatingEntries |          |   | ConsolidatedCompany |  
|                                                                                            |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |  
|Operating activities:                                                                       |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net income                                                                                  |  | $              | 190,631  |   |                 | $ | 187,944    |                       |  | $ | 39,684                        |   |  | $                  | 87,612   |   |                     | $ | (315,240 | ) |  | $ | 190,631    |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Depreciation and amortization                                                               |  |                |         |   |                 |   | 527        |                       |  |   | 1,565                         |   |  |                    |         |   |                     |   |         |   |  |   | 2,092      |  
|Equity in (income) loss of unconsolidated joint ventures                                    |  |                |         |   |                 |   | (4,991     | )                     |  |   | 690                           |   |  |                    |         |   |                     |   |         |   |  |   | (4,301     | )
|Distributions of income from unconsolidated joint ventures                                  |  |                |         |   |                 |   | 2,625      |                       |  |   | 83                            |   |  |                    |         |   |                     |   |         |   |  |   | 2,708      |  
|Minority equity in income of consolidated entities                                          |  |                |         |   |                 |   |           |                       |  |   |                              |   |  |                    |         |   |                     |   | 37,571   |   |  |   | 37,571     |  
|Equity in (earnings) loss of subsidiaries                                                   |  |                | (190,631 | ) |                 |   | (87,255    | )                     |  |   | 217                           |   |  |                    |         |   |                     |   | 277,669  |   |  |   |           |  
|Impairment loss on real estate asset                                                        |  |                |         |   |                 |   |           |                       |  |   | 4,600                         |   |  |                    |         |   |                     |   |         |   |  |   | 4,600      |  
|State income tax refund credited to additional paid in capital                              |  |                |         |   |                 |   | 1,845      |                       |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | 1,845      |  
|Provision for income taxes                                                                  |  |                |         |   |                 |   | 124,132    |                       |  |   |                              |   |  |                    | 17       |   |                     |   |         |   |  |   | 124,149    |  
|Net changes in operating assets and liabilities:                                            |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Receivables                                                                                 |  |                |         |   |                 |   | (53,047    | )                     |  |   | (41,206                       | ) |  |                    | (9,926   | ) |                     |   |         |   |  |   | (104,179   | )
|Intercompany receivables/payables                                                           |  |                |         |   |                 |   | 4,600      |                       |  |   | (28,260                       | ) |  |                    | (7,915   | ) |                     |   | 31,575   |   |  |   |           |  
|Real estate inventories                                                                     |  |                |         |   |                 |   | (268,431   | )                     |  |   | (1,213                        | ) |  |                    | 37,404   |   |                     |   |         |   |  |   | (232,240   | )
|Deferred loan costs                                                                         |  |                |         |   |                 |   | 1,659      |                       |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | 1,659      |  
|Other assets                                                                                |  |                |         |   |                 |   | (5,412     | )                     |  |   | (761                          | ) |  |                    |         |   |                     |   |         |   |  |   | (6,173     | )
|Accounts payable                                                                            |  |                |         |   |                 |   | 17,038     |                       |  |   | 376                           |   |  |                    | 10,548   |   |                     |   |         |   |  |   | 27,962     |  
|Accrued expenses                                                                            |  |                |         |   |                 |   | (88,450    | )                     |  |   | 2,279                         |   |  |                    | (4,687   | ) |                     |   |         |   |  |   | (90,858    | )
|                                                                                            |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net cash (used in) provided by operating activities                                         |  |                |         |   |                 |   | (167,216   | )                     |  |   | (21,946                       | ) |  |                    | 113,053  |   |                     |   | 31,575   |   |  |   | (44,534    | )
|                                                                                            |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Investing activities:                                                                       |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net change in investment in unconsolidated joint ventures                                   |  |                |         |   |                 |   | 18,990     |                       |  |   | 117                           |   |  |                    |         |   |                     |   |         |   |  |   | 19,107     |  
|Purchases of property and equipment                                                         |  |                |         |   |                 |   | (1,562     | )                     |  |   | (1,017                        | ) |  |                    |         |   |                     |   |         |   |  |   | (2,579     | )
|Investments in subsidiaries                                                                 |  |                |         |   |                 |   | 76,304     |                       |  |   | 841                           |   |  |                    |         |   |                     |   | (77,145  | ) |  |   |           |  
|Advances (to) from affiliates                                                               |  |                | (312     | ) |                 |   | (1,897     | )                     |  |   |                              |   |  |                    |         |   |                     |   | 2,209    |   |  |   |           |  
|                                                                                            |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net cash (used in) provided by investing activities                                         |  |                | (312     | ) |                 |   | 91,835     |                       |  |   | (59                           | ) |  |                    |         |   |                     |   | (74,936  | ) |  |   | 16,528     |  
|                                                                                            |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Financing activities:                                                                       |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Proceeds from borrowings on notes payable                                                   |  |                |         |   |                 |   | 1,131,835  |                       |  |   | 723,617                       |   |  |                    |         |   |                     |   |         |   |  |   | 1,855,452  |  
|Principal payments on notes payable                                                         |  |                |         |   |                 |   | (1,094,940 | )                     |  |   | (685,106                      | ) |  |                    | (14,753  | ) |                     |   |         |   |  |   | (1,794,799 | )
|Minority interest distributions, net                                                        |  |                |         |   |                 |   |           |                       |  |   |                              |   |  |                    | (76,664  | ) |                     |   |         |   |  |   | (76,664    | )
|Common stock issued for exercised stock options                                             |  |                | 312      |   |                 |   |           |                       |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | 312        |  
|Advances (to) from affiliates                                                               |  |                |         |   |                 |   |           |                       |  |   | (15,989                       | ) |  |                    | (27,372  | ) |                     |   | 43,361   |   |  |   |           |  
|                                                                                            |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net cash provided by (used in) financing activities                                         |  |                | 312      |   |                 |   | 36,895     |                       |  |   | 22,522                        |   |  |                    | (118,789 | ) |                     |   | 43,361   |   |  |   | (15,699    | )
|                                                                                            |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net (decrease) increase in cash and cash equivalents                                        |  |                |         |   |                 |   | (38,486    | )                     |  |   | 517                           |   |  |                    | (5,736   | ) |                     |   |         |   |  |   | (43,705    | )
|Cash and cash equivalents at beginning of year                                              |  |                |         |   |                 |   | 57,420     |                       |  |   | 6,170                         |   |  |                    | 32,484   |   |                     |   |         |   |  |   | 96,074     |  
|                                                                                            |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Cash and cash equivalents at end of year                                                    |  | $              |         |   |                 | $ | 18,934     |                       |  | $ | 6,687                         |   |  | $                  | 26,748   |   |                     | $ |         |   |  | $ | 52,369     |  
|                                                                                            |  |                |          |   |                 |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  



