##### 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, 2009

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 incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                                 |  |           
|------------------------------------------------ |  | ----------
|4490 Von Karman Avenue Newport Beach, California |  | 92660     
|(Address of principal executive offices)         |  | (Zip Code)

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   ̈    NO  x.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files).    Yes   ̈    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, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act.



|                                                                       |  |                             
|---------------------------------------------------------------------- |  | ----------------------------
|Large Accelerated Filer   ̈                                             |  | Accelerated filer   ̈        
|                                                                       | 
|Non-accelerated filer  x (Do not check if a smaller reporting company) |  | Smaller reporting company   ̈

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 5, 2010 was 1,000.

DOCUMENTS INCORPORATED BY REFERENCE

None









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WILLIAM LYON HOMES

INDEX



|         |  |                                                                                                              |  |         
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | --------
|         |  |                                                                                                              |  | Page No.
|         |  | PART I                                                                                                       |  |         
|         |  |                                                                                                             
|Item 1.  |  | Business                                                                                                     |  | 2       
|         |  |                                                                                                             
|Item 1A. |  | Risk Factors                                                                                                 |  | 12      
|         |  |                                                                                                             
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 20      
|         |  |                                                                                                             
|Item 2.  |  | Properties                                                                                                   |  | 20      
|         |  |                                                                                                             
|Item 3.  |  | Legal Proceedings                                                                                            |  | 20      
|         |  |                                                                                                             
|Item 4.  |  | Reserved                                                                                                     |  | 21      
|         |  |                                                                                                             
|         |  | PART II                                                                                                      |  |         
|         |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 22      
|         |  |                                                                                                             
|Item 6.  |  | Selected Financial Data                                                                                      |  | 23      
|         |  |                                                                                                             
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 25      
|         |  |                                                                                                             
|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                                                                                            |  | 53      
|         |  |                                                                                                             
|         |  | PART III                                                                                                     |  |         
|         |  |                                                                                                             
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 54      
|         |  |                                                                                                             
|Item 11. |  | Executive Compensation                                                                                       |  | 57      
|         |  |                                                                                                             
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 62      
|         |  |                                                                                                             
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 62      
|         |  |                                                                                                             
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 65      
|         |  |                                                                                                             
|         |  | PART IV                                                                                                      |  |         
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 66      
|         |  |                                                                                                             
|         |  | Index to Financial Statements                                                                                |  | 72      



i



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NOTE ABOUT 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 during presentations about the Company are forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 (the Act). Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as expects, anticipates, intends,
plans, believes, estimates, hopes, and similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues,
earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management are also forward-looking statements as defined in the Act. Forward-looking statements are based upon
expectations and projections about future events and are subject to assumptions, risks and uncertainties about, among other things, the Company, economic and market factors and the homebuilding industry.

Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to
a number of factors. The principal factors that could cause the Companys actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, worsening in general economic
conditions either nationally or in regions in which the Company operates, worsening in the markets for residential housing, further decline in real estate values resulting in further impairment of the companys real estate assets, volatility in
the banking industry and credit markets, 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 obligations at their maturity, anticipated tax refunds, the timing of receipt of regulatory approvals and the opening of projects and
the availability and cost of land for future growth. These and other risks and uncertainties are more fully described in Item 1A. Risk Factors. 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.



1



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##### 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 72,000 homes. The Company conducts its homebuilding operations through four reportable operating segments (Southern California, Northern California, Arizona and Nevada). For 2009, 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, 2009, on a consolidated basis the Company had revenues from home sales of $253.9 million and delivered 915
homes, which includes $5.6 million of revenue and 17 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, 2009, the Company marketed its homes through 17 sales locations. In 2009, the average sales price for consolidated homes delivered was $277,500. Base sales prices for actively selling projects in
2009, including affordable projects, ranged from $99,000 to $1,200,000.

As of December 31, 2009, the
Company and its consolidated joint ventures owned approximately 9,124 lots and had options to purchase an additional 1,206 lots. 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, 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
(including future land sales) for approximately six to eight years.