111



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS



Year Ended December 31, 2004

(in thousands)



|                                                                                            |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | -------------- | - | ---------- | --------------------- |  | - | ----------------------------- | - |  | ------------------ | -------- | - | ------------------- | - | -------- | - |  | - | ---------- | -
|                                                                                            |  | Unconsolidated |          |   |                |   |            |                       | 
|                                                                                            |  | DelawareLyon   |          |   | CaliforniaLyon |   |            | GuarantorSubsidiaries |  |   | Non-Guarantor    Subsidiaries |   |  | EliminatingEntries |          |   | ConsolidatedCompany |  
|                                                                                            |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |  
|Operating activities:                                                                       |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net income                                                                                  |  | $              | 171,649  |   |                | $ | 161,928    |                       |  | $ | 34,802                        |   |  | $                  | 121,106  |   |                     | $ | (317,836 | ) |  | $ | 171,649    |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Depreciation and amortization                                                               |  |                |         |   |                |   | 444        |                       |  |   | 883                           |   |  |                    |         |   |                     |   |         |   |  |   | 1,327      |  
|Equity in loss of unconsolidated joint ventures                                             |  |                |         |   |                |   | 352        |                       |  |   | 347                           |   |  |                    |         |   |                     |   |         |   |  |   | 699        |  
|Equity in earnings of subsidiaries                                                          |  |                | (171,649 | ) |                |   | (90,478    | )                     |  |   | (6,048                        | ) |  |                    |         |   |                     |   | 268,175  |   |  |   |           |  
|Minority equity in income of consolidated entities                                          |  |                |         |   |                |   |           |                       |  |   |                              |   |  |                    |         |   |                     |   | 49,661   |   |  |   | 49,661     |  
|Provision for income taxes                                                                  |  |                |         |   |                |   | 112,919    |                       |  |   |                              |   |  |                    | 580      |   |                     |   |         |   |  |   | 113,499    |  
|Net changes in operating assets and liabilities:                                            |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Receivables                                                                                 |  |                |         |   |                |   | (243       | )                     |  |   | 9,852                         |   |  |                    | (441     | ) |                     |   |         |   |  |   | 9,168      |  
|Intercompany receivables/payables                                                           |  |                |         |   |                |   |           |                       |  |   | (20,040                       | ) |  |                    | 1,332    |   |                     |   | 18,708   |   |  |   |           |  
|Real estate inventories                                                                     |  |                |         |   |                |   | (289,897   | )                     |  |   | (673                          | ) |  |                    | 95,230   |   |                     |   |         |   |  |   | (195,340   | )
|Deferred loan costs                                                                         |  |                |         |   |                |   | (1,004     | )                     |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | (1,004     | )
|Other assets                                                                                |  |                |         |   |                |   | (4,790     | )                     |  |   | (332                          | ) |  |                    |         |   |                     |   |         |   |  |   | (5,122     | )
|Accounts payable                                                                            |  |                |         |   |                |   | (1,489     | )                     |  |   | (41                           | ) |  |                    | (1,082   | ) |                     |   |         |   |  |   | (2,612     | )
|Accrued expenses                                                                            |  |                |         |   |                |   | (60,010    | )                     |  |   | 62                            |   |  |                    | 5,316    |   |                     |   |         |   |  |   | (54,632    | )
|                                                                                            |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net cash (used in) provided by operating activities                                         |  |                |         |   |                |   | (172,268   | )                     |  |   | 18,812                        |   |  |                    | 222,041  |   |                     |   | 18,708   |   |  |   | 87,293     |  
|                                                                                            |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Investing activities:                                                                       |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net change in investments in and advances to unconsolidated joint ventures                  |  |                |         |   |                |   | 1,046      |                       |  |   | (347                          | ) |  |                    |         |   |                     |   |         |   |  |   | 699        |  
|Purchases of property and equipment                                                         |  |                |         |   |                |   | (737       | )                     |  |   | (17,031                       | ) |  |                    |         |   |                     |   |         |   |  |   | (17,768    | )
|Investment in subsidiaries                                                                  |  |                |         |   |                |   | 51,729     |                       |  |   | (5,342                        | ) |  |                    |         |   |                     |   | (46,387  | ) |  |   |           |  
|Advances from (to) affiliates                                                               |  |                | 80,069   |   |                |   | (32,304    | )                     |  |   |                              |   |  |                    | (26,304  | ) |                     |   | (21,461  | ) |  |   |           |  
|                                                                                            |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net cash provided by (used in) investing activities                                         |  |                | 80,069   |   |                |   | 19,734     |                       |  |   | (22,720                       | ) |  |                    | (26,304  | ) |                     |   | (67,848  | ) |  |   | (17,069    | )
|                                                                                            |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Financing activities:                                                                       |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Proceeds from borrowings on notes payable                                                   |  |                |         |   |                |   | 1,339,500  |                       |  |   | 429,433                       |   |  |                    |         |   |                     |   |         |   |  |   | 1,768,933  |  
|Principal payments on notes payable                                                         |  |                |         |   |                |   | (1,381,024 | )                     |  |   | (429,749                      | ) |  |                    | (85,592  | ) |                     |   |         |   |  |   | (1,896,365 | )
|Issuance of 75/8% Senior Notes                                                              |  |                |         |   |                |   | 148,500    |                       |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | 148,500    |  
|Issuance of 71/2% Senior Notes                                                              |  |                |         |   |                |   | 147,563    |                       |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | 147,563    |  
|Minority interest (distributions) contributions, net                                        |  |                |         |   |                |   | (58,269    | )                     |  |   |                              |   |  |                    | (28,580  | ) |                     |   |         |   |  |   | (86,849    | )
|Common stock issued for exercised options                                                   |  |                | 932      |   |                |   |           |                       |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | 932        |  
|Common stock purchased                                                                      |  |                | (81,001  | ) |                |   |           |                       |  |   |                              |   |  |                    |         |   |                     |   |         |   |  |   | (81,001    | )
|Advances from (to) affiliates                                                               |  |                |         |   |                |   |           |                       |  |   | 6,187                         |   |  |                    | (55,327  | ) |                     |   | 49,140   |   |  |   |           |  
|                                                                                            |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net cash (used in) provided by financing activities                                         |  |                | (80,069  | ) |                |   | 196,270    |                       |  |   | 5,871                         |   |  |                    | (169,499 | ) |                     |   | 49,140   |   |  |   | 1,713      |  
|                                                                                            |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Net increase in cash and cash equivalents                                                   |  |                |         |   |                |   | 43,736     |                       |  |   | 1,963                         |   |  |                    | 26,238   |   |                     |   |         |   |  |   | 71,937     |  
|Cash and cash equivalents at beginning of year                                              |  |                |         |   |                |   | 13,684     |                       |  |   | 4,207                         |   |  |                    | 6,246    |   |                     |   |         |   |  |   | 24,137     |  
|                                                                                            |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  
|Cash and cash equivalents at end of year                                                    |  | $              |         |   |                | $ | 57,420     |                       |  | $ | 6,170                         |   |  | $                  | 32,484   |   |                     | $ |         |   |  | $ | 96,074     |  
|                                                                                            |  |                |          |   |                |   |            |                       |  |   |                               |   |  |                    |          |   |                     |   |          |   |  |   |            |  



112



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Revolving Credit Facilities



As of December 31, 2006, the Company has seven revolving credit facilities which have an aggregate maximum loan commitment
of $560.0 million, (including one facility of $150.0 million, one of $100.0 million, one of $90.0 million, one of $70.0 million and three of $50.0 million each), and mature at various dates through 2008. The revolving credit facilities have similar
characteristics. The Company may borrow amounts, subject to applicable borrowing base and concentration limitations, as defined. During the last year of the term of each facility, the commitment amount will decrease ratably until the commitment
under each facility is reduced to zero by the final maturity date, as defined in each respective agreement.



Availability under each credit facility is subject not only to the maximum amount committed under the respective facility, but also to both various
borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases as the asset progresses from land under development to residence subject
to contract of sale. Advances for each type of collateral become due in whole or in part, subject to possible re-borrowing, and/or the collateral becomes excluded from the borrowing base, after a specified period or earlier upon sale. Concentration
limitations further restrict availability under the credit facilities. The effect of these borrowing base and concentration limitations essentially is to mandate minimum levels of the Companys investment in a project, with higher percentages
of investment required at earlier phases of a project, and with greater absolute dollar amounts of investment required as a project progresses. Each revolving credit facility is secured by deeds of trust on the real property and improvements thereon
owned by the Company in the subdivision project(s) approved by the respective lender, as well as pledges of all net sale proceeds, related contracts and other ancillary property. Also, each credit facility includes financial covenants, which may
limit the amount that may be borrowed thereunder. Outstanding advances bear interest at various rates, which approximate the prime rate. As of December 31, 2006, $145,990,000 was outstanding under these credit facilities, with a weighted-average
interest rate of 7.71%, and the undrawn availability was $305,779,000 as limited by the Companys borrowing base formulas. Interest on the revolving credit facilities is calculated on the average, outstanding daily balance and is paid following
the end of each month. During the year ended December 31, 2006, the Company borrowed $1,263,000,000 and repaid $1,167,000,000 under these facilities. The maximum amount outstanding was $228,281,000 and the weighted average borrowings were
$152,549,000 during the year ended December 31, 2006. Interest incurred on the revolving credit facilities for the year ended December 31, 2006 was $13,573,000. Delaware Lyon has guaranteed on an unsecured basis California Lyons obligations
under certain of the revolving credit facilities and has provided an unsecured environmental indemnity in favor of the lender under the $90,000,000 bank line of credit. The Company routinely makes borrowings under its revolving credit facilities in
the ordinary course of business within the maximum aggregate loan commitment amounts to fund its operations, including its land acquisition and home building activities, and repays such borrowings, as required by the credit facilities, with the net
proceeds from sales of the real property, including homes, which secure the applicable credit facility.