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 current cash 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 team.

The Company had total consolidated revenues from operations of $309.2 million, $526.1 million and $1.105 billion for the
years ended December 31, 2009, 2008 and 2007, respectively. Homes closed by the Company, including its joint ventures, were 915, 1,260 and 2,182 for the years ended December 31, 2009, 2008 and 2007, respectively. Including its joint
ventures, the Companys dollar amount of backlog of homes sold but not closed as of December 31, 2009, was $56.5 million, a 30% decrease from the $80.8 million as of December 31, 2008. The cancellation rate of buyers who contracted to
buy a home but did not close escrow was approximately 21% during 2009 and 28% during 2008.

The Company
entered into certain agreements with various affiliates to build and market homes on behalf of the affiliates. For such services, the Company receives fees and may, under certain circumstances, receive additional compensation if certain financial
thresholds are achieved. The Company recorded $34.1 million of revenue on 176 delivered homes for the year ended December 31, 2009.

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 Senior Secured Term Loan (more fully described in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation  Financial Condition and Liquidity), 75/8% Senior Notes, 103/4% Senior Notes, 71/2% Senior Notes (collectively the Senior Notes),
construction notes payable, and land banking transactions. During 2009, the Companys revolving credit facilities were a significant credit source until the facilities were repaid with the proceeds from the Senior Secured Term Loan. At
December 31, 2009, the outstanding principal amount of the Secured Term Loan was $206.0 million, the outstanding principal amount of the 75/8% Senior Notes was $67.2 million, the outstanding principal amount
of the 103/4% Senior Notes was $168.2 million
and the outstanding principal amount of the 71/2%
Senior Notes was $84.7 million.

On June 10, 2009, the
Companys wholly-owned subsidiary, William Lyon Homes, Inc., a California corporation (California Lyon), consummated a cash tender offer (the Tender Offer) to purchase a portion of its outstanding Senior Notes, on the
terms and subject to the conditions set forth in its offer to purchase, as amended. The principal amount of



2



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Senior Notes purchased by California Lyon on settlement of the Tender Offer totaled $53.2 million, including $29.1 million of the 75/8% Senior Notes due 2012, $2.4 million of the 103/4% Senior Notes due 2013, and $21.7 million of the 71/2% Senior Notes due 2014. The aggregate Tender Offer
consideration paid totaled $14.9 million, plus accrued interest. The net gain resulting from the Tender Offer, after closing costs, was $37.0 million.

Also, during 2009, the Company purchased, in privately negotiated transactions, a total of $103.7 million principal amount of its outstanding Senior Notes at a cost of $62.1 million,
plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs was $41.1 million. At December 31, 2009, the Company had fully repaid the outstanding principal amounts under
revolving credit facilities, as well as the two revolving credit facilities the Company used to fund its mortgage operations. 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.

In October 2008, the Company purchased, in privately negotiated transactions, $71.9 million principal amount of its
outstanding Senior Notes at a cost of $16.7 million, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs was $54.0 million.

Beginning in 2006 and continuing into the beginning of 2009, the homebuilding industry has experienced decreased demand for
housing and declining sales prices. These conditions were the result of an erosion of homebuyer confidence which was driven by increases in unemployment, limited availability of mortgage financing due to stress in the mortgage and credit markets,
price instability, increasing foreclosures and increased levels of housing inventory in the market. In certain of the Companys markets, however, the Company has experienced steadying sales absorption rates, a decrease in sales incentives and
an increase in base pricing, while homebuilding costs continue to decrease. In Southern California, net new home orders per average sales location increased to 50.0 during the year ended December 31, 2009 from 30.8 for the same period in 2008.
In Arizona, net new home orders per average sales location increased to 49.3 during the year ended December 31, 2009 from 45.8 for the same period in 2008. In addition, the Companys cancellation rate decreased to 21% in the 2009 period
compared to 28% in the 2008 period, particularly impacted by Southern California of 19% in the 2009 period compared to 30% in the 2008 period and Arizona of 13% in the 2009 period compared to 22% in the 2008 period. In addition, the Company is
experiencing increased homebuilding gross margin percentages of 13.5% in the 2009 period compared to 6.2% in the 2008 period particularly impacted by Southern California of 15.6% in the 2009 period compared to 7.5% in the 2008 period and Northern
California of 13.8% in the 2009 period compared to (2.6)% in the 2008 period.