Under the revolving credit facilities, we are required to comply with a number of covenants, the most restrictive of which require Delaware Lyon to
maintain:



| |  |  | A tangible net worth, as defined, of $200,000,000, adjusted upwards quarterly by 50% of Delaware Lyons quarterly net income after June 30, 2004,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A ratio of total liabilities to tangible net worth, each as defined, of less than 3.25 to 1; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Minimum liquidity, as defined, of at least $10,000,000.
| | - |  | -------------------------------------------------------



As of and for the period ending December 31, 2006, the Company is in compliance with these covenants.



These facilities include a number of other covenants with respect to such
matters as the posting of cash or letters of credit in certain circumstances, the application or deposit of excess net sales proceeds, maintenance of



113



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



specified ratios, limitations on investments in joint ventures, maintenance of fixed charge coverages, stock ownership changes, and lot ownership.



As a common practice required by commercial lenders, the
Company is obligated to repay loans to a level such that they do not exceed certain required loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by appraising the property securing the loan at any time. Either a
decrease in the value of the property securing the loan or an increase in the construction costs could trigger this pay down obligation. The term of the obligation corresponds with the term of the loan and is limited to the outstanding loan balance.
The entire revolving credit facilities balance is subject to these obligations as of December 31, 2006.



Construction Notes Payable



At December 31, 2006, the Company had construction notes payable on certain consolidated entities amounting to $70,408,000. The construction notes have
various maturity dates through 2008 and bear interest at rates ranging from prime plus 0.25% to prime plus 2.0% at December 31, 2006. Interest is calculated on the average daily balance and is paid following the end of each month.



Seller Financing



At December 31, 2006, the Company had $28,339,000 of notes payable
outstanding related to land acquisitions for which seller financing was provided. The seller financing notes have various maturity dates through March 2008 and bear interest at rates ranging from 9.0% to 12.0% at December 31, 2006. Interest is
calculated on the average principal balance outstanding and is accrued and paid when the financing is repaid.



Revolving Mortgage Warehouse Credit Facilities



The Company, through its mortgage subsidiary and one of its unconsolidated joint ventures, has entered into two revolving mortgage warehouse credit
facilities with banks to fund its mortgage origination operations. The original credit facility, which matures in May 2007, provides for revolving loans of up to $30,000,000 outstanding, $20,000,000 of which is committed (lender obligated to lend if
stated conditions are satisfied) and $10,000,000 of which is not committed (lender advances are optional even if stated conditions are otherwise satisfied). The Companys mortgage subsidiary and one of its unconsolidated joint ventures entered
into an additional $50,000,000 credit facility which matures in April 2007. The Company expects the maturities to be extended by the lender at each maturity date for an additional year. Mortgage loans are generally held for a short period of time
and are typically sold to investors within 7 to 15 days following funding. The facilities are secured by substantially all of the assets of each of the borrowers, including the mortgage loans held for sale, all rights of each of the borrowers with
respect to contractual obligations of third party investors to purchase such mortgage loans, and all proceeds of sale of such mortgage loans. The facilities, which have LIBOR based pricing, also contain certain financial covenants requiring the
borrowers to maintain minimum tangible net worth, leverage, profitability and liquidity. These facilities are non-recourse and are not guaranteed by the Company. At December 31, 2006 the outstanding balance under these facilities was $59,359,000.



Prime Interest Rates



The prime interest rates at December 31, 2006, 2005 and 2004 were
8.25%, 7.25% and 5.25%, respectively. The weighted-average prime interest rates for each of the three years ended December 31, 2006, 2005 and 2004 were 7.96%, 6.19% and 4.34%, respectively.



114



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 7  Tender Offer and Merger



On March 17, 2006, General William Lyon, Chairman of the Board and Chief Executive Officer of the Company, announced that he
commenced an offer to purchase all outstanding shares of common stock of William Lyon Homes not already owned by him for $93.00 per share in cash. The expiration date for the tender offer at the time of the offer was Thursday, April 13, 2006, unless
the offer were extended.



The offer was subject to the
non-waivable condition that there shall have been validly tendered and not withdrawn before the offer expires at least a majority of the outstanding shares not owned by General Lyon, The William Harwell Lyon 1987 Trust, The William Harwell Lyon
Separate Property Trust or the officers and directors of William Lyon Homes immediately before the commencement of the offer. The offer was also subject to the receipt by General Lyon of the proceeds under his financing commitment from Lehman
Commercial Paper Inc. and Lehman Brothers Inc. The offer was also subject to other terms and conditions as set forth in the tender offer materials filed with the Securities and Exchange Commission and distributed to William Lyon Homes
stockholders, and was initially subject to the further condition that sufficient shares were tendered in the offer such that the tendered shares, together with the shares already directly or indirectly owned by General Lyon and the trusts, would
represent at least 90% of the shares outstanding upon expiration of the offer.



On March 23, 2006, the Company announced that its board of directors had formed a special committee of independent directors to consider the offer by General Lyon with the assistance of outside financial and legal
advisors which the special committee retained. On April 10, 2006, General Lyon announced that he would amend his tender offer for all the outstanding shares of William Lyon Homes by increasing the offer price to $100.00 per share. The special
committee determined that it would recommend that stockholders tender their shares in connection with the amended offer. General Lyon also extended his offer until Friday, April 21, 2006. General Lyon had also reached an agreement, subject to final
court approval, to settle certain class action lawsuits that had been filed in Delaware on behalf of William Lyon Homes stockholders. As described below in Note 7 Commitments and Contingencies, the Delaware Chancery Court approved the
settlement on August 9, 2006. Another class action lawsuit filed in California has been stayed by the California court.



On April 24, 2006, General Lyon announced that he was extending his tender offer for all outstanding shares of William Lyon Homes not owned by him through
April 28, 2006, and that he would waive the 90% condition to the offer. On May 1, 2006, General Lyon announced that he was further extending the tender offer through May 12, 2006, and that he was further amending the tender offer by increasing the
offer price to $109.00 per share. All other terms and conditions of the offer remained the same, as set forth in the tender offer materials disseminated by General Lyon.



On May 18, 2006, General Lyon announced the completion of his tender offer to purchase all of the outstanding shares of the
common stock of the Company not already owned by him for $109.00 net per share in cash. Computershare Trust Company of New York, the depositary for the offer, had advised General Lyon that an aggregate of 1,711,125 shares were tendered in the offer,
including 310,652 shares that remained subject to guaranteed delivery procedures. The shares tendered in the offer, together with the shares already owned by General Lyon, The William Harwell Lyon 1987 Trust and The William Harwell Lyon Separate
Property Trust, represented over 90% of the outstanding shares of the Company, which would be sufficient to enable General Lyon to effect a short-form merger with the Company under Delaware law.