During 2009, the Company
incurred impairment losses on real estate assets amounting to $45.3 million. The impairments were primarily attributable to lower than anticipated net revenue in certain of its projects due to the effects of the economy on the homebuilding industry
as described previously. At two of the Companys projects, impairment loss was primarily attributable to an increase in interest cost allocated to the project related to the addition of the Senior Secured Term Loan at 14% interest. In addition,
the Company decreased base sales prices and increased certain incentives related to the projects, which is a strategy to improve sales absorption rates. The Company was required to write-down the book value of these real estate assets in accordance
with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement No. 144), now codified as FASB ASC Topic 360, as
defined in Note 5 of Notes to Consolidated Financial Statements.

Beginning in 2008 and into 2009,
in response to the declining demand for housing in the homebuilding industry, management of the Company shifted its strategy to focus on generating positive cash flow, reducing overall debt levels and improving liquidity. Management of the Company
has managed cash flow by reducing staffing to levels to support current operations, reducing inventory levels for projects near completion, identifying land opportunities (finished lots) and acquiring land in stabilizing markets, using available
funds to repurchase senior notes at a discount, and evaluate the timing of reintroducing projects to the marketplace that have been temporarily suspended.

From 2007 through 2009, the Company temporarily suspended the development, sales and marketing activities at certain of its projects. The Company concluded that this strategy was necessary under the
prevailing market conditions at the time and will allow the Company to market the properties at some future time when market conditions may have improved. As markets continue to improve, management continues to evaluate and analyze the market place
to potentially activate temporarily suspended projects in 2010 and beyond.

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.



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Additionally, as a result of tax legislation that was enacted in November
2009, the Company filed for a tax refund of approximately $101.8 million, which was received in March 2010.

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 in four reportable operating segments: Southern California, Northern California, Arizona, and Nevada. Each of the segments 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 segments during the preceding three fiscal years:



|                       |  |                         |         |      |   |         |  |   |          
|---------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | ---------
|                       |  | Total Revenue          
|                       |  | Year Ended December 31,
|                       |  | 2009                    |         | 2008 |   | 2007   
|                       |  | (in thousands)         
|                       |  | (note 1)               
|Consolidated           |  |                         |         |      |   |         |  |   |          
|Southern California(2) |  | $                       | 179,282 |      | $ | 323,446 |  | $ | 780,213  
|Northern California(3) |  |                         | 43,211  |      |   | 95,084  |  |   | 102,432  
|Arizona(4)             |  |                         | 51,215  |      |   | 49,187  |  |   | 134,153  
|Nevada(5)              |  |                         | 35,535  |      |   | 58,361  |  |   | 88,559   
|                       |  |                         |         |      |   |         |  |   |          
|                       |  | $                       | 309,243 |      | $ | 526,078 |  | $ | 1,105,357
|                       |  |                         |         |      |   |         |  |   |          



|(1) | The Company has organized its operations into geographic segments. Each segment has a management team led by a divisional president.
|--- | ------------------------------------------------------------------------------------------------------------------------------------



|(2) | The Southern California Segment consists of operations in Orange, Los Angeles, Riverside, San Bernardino and San Diego counties.
|--- | --------------------------------------------------------------------------------------------------------------------------------



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



|(4) | The Arizona Segment consists of operations in the Phoenix, Arizona metropolitan area.
|--- | -------------------------------------------------------------------------------------



|(5) | The Nevada Segment consists of operations in the Las Vegas, Nevada metropolitan area.
|--- | -------------------------------------------------------------------------------------

For financial information concerning segments, see the Consolidated Financial Statements and Note 3 of
Notes to Consolidated Financial Statements.