On July 26, 2006, General Lyon announced that on July 25, 2006, WLH
Acquisition Corp., a corporation owned by General Lyon, The William Harwell Lyon 1987 Trust and The William Harwell Lyon Separate Property Trust, was merged with and into the Company, with the Company continuing as the surviving corporation of the
merger. At the effective time of the merger, each outstanding share of the Companys common



115



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



stock (except for shares owned by WLH Acquisition Corp. and by stockholders who properly exercise their appraisal rights in accordance with Delaware law) was
cancelled and converted into the right to receive $109.00 per share in cash, without interest, which is the same consideration that was paid for shares of the Company in the tender offer by General Lyon. Shareholders of the Company as of the
effective time of the merger were sent additional information by mail on the process for receiving the merger consideration or exercising their appraisal rights.



Prior to the completion of the merger, General Lyon and the two trusts contributed all the shares of the Company owned by
them, which constituted more than 90% of the outstanding shares, to WLH Acquisition Corp. WLH Acquisition Corp. was then merged with and into the Company pursuant to the short-form merger provisions of Delaware law. Prior to the merger, the Company
had cancelled and retired 1,275,000 shares of its common stock which had been repurchased and were being held in the treasury. After the merger, the Companys capital structure consists of common stock, par value $.01 per share, 3,000 shares
authorized, and 1,000 shares outstanding. The Company will continue as a privately held company, wholly owned by General Lyon and the two trusts.



The Company has incurred approximately $3,165,000 in financial advisory expenses related to the tender offer which are reflected as financial advisory
expenses in the accompanying consolidated statement of income.



See Note 11 for information on certain lawsuits which have been filed relating to the tender offer.



Note 8  Stockholders Equity



Incentive Compensation Plans



The Companys 2006 Senior Executive Bonus Plan (the Plan) provides that (i) the Chief Executive Officer (CEO) and the Chief Operating Officer (COO) are each eligible to receive a bonus of 3% of the
Companys Consolidated pre-tax, pre-bonus income; (ii) the Executive Vice President (EVP) is eligible to receive a bonus of 3⁄4 of 1% of the Companys consolidated pre-tax, pre-bonus income and 3% of the Northern California
Regions pre-tax, pre-bonus income, determined after allocation to the Region of its allocable portion of corporate general and administrative expenses; and (iii) the Chief Financial Officer (CFO) is eligible to receive a bonus of
1⁄2 of 1% of the Companys consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Region President is eligible to receive a bonus of 3% of the regions pre-tax, pre-bonus income, determined after allocation to the
region of its allocable portion of corporate general and administrative expenses. In addition, the Companys board of directors has approved a cash bonus plan applicable in 2006 for all of its full-time, salaried employees who are not included
in the Plan. All other participants under this cash bonus plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income.



For the CEO, COO, EVP CFO, region presidents, executives and managers, awards
under bonus plans are paid over two years with 75% paid following the determination of bonus awards, and 25% paid one year later. The deferred amounts would be forfeited in the event of termination for any reason except retirement, death or
disability. All awards under the Plan will be prorated downward if the sum of all calculated awards under the Plan and the Companys 2006 bonus plans for other officers and employees of the Company and its subsidiaries would exceed 20% of the
Companys consolidated pre-tax, pre-bonus income.



Executive Deferred Compensation Plans



The
Company has implemented deferred compensation plans which allow certain officers and employees to defer a portion of total income (base salary and bonuses). The deferral amount can be up to 20% of total income



116



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



with a minimum of $10,000 annually. The Company must accrue the deferred compensation liability but cannot deduct such amounts for income tax purposes until
actually paid to the employee.



Note 9  Income Taxes



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



|         |  |                         |         |   |      |   |          |      |  |   |          |  
|-------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|         |  | Year Ended December 31, |        
|         |  | 2006                    |         |   | 2005 |   |          | 2004 | 
|Current  |  |                         |         |   |      |   |          |      |  |   |          |  
|Federal  |  | $                       | (47,250 | ) |      | $ | (103,314 | )    |  | $ | (99,580  | )
|State    |  |                         | (12,285 | ) |      |   | (24,532  | )    |  |   | (22,391  | )
|         |  |                         |         |   |      |   |          |      |  |   |          |  
|         |  |                         | (59,535 | ) |      |   | (127,846 | )    |  |   | (121,971 | )
|         |  |                         |         |   |      |   |          |      |  |   |          |  
|Deferred |  |                         |         |   |      |   |          |      |  |   |          |  
|Federal  |  |                         | 7,766   |   |      |   | 3,141    |      |  |   | 7,589    |  
|State    |  |                         | 2,838   |   |      |   | 556      |      |  |   | 883      |  
|         |  |                         |         |   |      |   |          |      |  |   |          |  
|         |  |                         | 10,604  |   |      |   | 3,697    |      |  |   | 8,472    |  
|         |  |                         |         |   |      |   |          |      |  |   |          |  
|         |  | $                       | (48,931 | ) |      | $ | (124,149 | )    |  | $ | (113,499 | )
|         |  |                         |         |   |      |   |          |      |  |   |          |  



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



|                                                                     |  |                         |         |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                     |  | Year Ended December 31, |        
|                                                                     |  | 2006                    |         |   | 2005 |   |          | 2004 | 
|Provision for Federal income taxes at the statutory rate             |  | $                       | (43,298 | ) |      | $ | (110,173 | )    |  | $ | (99,801  | )
|Provision for state income taxes, net of Federal income tax benefits |  |                         | (6,111  | ) |      |   | (15,528  | )    |  |   | (14,011  | )
|Other                                                                |  |                         | 478     |   |      |   | 1,552    |      |  |   | 313      |  
|                                                                     |  |                         |         |   |      |   |          |      |  |   |          |  
|                                                                     |  | $                       | (48,931 | ) |      | $ | (124,149 | )    |  | $ | (113,499 | )
|                                                                     |  |                         |         |   |      |   |          |      |  |   |          |  



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



|                                                                                  |  |              |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                                                                  |  | December 31, |       
|                                                                                  |  | 2006         |        |   | 2005 |  
|Deferred tax assets                                                               |  |              |        |   |      |   |        |  
|Reserves deducted for financial reporting purposes not allowable for tax purposes |  | $            | 29,799 |   |      | $ | 10,415 |  
|Compensation deductible for tax purposes when paid                                |  |              | 6,175  |   |      |   | 10,893 |  
|State income tax provisions deductible when paid for Federal tax purposes         |  |              | 1,543  |   |      |   | 7,299  |  
|Effect of book/tax differences for joint ventures                                 |  |              | 1,181  |   |      |   | 1,860  |  
|                                                                                  |  |              |        |   |      |   |        |  
|                                                                                  |  |              | 38,698 |   |      |   | 30,467 |  
|Deferred tax liabilities                                                          |  |              |        |   |      |   |        |  
|Effect of book/tax differences for joint ventures                                 |  |              | (6,034 | ) |      |   | (8,407 | )
|                                                                                  |  |              |        |   |      |   |        |  
|                                                                                  |  | $            | 32,664 |   |      | $ | 22,060 |  
|                                                                                  |  |              |        |   |      |   |        |  



117



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



During the years ended December 31, 2006 and 2005, income tax benefits of $3,059,000 and $1,990,000,
respectively, related to stock option exercises were excluded from the results of operations and credited to additional paid-in capital. In addition, for the year ending December 31, 2006, utilization of built-in losses associated with
transactions prior to the quasi-reorganization, including federal and state tax refunds received of $1,820,000 and $10,000, respectively, resulted in income tax benefits credited to additional paid-in capital of $4,229,000.



The estimated overall effective tax rate for the years ending
December 31, 2006, 2005 and 2004 are 39.5%, 39.4% and 39.8%, respectively. At December 31, 2006 the Company has unused recognized built-in losses in the amount of $19,414,000 which are available to offset future income and expire between
2009 and 2011. The utilization of these losses is limited to offset $3,883,000 of taxable income per year; however, any unused losses in any year may be carried forward for utilization in future years through 2011. The Companys ability to
utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be further limited under certain circumstances.