LAND ACQUISITION AND DEVELOPMENT

As of December 31, 2009, the Company and its consolidated joint ventures owned approximately 9,124 lots and had options
to purchase an additional 1,206 lots.

The Company estimates that its current inventory of lots owned and
controlled is adequate to supply its homebuilding operations at current operating levels (including future land sales) for approximately six to eight years.

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, for land prices above certain thresholds, 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 long-term strategy consists of the
following elements:



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



4



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##### Table of Contents

| |  |  | 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;
| | - |  | ---------------------------------------------------------------------



| |  |  | Homebuilding operations in the Southwest, particularly in the Companys long established markets of California, Arizona and Nevada; 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.

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 a 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, 2009, the Company and its joint ventures had 17 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 2,737 square feet, and the detached housing ranges from 1,077 to
4,957 square feet.

Due to the Companys product and geographic diversification strategy, the prices of
the Companys homes also vary substantially. During 2009, base sales prices for the Companys attached housing range from approximately $180,000 to $525,000 and base sales prices for detached housing range from approximately $99,000 to
$1,200,000. On a consolidated basis, the average sales price of homes closed for the year ended December 31, 2009 was $277,500.

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 and home construction cycles.

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; instead it contracts
development work by project and where possible by phase size of 8 to 20 home sites. 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 in good standing.



5



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##### 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 operating segments as of December 31, 2009 and only includes projects with lots owned as of December 31, 2009, lots consolidated in accordance with certain accounting
principles as of December 31, 2009 or homes closed for the year ended December 31, 2009.