Note 10  Related Party Transactions



On October 26, 2000, the Companys Board of Directors (with General 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. In addition, one-half of the net profits in excess of six percent from the development are to be paid to the seller. Phase takedowns of approximately 20 lots each were anticipated to occur at two to three
month intervals for each of several product types through September 2004. As of December 31, 2004, all lots were purchased under this agreement. During the years ended December 31, 2004 the Company purchased 92 lots under
this agreement for a total purchase price of $1,984,000. During the years ended December 31, 2006, 2005 and 2004, the Company paid $0, $1,949,000 and $1,689,000, respectively for one-half of the net profits in excess of six percent from the
development. This land acquisition qualified as an affiliate transaction under the Companys 121/2% Senior
Notes due July 1, 2003 Indenture dated as of June 29, 1994, as amended (the Old Indenture). Pursuant to the terms of the Old Indenture, the Company 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 delivered to the Trustee under the Old 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 was approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company delivered to the Trustee under the Old 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 $6,221,000, $116,773,000 and $33,655,000 during the years ended December 31, 2006, 2005 and
2004, respectively, from certain of its joint ventures.



For
the years ended December 31, 2006, 2005 and 2004, the Company incurred reimbursable on-site labor costs of $133,000, $146,000, $183,000, respectively, for providing customer service to real estate projects developed by entities controlled by
William Lyon and William H. Lyon, of which $1,000 and $32,000 was due to the Company at December 31, 2006 and 2005, respectively. In addition, the Company earned fees of $98,000, $121,000 and $110,000, respectively, for tax and accounting
services performed for entities controlled by William Lyon and William H. Lyon during the years ended December 31, 2005, 2004 and 2003, of which $92,000 was due to the Company at December 31, 2005.



118



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For each of the years ended December 31, 2006, 2005 and 2004, the Company incurred charges of
$755,000, related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary.



During the years ended December 31, 2004, the Company incurred charges of $172,000 related to the charter and use of aircraft owned by an affiliate
of William Lyon.



Effective September 1, 2004, the Company
entered into an aircraft consulting and management agreement with an affiliate (the Affiliate) of William Lyon to operate and manage the Companys aircraft which was placed in service effective as of September 1, 2004. The
terms of the agreement provide that the Affiliate shall consult and render its advice and management services to the Company with respect to all functions necessary to the operation, maintenance and administration of the aircraft. The Companys
business plan for the aircraft includes (i) use by Company executives for traveling on Company business to the Companys divisional offices and other destinations, (ii) charter service to outside third parties and (iii) charter service to
William Lyon personally. Charter services for outside third parties are contracted for at market rates. As compensation to the Affiliate for its management and consulting services under the agreement, the Company pays the Affiliate a fee equal to
(i) the amount equal to 107% of compensation paid by the Affiliate for the pilots supplied pursuant to the agreement, (ii) $50 per operating hour for the aircraft and (iii) $9,000 per month for hangar rent. In addition, all maintenance work,
inspections and repairs performed by the Affiliate on the aircraft are charged to the Company at the Affiliates published rates for maintenance, inspection and repairs in effect at the time such work is completed. The total compensation paid
to the Affiliate under the agreement amounted to $1,488,000, $1,414,000 and $317,000 during the years ended December 31, 2006, 2005 and 2004, respectively.



Effective July 1, 2006, General William Lyon entered into a time sharing agreement (the Agreement) with the Company pertaining to his
personal use of the aircraft. The agreement calls for General Lyon to reimburse the company for all costs incurred by the Company during his personal flights plus a surcharge on fuel consumption of two times the cost. Pursuant to the agreement and
the rates charged to General Lyon prior to the agreement, the Company had earned revenue of $524,000, $457,000 and $187,000 for charter services provided to William Lyon personally, during the years ended December 31, 2006, 2005 and 2004,
respectively, of which $333,000 and $129,000 was due to the Company at December 31, 2006 and 2005.



On May 28, 2004 and June 18, 2004, William Lyon and his wife, Willa Dean Lyon, purchased two of the Companys homes for a total purchase price of
approximately $877,000. The purchase prices were based on the prices offered to third parties and no discounts were given. The homes were purchased for use as residences by certain family members.



On October 28, 2004, one of the Companys directors, Michael L. Meyer,
who has since resigned, purchased one of the Companys homes for a total purchase price of approximately $835,000. The purchase price was based on the prices offered to third parties and no discounts were given.



The Company and one of the Companys directors, Alex Meruelo, are
parties to an agreement pursuant to which Mr. Meruelo is eligible to receive a finders fee based upon the cash distributions received by a subsidiary of the Company from a joint venture development project relating to a portion of the Fort Ord
military base in Monterey County, California. The joint venture development project resulted from Mr. Meruelos introduction of the Company to Woodman Development Company, LLC (Woodman) and the subsequent formation of East Garrison
Partners I, LLC (EGP) as a joint venture between Woodman and Lyon East Garrison Company I, LLC (EGC). The finders fee will equal 5% of all net cash distributions distributed by EGP to EGC with respect to EGCs
existing 50% interest in EGP that are in excess of distributions with respect to certain deficit advances, deficit preferred returns, returns of capital and preferred returns on unreturned capital. The calculation of the finders fee will be
based on net cash distributions received from EGP on land sales and will not be



119



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



determined on the basis of any revenues, profits or distributions received from any affiliate of EGC for the construction and sale or leasing of residential
or commercial buildings on such lots. Mr. Meruelo is not obligated to perform any services for EGC other than the introduction to Woodman. As of December 31, 2006, no amounts had been paid to Mr. Meruelo under this agreement.



The Company offers home mortgage loans to its employees and directors through
its mortgage company subsidiary, Duxford Financial, Inc. These loans are made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons. These loans do not involve more than the normal risk of collectibility or present other unfavorable features and are sold to investors typically within 7 to 15 days.



Note 11  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, results of operations or cash flows.



Duxford Title Reinsurance Company, a wholly-owned subsidiary
of the Company, provides title reinsurance to unrelated title insurers directly issuing title policies on homes sold by the Company in California, Nevada and Arizona. In February 2005, Duxford Title Reinsurance Company was notified by its title
insurers that as a result of current investigations by several state insurance regulators into the large number of captive reinsurance arrangements existing in the title insurance industry, the title insurers were suspending and/or terminating their
current captive reinsurance agreements with Duxford Title Reinsurance Company pending final determination from the appropriate regulatory bodies as to their permissibility or necessary modification to assure compliance with applicable law. In April
2005, in response to a subpoena issued by the California Insurance Commissioner, the Company testified in connection with the Commissioners investigation of captive reinsurance arrangements, including testimony that in many instances, the
Company pays for the title insurance being issued. The Company has not had any further communication to date from the California Insurance Commissioner or any other state insurance regulator about this matter and does not believe that the resolution
of this matter will have a material effect on the Companys financial position, results of operations or cash flows. In November 2005, the Company was notified that the United States Department of Housing and Urban Development had instituted a
formal Federal investigation of the Company in connection with its participation in captive title reinsurance arrangements. The Company has fully cooperated with the Department in its investigation. Effective as of September 15, 2006, the
Company and the Department entered into a Settlement Agreement in which each desired to avoid prolonged proceedings, any further expense of investigation and/or possible litigation and to finally resolve the matter. Based on the Companys
compliance with the Settlement Agreement and with the Company not admitting liability or wrongdoing, the Department agreed to terminate its investigation and to take no enforcement action and the Company agreed to make a settlement payment of
$850,000.



Litigation Arising from General Lyons
Tender Offer



As described above in Note
7Tender Offer and Merger, on March 17, 2006, the Companys principal stockholder commenced a tender offer (the Tender Offer) to purchase all outstanding shares of the Companys common stock not already owned by him.
Initially, the price offered in the Tender was $93 per share, but it has since been increased to $109 per share.



Two purported class action lawsuits were filed in the Court of Chancery of the State of Delaware in and for New Castle County, purportedly on behalf of
the public stockholders of the Company, challenging the Tender Offer and challenging related actions of the Company and the directors of the Company. Stephen L. Brown v.



120



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



William Lyon Homes, et al., Civil Action No. 2015-N was filed on March 20, 2006, and Michael Crady, et al. v. General William Lyon, et al.,
Civil Action No. 2017-N was filed on March 21, 2006 (collectively, the Delaware Complaints). On March 21, 2006, plaintiff in the Brown action also filed a First Amended Complaint. The Delaware Complaints name the Company and the
directors of the Company as defendants. These complaints allege, among other things, that the defendants have breached their fiduciary duties owed to the plaintiffs in connection with the Tender Offer and other related corporate activities. The
plaintiffs sought to enjoin the Tender Offer and, among other things, to obtain attorneys fees and expenses related to the litigation.



On March 23, 2006, the Company announced that its Board had appointed a special committee of independent directors who are not members of the
Companys management or employed by the Company (the Special Committee) to consider the Tender Offer. The members of the Special Committee were Harold H. Greene, Lawrence M. Higby, and Dr. Arthur Laffer. The Company also announced
that the Special Committee had retained Morgan Stanley & Co. as its financial advisor and Gibson, Dunn & Crutcher LLP as its legal counsel.



On March 24, 2006, the Delaware Chancery Court consolidated the Delaware Complaints into a single case entitled In re: William Lyon Homes Shareholder
Litigation, Civil Action No. 2015-N (the Consolidated Delaware Action).



On April 10, 2006, the parties to the Consolidated Delaware Action executed a Memorandum of Understanding (MOU), detailing a proposed settlement subject to the Delaware Chancery Courts approval.
Pursuant to the MOU, General Lyon increased his offer of $93 per share to $100 per share, extended the closing date of the offer to April 21, 2006, and, on April 11, 2006, filed an amended Schedule TO. Plaintiffs in the Consolidated Delaware Action
have determined that the settlement is fair, reasonable, adequate, and in the best interests of plaintiffs and the putative Class. The Special Committee also determined that the price of $100 per share was fair to the shareholders, and
recommended that the Companys shareholders accept the revised Tender Offer and tender their shares. Thereafter, General Lyon also decided to further extend the closing date of the Tender Offer from April 21, 2006 to April 28, 2006.



On April 23, 2006, Delaware Chancery Court conditionally certified a class
in the Consolidated Delaware Action. The parties to the Consolidated Delaware Action agreed to a Stipulation of Settlement, and on August 9, 2006, the Delaware Chancery Court certified a class in the Consolidated Delaware Action, approved the
settlement, and dismissed the Consolidated Delaware Action with prejudice as to all defendants and the class. On February 16, 2007, the matter was appealed to the Supreme Court of the State of Delaware.



A purported class action lawsuit challenging the Tender Offer was also filed
in the Superior Court of the State of California, County of Orange. On March 17, 2006, a complaint captioned Alaska Electrical Pension Fund v. William Lyon Homes, Inc., et al., Case No. 06-CC-00047, was filed. On April 5, 2006, plaintiff in
the Alaska Electrical action filed an Amended Complaint (the California Action). The complaint in the California Action names the Company and the directors of the Company as defendants and alleges, among other things, that the
defendants have breached their fiduciary duties to the public stockholders. Plaintiff in the California Action also sought to enjoin the Tender Offer, and, among other things, to obtain attorneys fees and expenses related to the litigation.



On April 20, 2006, the California court denied the request of
plaintiff in the California Action to enjoin the Tender Offer. Plaintiff filed a motion to certify a class in the California Action which was later taken off calendar, and the Company filed a motion to stay the California Action. On July 5,
2006, the California Court granted the Companys motion to stay the California Action.



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.



121



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Land Banking Arrangements



The Company enters into purchase agreements with various land sellers. In
some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Companys revolving credit facilities and other corporate financing sources and limiting the Companys risk, the Company
transfers the Companys right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the
lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 25% of the total purchase price. The Company is under no obligation to
purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities.
These land banking arrangements help the Company manage the financial and market risk associated with land holdings. As described in Note 2, above, Interpretation No. 46, requires the consolidation of the assets, liabilities and operations of four
of the Companys land banking arrangements including, as of December 31, 2006, real estate inventories of $69,103,000, which are included in real estate inventories not owned in the accompanying balance sheet. The Company participates in one
land banking arrangements, which is not a VIE in accordance with Interpretation No. 46, and is not consolidated as of December 31, 2006. The deposits related to the unconsolidated land banking arrangements has been recorded in the accompanying
consolidated balance sheet.



In addition, the Company
participates in another land banking arrangement, which is not a VIE in accordance with Interpretation No. 46, but is consolidated in accordance with SFAS No. 49, Accounting for Product Financing Arrangements, (FAS 49). Under the
provisions of FAS 49, the Company has determined it is economically compelled, based on certain factors, to purchase the land in the land banking arrangement, and therefore, must record the remaining purchase price of the land of $131,564,000, which
is included in real estate inventories not owned and liabilities from inventories not owned in the accompanying balance sheet.



During the year ended December 31, 2005, the Company and an unaffiliated party formed a limited liability company (the LLC) for the purpose of
acquiring 222 acres in the city of Pittsburgh, California and developing the land into 533 residential home sites. The LLC was determined to be a variable interest entity and is consolidated in the accompanying consolidated balance sheet. During the
year ended December 31, 2006, the LLC sold 284 lots to the Company for a purchase price of $43,300,000. The lots were acquired through two land banking arrangements which have been determined to be VIEs and are consolidated in the accompanying
consolidated balance sheet in real estate inventories not owned. The lots will be purchased from the two consolidated land banking arrangements on staged take-downs through 2008. Information pertaining to the two consolidated land banking
arrangements is included in the table below. The intercompany land sales and related profits have been eliminated in consolidation.



122



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Summary information with respect to the Companys consolidated and unconsolidated land banking
arrangements is as follows as of December 31, 2006 (dollars in thousands):



|                                                      |  |              |         |                |   |       
|----------------------------------------------------- |  | ------------ | ------- | -------------- | - | ------
|                                                      |  | Consolidated |         | Unconsolidated
|Total number of land banking projects                 |  |              | 5       |                |   | 1     
|                                                      |  |              |         |                |   |       
|Total number of lots                                  |  |              | 1,077   |                |   | 323   
|                                                      |  |              |         |                |   |       
|Total purchase price                                  |  | $            | 272,164 |                | $ | 64,000
|                                                      |  |              |         |                |   |       
|Balance of lots still under option and not purchased: |  |              |         |                |   |       
|Number of lots                                        |  |              | 1,027   |                |   | 323   
|                                                      |  |              |         |                |   |       
|Purchase price                                        |  | $            | 200,670 |                | $ | 64,000
|                                                      |  |              |         |                |   |       
|Forfeited deposits if lots are not purchased          |  | $            | 50,820  |                | $ | 3,922 
|                                                      |  |              |         |                |   |       



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.



As of December 31, 2006, the Company had $12,384,000 of outstanding irrevocable standby letters of credit to guarantee the Companys financial obligations under certain land banking arrangements and other contractual
arrangements in the normal course of business. The beneficiary may draw upon these letters of credit in the event of a contractual default by the Company relating to each respective obligation. These letters of credit have a stated term of 12 months
and have varying maturities throughout 2009, at which time the Company may be required to renew to coincide with the term of the respective arrangement.



The Company also had outstanding performance and surety bonds of $281,404,000 at December 31, 2006 related principally to its obligations for site
improvements at various projects. The Company does not believe that draws upon these bonds, if any, will have a material effect on the Companys financial position, results of operations or cash flows.



The Company has provided unsecured environmental indemnities to certain
lenders, joint venture partners and land sellers. In each case, the Company has performed due diligence on the potential environmental risks including obtaining an independent environmental review from outside environmental consultants. These
indemnities obligate the Company to reimburse the guaranteed parties for damages related to environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, the Company could have
recourse against other previous owners.



See Notes 5 and 6 for
additional information relating to the Companys guarantee arrangements.