|                                       |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|-------------------------------------- |  | -------------------- |  | --------------------------------------- |  | --------------------------------------- |  | --------------------------- |  | ----------------------------- |  | ----------------------------------------- |  | ------------------- | ---------------------
|Project (County or City)               |  | Year ofFirstDelivery |  | EstimatedNumber ofHomes atCompletion(1) |  | CumulativeUnits Closedas ofDec 31,
2009 |  | Backlog atDec 31,2009(2)(3) |  | Lots Ownedas ofDec 31,2009(4) |  | Homes Closedfor theYear EndedDec 31, 2009 |  | Sales PriceRange(5)
|                                      
|SOUTHERN CALIFORNIA                   
|San Diego County:                      |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|Pasado, Del Sur                        |  | 2009                 |  | 89                                      |  | 20                                      |  | 0                           |  | 37                            |  | 20                                        |  | $                   | 520,000 - 575,000    
|Altair, Santee                         |  | 2008                 |  | 85                                      |  | 85                                      |  | 0                           |  | 0                             |  | 54                                        |  | $                   | 271,000 - 301,000    
|Carlsbad                               |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|Blossom Grove                          |  | 2010                 |  | 110                                     |  | 0                                       |  | 0                           |  | 32                            |  | 0                                         |  | $                   | 605,000 - 690,000    
|Mirasol at La Costa Greens             |  | 2010                 |  | 71                                      |  | 0                                       |  | 0                           |  | 71                            |  | 0                                         |  | $                   | 636,000 - 771,000    
|Riverside County:                      |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|Corona                                 |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|Parkside                               |  | 2007                 |  | 122                                     |  | 122                                     |  | 0                           |  | 0                             |  | 2                                         |  | $                   | 436,000 - 529,000    
|Serafina,                              |  | 2007                 |  | 314                                     |  | 314                                     |  | 0                           |  | 0                             |  | 60                                        |  | $                   | 200,000 - 280,000    
|Bridle Creek,                          |  | 2003                 |  | 264                                     |  | 264                                     |  | 0                           |  | 0                             |  | 5                                         |  | $                   | 436,000 - 560,000    
|Savannah at Harveston Ranch,Temecula   |  | 2005                 |  | 162                                     |  | 162                                     |  | 0                           |  | 0                             |  | 8                                         |  | $                   | 257,000 - 320,000    
|San Bernardino County:                 |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|Fontana                                |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|Adelina,                               |  | 2008                 |  | 109                                     |  | 59                                      |  | 25                          |  | 50                            |  | 41                                        |  | $                   | 206,000 - 241,000    
|Rosabella                              |  | 2007                 |  | 114                                     |  | 73                                      |  | 10                          |  | 41                            |  | 47                                        |  | $                   | 220,000 - 255,000    
|Rancho Cucamonga                       |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|Amador                                 |  | 2007                 |  | 69                                      |  | 60                                      |  | 4                           |  | 9                             |  | 22                                        |  | $                   | 214,000 - 258,000    
|Amador (Lewis)                         |  | 2010                 |  | 30                                      |  | 0                                       |  | 26                          |  | 30                            |  | 0                                         |  | $                   | 214,000 - 256,000    
|Vintners Grove                        |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|SFD                                    |  | 2007                 |  | 45                                      |  | 38                                      |  | 0                           |  | 7                             |  | 17                                        |  | $                   | 345,000 - 395,000    
|Triplex                                |  | 2007                 |  | 63                                      |  | 54                                      |  | 8                           |  | 9                             |  | 26                                        |  | $                   | 220,000 - 260,000    
|Vintners Grove (Lewis)                |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|SFD                                    |  | 2009                 |  | 33                                      |  | 0                                       |  | 25                          |  | 33                            |  | 0                                         |  | $                   | 356,000 - 408,000    
|Triplex                                |  | 2010                 |  | 15                                      |  | 0                                       |  | 15                          |  | 15                            |  | 0                                         |  | $                   | 217,000 - 256,000    
|Orange County:                         |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|Irvine                                 |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|San Carlos                             |  | 2007                 |  | 60                                      |  | 60                                      |  | 0                           |  | 0                             |  | 12                                        |  | $                   | 310,000 - 475,000    
|San Carlos II                          |  | 2010                 |  | 92                                      |  | 0                                       |  | 0                           |  | 0                             |  | 0                                         |  | $                   | 315,000 - 470,000    
|Ivy                                    |  | 2009                 |  | 135                                     |  | 20                                      |  | 30                          |  | 1                             |  | 20                                        |  | $                   | 379,000 - 457,000    
|Columbus Grove/Columbus Square,Tustin: |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|Cambridge Lane                         |  | 2007                 |  | 156                                     |  | 156                                     |  | 0                           |  | 0                             |  | 31                                        |  | $                   | 116,000 - 475,000    
|Ciara                                  |  | 2007                 |  | 67                                      |  | 67                                      |  | 0                           |  | 0                             |  | 10                                        |  | $                   | 1,000,000 - 1,200,000
|Los Angeles County:                    |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|Arboreta at Rainbird, Glendora         |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|Vintage                                |  | 2008                 |  | 87                                      |  | 53                                      |  | 15                          |  | 34                            |  | 37                                        |  | $                   | 345,000 - 455,000    
|Tradition                              |  | 2008                 |  | 53                                      |  | 53                                      |  | 0                           |  | 0                             |  | 14                                        |  | $                   | 600,000 - 689,000    
|360 South Bay, Hawthorne (6):          |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                      
|The Flats                              |  | 2010                 |  | 188                                     |  | 0                                       |  | 0                           |  | 188                           |  | 0                                         |  | $                   | 375,000 - 520,000    
|The Lofts                              |  | 2011                 |  | 123                                     |  | 0                                       |  | 0                           |  | 123                           |  | 0                                         |  | $                   | 370,000 - 525,000    
|The Rows                               |  | 2011                 |  | 94                                      |  | 0                                       |  | 0                           |  | 94                            |  | 0                                         |  | $                   | 515,000 - 630,000    
|The Courts                             |  | 2010                 |  | 118                                     |  | 0                                       |  | 0                           |  | 118                           |  | 0                                         |  | $                   | 470,000 - 575,000    
|The Gardens                            |  | 2012                 |  | 102                                     |  | 0                                       |  | 0                           |  | 102                           |  | 0                                         |  | $                   | 580,000 - 725,000    



6



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##### Table of Contents

|                                  |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|--------------------------------- |  | -------------------- |  | --------------------------------------- |  | --------------------------------------- |  | --------------------------- |  | ----------------------------- |  | ----------------------------------------- |  | ------------------- | -----------------
|Project (County or City)          |  | Year ofFirstDelivery |  | EstimatedNumber ofHomes atCompletion(1) |  | CumulativeUnits Closedas ofDec
31, 2009 |  | Backlog atDec 31,2009(2)(3) |  | Lots Ownedas ofDec 31,2009(4) |  | Homes Closedfor theYear EndedDec 31, 2009 |  | Sales PriceRange(5)
|Rosedale, Azusa                   |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Gardenia                          |  | 2011                 |  | 147                                     |  | 0                                       |  | 0                           |  | 81                            |  | 0                                         |  | $                   | 455,000 - 550,000
|Sage Court                        |  | 2011                 |  | 176                                     |  | 0                                       |  | 0                           |  | 64                            |  | 0                                         |  | $                   | 420,000 - 515,000
|                                  |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|SOUTHERN CALIFORNIA TOTAL         |  | 3,293                |  | 1,660                                   |  | 158                                     |  | 1,139                       |  | 426                           |  |                                           | 
|                                  |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|                                 
|NORTHERN CALIFORNIA              
|Contra Costa County:              |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Rivergate I & II, Antioch         |  | 2006                 |  | 167                                     |  | 167                                     |  | 0                           |  | 0                             |  | 26                                        |  | $                   | 300,000 - 380,000
|Vista Del Mar, Pittsburgh         |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Villages                          |  | 2007                 |  | 102                                     |  | 50                                      |  | 0                           |  | 52                            |  | 10                                        |  | $                   | 296,000 - 354,000
|Venue                             |  | 2007                 |  | 132                                     |  | 48                                      |  | 0                           |  | 84                            |  | 7                                         |  | $                   | 363,000 - 410,000
|Vineyard                          |  | 2007                 |  | 29                                      |  | 17                                      |  | 3                           |  | 12                            |  | 0                                         |  | $                   | 386,000 - 430,000
|Victory                           |  | 2008                 |  | 25                                      |  | 14                                      |  | 0                           |  | 11                            |  | 1                                         |  | $                   | 680,000 - 745,000
|Placer County:                    |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Whitney Ranch, Rocklin            |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Shady Lane                        |  | 2006                 |  | 96                                      |  | 96                                      |  | 0                           |  | 0                             |  | 27                                        |  | $                   | 330,000 - 350,000
|Twin Oaks                         |  | 2006                 |  | 92                                      |  | 63                                      |  | 3                           |  | 29                            |  | 26                                        |  | $                   | 400,000 - 470,000
|Sacramento County:                |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Big Horn, Elk Grove               |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Plaza Walk                        |  | 2005                 |  | 106                                     |  | 106                                     |  | 0                           |  | 0                             |  | 16                                        |  | $                   | 250,000 - 300,000
|Gallery Walk                      |  | 2005                 |  | 149                                     |  | 148                                     |  | 0                           |  | 1                             |  | 31                                        |  | $                   | 180,000 - 230,000
|Marquis at Maderia                |  | 2010                 |  | 89                                      |  | 0                                       |  | 0                           |  | 89                            |  | 0                                         |  | $                   | 290,000 - 335,000
|San Joaquin County:               |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|The Ranch @ Mossdale Landing      |  | 2010                 |  | 164                                     |  | 0                                       |  | 0                           |  | 164                           |  | 0                                         |  | $                   | 210,000 - 245,000
|Santa Clara County:               |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|9th & Taylor, San Jose            |  | 2010                 |  | 40                                      |  | 0                                       |  | 0                           |  | 36                            |  | 0                                         |  | $                   | 660,000 - 660,000
|                                  |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|NORTHERN CALIFORNIA TOTAL         |  | 1,191                |  | 709                                     |  | 6                                       |  | 478                         |  | 144                           |  |                                           | 
|                                  |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|                                 
|ARIZONA                          
|Maricopa County                   |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Arroyo @ Coldwater Ranch, Peoria  |  | 2009                 |  | 20                                      |  | 8                                       |  | 2                           |  | 12                            |  | 8                                         |  | $                   | 132,000 - 168,000
|Lehi Crossing, Mesa               |  | 2012                 |  | 928                                     |  | 0                                       |  | 0                           |  | 113                           |  | 0                                         |  | $                   | 179,000 - 292,000
|Rancho Mercado, Phoenix           |  | 2013                 |  | 1,826                                   |  | 0                                       |  | 0                           |  | 1,826                         |  | 0                                         |  | $                   | 125,000 - 230,000
|Hastings Property, Queen Creek    |  | 2011                 |  | 631                                     |  | 0                                       |  | 0                           |  | 631                           |  | 0                                         |  | $                   | 183,000 - 382,000
|Circle G at the Church Farm North |  | 2012                 |  | 1,745                                   |  | 0                                       |  | 0                           |  | 1,745                         |  | 0                                         |  | $                   | 111,000 - 400,000
|Lyons Gate, Gilbert:             |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Pride                             |  | 2006                 |  | 650                                     |  | 434                                     |  | 8                           |  | 216                           |  | 95                                        |  | $                   | 134,000 - 162,000
|Savanna                           |  | 2006                 |  | 174                                     |  | 172                                     |  | 2                           |  | 2                             |  | 20                                        |  | $                   | 172,000 - 215,000
|Sahara                            |  | 2006                 |  | 169                                     |  | 166                                     |  | 3                           |  | 3                             |  | 25                                        |  | $                   | 196,000 - 259,000
|Acacia                            |  | 2007                 |  | 365                                     |  | 141                                     |  | 2                           |  | 224                           |  | 66                                        |  | $                   | 160,000 - 216,000
|Future Products                   |  | 2011                 |  | 213                                     |  | 0                                       |  | 0                           |  | 213                           |  | 0                                         |  |                     |                  
|                                  |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|ARIZONA TOTAL                     |  |                      |  | 6,721                                   |  | 921                                     |  | 17                          |  | 4,985                         |  | 214                                       |  |                     |                  
|                                  |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  