123



---

##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





Note 12  Unaudited Summarized
Quarterly Financial Information



Summarized unaudited
quarterly financial information for the years ended December 31, 2006, 2005 and 2004 is as follows (in thousands except per common share amounts):



|                                         |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|---------------------------------------- |  | ------------------ | -------- | - | ------------ | - | -------- | ----------------- |  | - | ---------------- | - |  | - | -------- | -
|                                         |  | Three Months Ended |         
|                                         |  | March 31,2006      |          |   | June 30,2006 |   |          | September 30,2006 |  |   | December 31,2006 |  
|Sales                                    |  | $                  | 307,381  |   |              | $ | 408,254  |                   |  | $ | 311,248          |   |  | $ | 465,338  |  
|Cost of sales                            |  |                    | (229,873 | ) |              |   | (315,993 | )                 |  |   | (247,099         | ) |  |   | (388,073 | )
|                                         |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Gross profit                             |  |                    | 77,508   |   |              |   | 92,261   |                   |  |   | 64,149           |   |  |   | 77,265   |  
|Other income, costs and expenses, net    |  |                    | (34,386  | ) |              |   | (42,283  | )                 |  |   | (46,382          | ) |  |   | (64,423  | )
|                                         |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Income before provision for income taxes |  |                    | 43,122   |   |              |   | 49,978   |                   |  |   | 17,767           |   |  |   | 12,842   |  
|Provision for income taxes               |  |                    | (16,908  | ) |              |   | (19,597  | )                 |  |   | (7,265           | ) |  |   | (5,161   | )
|                                         |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net income                               |  | $                  | 26,214   |   |              | $ | 30,381   |                   |  | $ | 10,502           |   |  | $ | 7,681    |  
|                                         |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|                                         | 
|                                         |  | Three Months Ended |         
|                                         |  | March 31,2005      |          |   | June 30,2005 |   |          | September 30,2005 |  |   | December 31,2005 |  
|Sales                                    |  | $                  | 246,682  |   |              | $ | 407,489  |                   |  | $ | 376,331          |   |  | $ | 825,881  |  
|Cost of sales                            |  |                    | (176,795 | ) |              |   | (288,976 | )                 |  |   | (279,063         | ) |  |   | (606,967 | )
|                                         |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Gross profit                             |  |                    | 69,887   |   |              |   | 118,513  |                   |  |   | 97,268           |   |  |   | 218,914  |  
|Other income, costs and expenses, net    |  |                    | (36,014  | ) |              |   | (45,621  | )                 |  |   | (34,321          | ) |  |   | (73,846  | )
|                                         |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Income before provision for income taxes |  |                    | 33,873   |   |              |   | 72,892   |                   |  |   | 62,947           |   |  |   | 145,068  |  
|Provision for income taxes               |  |                    | (13,380  | ) |              |   | (28,792  | )                 |  |   | (24,864          | ) |  |   | (57,113  | )
|                                         |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net income                               |  | $                  | 20,493   |   |              | $ | 44,100   |                   |  | $ | 38,083           |   |  | $ | 87,955   |  
|                                         |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|                                         | 
|                                         |  | Three Months Ended |         
|                                         |  | March 31,2004      |          |   | June 30,2004 |   |          | September 30,2004 |  |   | December 31,2004 |  
|Sales                                    |  | $                  | 254,548  |   |              | $ | 384,483  |                   |  | $ | 474,950          |   |  | $ | 707,866  |  
|Cost of sales                            |  |                    | (200,436 | ) |              |   | (296,654 | )                 |  |   | (349,391         | ) |  |   | (503,749 | )
|                                         |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Gross profit                             |  |                    | 54,112   |   |              |   | 87,829   |                   |  |   | 125,559          |   |  |   | 204,117  |  
|Other income, costs and expenses, net    |  |                    | (28,361  | ) |              |   | (35,806  | )                 |  |   | (51,349          | ) |  |   | (70,953  | )
|                                         |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Income before provision for income taxes |  |                    | 25,751   |   |              |   | 52,023   |                   |  |   | 74,210           |   |  |   | 133,164  |  
|Provision for income taxes               |  |                    | (10,342  | ) |              |   | (20,875  | )                 |  |   | (29,273          | ) |  |   | (53,009  | )
|                                         |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net income                               |  | $                  | 15,409   |   |              | $ | 31,148   |                   |  | $ | 44,937           |   |  | $ | 80,155   |  
|                                         |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  



124



---

##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                    
|3.1(2)        |  | Certificate of Incorporation of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                                    
|3.2(1)        |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                           
|3.3(38)       |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                           
|3.4(38)       |  | Certificate of Amendment of Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                      
|3.5(2)        |  | Bylaws of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                                                          
|4.1(23)       |  | Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and
guarantees).                                                                                                                                                                                                             
|4.2(15)       |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as
Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).   
|4.3(24)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee
(supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).              
|4.4(3)        |  | Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and
guarantees).                                                                                                                                                                                                           
|4.5(15)       |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as
Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee). 
|4.6(24)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee
(supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).            
|4.7(14)       |  | Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and
guarantees).                                                                                                                                                                                                          
|4.8(15)       |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as
Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
|4.9(24)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee
(supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).           
|10.1(11)      |  | Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a Delaware
corporation.                                                                                                                                                                                                                     
|10.2(34)      |  | First Amendment to Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a
Delaware corporation.                                                                                                                                                                                                  



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                       
|10.3(4)       |  | 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).                                                                                                 
|10.4(6)       |  | Agreement for First Modification of Deeds of Trust and Other Loan Instruments, dated as of June 8, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.     
|10.5(5)       |  | Agreement for Second Modification of Deeds of Trust and Other Loan Instruments, dated as of July 23, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.   
|10.6(5)       |  | Agreement for Third Modification of Deeds of Trust and Other Loan Instruments, dated as of December 19, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.
|10.7(5)       |  | Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments, dated as of May 29, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.    
|10.8(7)       |  | Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.      
|10.9(3)       |  | Agreement for Sixth Modification of Deeds of Trust and Other Loan Agreements, dated as of November 14, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender. 
|10.10(12)     |  | Agreement for Seventh Modification of Deeds of Trust and Other Loan Instruments dated as of October 6, 2004 by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.                                                      
|10.11(25)     |  | Agreement for Eighth Modification of Deeds of Trust and Other Loan Instruments dated as of October 14, 2005 by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.                                                      
|10.12(37)     |  | Agreement for Ninth Modification of Deeds of Trust and Other Loan Instruments dated as of October 31, 2006 by and between William Lyon Homes, Inc., a California corporation, and Guaranty
Bank, a federal savings bank organized and existing under the laws of the United States, as lender.                                                                    
|10.13(4)      |  | 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.                                                                                                                                   
|10.14(17)     |  | Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of September 18, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
California Bank & Trust, a California banking corporation, as lender.                                                                                                  
|10.15(5)      |  | Second Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of December 13, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and California Bank & Trust, a California banking corporation, as lender.                                                                                            
|10.16(3)      |  | Third Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of January 26, 2004, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
California Bank & Trust, a California banking corporation, as lender.                                                                                              



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                   
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                       
|10.17(11)     |  | Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes,
Inc., a California corporation.                                                                           
|10.18(27)     |  | First Amendment to Amended and Restated Revolving Line of Credit Loan Agreement, dated as of July 19, 2005, by and between William Lyon Homes, Inc. and California Bank &
Trust.                                                                                                                  
|10.19(34)     |  | Second Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and
William Lyon Homes, Inc., a California corporation.                                                       
|10.20(7)      |  | Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as
Lender.                                                                                                               
|10.21(10)     |  | Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2004 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as
Lender.                                                                                                               
|10.22(32)     |  | Mortgage Warehouse Loan and Security Agreement dated June 29, 2006 by and between Duxford Financial, Inc. dba William Lyon Financial Services and/or Bayport Mortgage, L.P. and/or California
Pacific Mortgage, L.P., as Borrower and First Tennessee Bank as Lender.                             
|10.23(8)      |  | Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                                                        
|10.24(3)      |  | Amendment No. 1 to Credit Agreement dated as of January 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                              
|10.25(15)     |  | First Amendment to Credit Agreement dated as of August 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                               
|10.26(13)     |  | Amendment No. 2 to Credit Agreement dated as of November 15, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                             
|10.27(9)      |  | Revolving Line of Credit Loan Agreement, dated as of March 11, 2003, by and among Moffett Meadows Partners, LLC, a Delaware limited liability company, as borrower, and California Bank &
Trust, a California banking corporation, and the other financial institutions named therein, as lenders.
|10.28(9)      |  | Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware corporation.                                                                                                                                                     
|10.29(10)     |  | Borrowing Base Revolving Line of Credit Agreement, dated as of June 28, 2004, by and between William Lyon Homes, Inc., a California corporation, and Bank One, NA, a national banking
association.                                                                                                
|10.30(15)     |  | Modification Agreement, dated as of December 7, 2004, by and between William Lyon Homes, Inc., a California corporation, and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA, a
national banking association).                                                                     
|10.31(27)     |  | Second Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of July 14, 2005, between William Lyon Homes, Inc. and JPMorgan Chase Bank, N.A. (successor by
merger to Bank One, NA).                                                                              
|10.32(36)     |  | Third Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated October 23, 2006 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase
Bank, N.A., a National Banking Association.                                                         
|10.33(18)     |  | Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.                                                                                                                                                            
|10.34(18)     |  | 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.                                                                                        
|10.35(18)     |  | Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5,
1999.                                                                                                             
|10.36(4)      |  | 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.                                                                                                 
|10.37(19)     |  | William Lyon Homes 2000 Stock Incentive Plan.                                                                                                                                                                                                                                                     



---

##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                            
|10.38(20)     |  | Form of Stock Option Agreements.                                                                                                                                                                                                                                                                                       
|10.39(20)     |  | William Lyon Homes, Inc. 2000 Cash Bonus Plan.                                                                                                                                                                                                                                                                         
|10.40(26)     |  | William Lyon Homes 2005 Senior Executive Bonus Plan.                                                                                                                                                                                                                                                                   
|10.41(28)     |  | Description of 2005 Cash Bonus Plan.                                                                                                                                                                                                                                                                                   
|10.42(29)     |  | Adjustment of Salary of Douglas F. Bauer.                                                                                                                                                                                                                                                                              
|10.43(38)     |  | Description of 2006 Cash Bonus Plan.                                                                                                                                                                                                                                                                                   
|10.44(38)     |  | 2006 Senior Executive Bonus Plan.                                                                                                                                                                                                                                                                                      
|10.45(38)     |  | Description of 2007 Cash Bonus Plan.                                                                                                                                                                                                                                                                                   
|10.46(38)     |  | 2007 Senior Executive Bonus Plan.                                                                                                                                                                                                                                                                                      
|10.47(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.                                                                                                                                                                
|10.48(21)     |  | William Lyon Homes Executive Deferred Compensation Plan effective as of February 11, 2002.                                                                                                                                                                                                                             
|10.49(22)     |  | William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002.                                                                                                                                                                                                                     
|10.50(5)      |  | The Presley Companies Non-Qualified Retirement Plan for Outside Directors.                                                                                                                                                                                                                                             
|10.51(16)     |  | William Lyon Homes 2004 Executive Deferred Compensation Plan.                                                                                                                                                                                                                                                          
|10.52(16)     |  | William Lyon Homes 2004 Outside Directors Deferred Compensation Plan.                                                                                                                                                                                                                                                  
|10.53(3)      |  | Underwriting Agreement dated as of March 12, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Warburg, LLC and Salomon Smith Barney Inc., as
Underwriters.                                                                                                                            
|10.54(3)      |  | Purchase Agreement dated as of January 28, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Securities LLC, as Initial Purchaser.                                                                                                                                                     
|10.55(3)      |  | Registration Rights Agreement dated as of February 6, 2004 by and among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Securities LLC, as Initial
Purchaser.                                                                                                                                   
|10.56(13)     |  | Purchase Agreement dated as of November 15, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein) and UBS Securities LLC, as Initial Purchaser.                                                                                                                                                     
|10.57(14)     |  | Registration Rights Agreement dated as of November 22, 2004 by and among William Lyon Homes, Inc., the Guarantors (as defined therein), and UBS Securities LLC, as Initial
Purchaser.                                                                                                                                  
|10.58(30)     |  | Summary of Director Compensation.                                                                                                                                                                                                                                                                                      
|10.59(30)     |  | Borrowing Base Revolving Line of Credit Agreement, dated as of February 14, 2006, by and between William Lyon Homes, Inc., a California corporation, and Wachovia Financial Services, Inc, a
North Carolina corporation, by and through its Agent, Wachovia Bank, National Association, a national banking association.
|10.60(35)     |  | First Amendment to Borrowing Base Revolving Line of Credit Agreement dated September 29, 2006 by and between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National
Association, a national banking association.                                                                               
|10.61(33)     |  | Borrowing Base Revolving Line of Credit Agreement dated as of July 10, 2006 by and between William Lyon Homes, Inc., a California corporation, and California National Bank.                                                                                                                                           
|10.62(31)     |  | Revolving Line of Credit Loan Agreement dated as of March 8, 2006 by and between William Lyon Homes, Inc., a California corporation, and Comerica Bank.                                                                                                                                                                
|12.1(38)      |  | Statement of computation of ratio of earnings to fixed charges.                                                                                                                                                                                                                                                        
|21.1(38)      |  | List of Subsidiaries of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                    
|31.1(38)      |  | Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                    
|31.2(38)      |  | Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                    
|32.1(38)      |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                     
|32.2(38)      |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                     

---

|(1) |  | Previously filed as an exhibit to the Current Report on Form 8-K of William Lyon Homes, a Delaware corporation (the Company) filed January 5, 2000 and incorporated
herein by this reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

|(2) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-4, and amendments thereto (SEC Registration No. 333-88569), and incorporated herein by this
reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | 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
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2002 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, 2001 and incorporated herein by this reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 and incorporated herein by this reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003 and incorporated herein by this reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Previously filed as an exhibit to Amendment No. 3 to the Companys Registration Statement on Form S-4 (File No. 333-114691) filed July 15, 2004 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 June 30, 2004 and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed September 22, 2004 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed October 18, 2004 and incorporated herein by this reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed November 19, 2004 and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(14) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed November 23, 2004 and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(15) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-4 (SEC Registration No. 333-121346) filed December 16, 2004 and incorporated herein by this
reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(16) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed December 30, 2004 and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(17) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 and incorporated herein by this reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(18) |  | 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.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(19) |  | 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.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(20) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(21) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-8 (SEC Registration No. 333-82448), and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(22) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(23) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(24) |  | Previously filed as an exhibit to Amendment No. 1 to the Companys Registration Statement on Form S-4 (SEC Registration No. 333-121346) filed January 10, 2005 and incorporated
herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(25) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed November 14, 2005 and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(26) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed November 9, 2005 and incorporated herein by this reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(27) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed July 14, 2005 and incorporated herein by this reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|(28) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

|(29) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------

|(30) | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(31) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed April 3, 2006 and incorporated herein by reference.
|---- | ------------------------------------------------------------------------------------------------------------------------------------

|(32) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed July 6, 2006 and incorporated herein by reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------

|(33) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed August 1, 2006 and incorporated herein by reference.
|---- | -------------------------------------------------------------------------------------------------------------------------------------

|(34) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed September 27, 2006 and incorporated herein by reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------

|(35) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed October 17, 2006 and incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------

|(36) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed October 27, 2006 and incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------

|(37) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed December 11, 2006 and incorporated herein by reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------

|(38) |  | Filed herewith.
|---- |  | ---------------