7



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##### Table of Contents

|                                 |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|-------------------------------- |  | -------------------- |  | --------------------------------------- |  | --------------------------------------- |  | --------------------------- |  | ----------------------------- |  | ----------------------------------------- |  | ------------------- | -----------------
|Project (County or City)         |  | Year ofFirstDelivery |  | EstimatedNumber ofHomes atCompletion(1) |  | CumulativeUnits Closedas ofDec 31, 2009 |  | Backlog atDec 31,2009(2)(3) |  | Lots Ownedas ofDec
31,2009(4) |  | Homes Closedfor theYear
EndedDec 31, 2009 |  | Sales PriceRange(5)
|                                
|NEVADA                          
|Clark County:                    |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Summerlin, Las Vegas             |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Kingwood Crossing                |  | 2006                 |  | 100                                     |  | 100                                     |  | 0                           |  | 0                             |  | 8                                         |  | $                   | 385,000 - 471,000
|North Las Vegas                  |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|The Cottages                     |  | 2004                 |  | 360                                     |  | 316                                     |  | 0                           |  | 44                            |  | 9                                         |  | $                   | 152,000 - 179,000
|La Tierra                        |  | 2006                 |  | 67                                      |  | 67                                      |  | 0                           |  | 0                             |  | 6                                         |  | $                   | 230,000 - 260,000
|Tierra Este                      |  | 2008                 |  | 8                                       |  | 8                                       |  | 0                           |  | 0                             |  | 2                                         |  | $                   | 275,000 - 305,000
|Carson Ranch, Las Vegas          |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|West Series I                    |  | 2005                 |  | 74                                      |  | 67                                      |  | 0                           |  | 7                             |  | 0                                         |  | $                   | 395,000 - 430,000
|West Series II                   |  | 2005                 |  | 56                                      |  | 53                                      |  | 0                           |  | 3                             |  | 0                                         |  | $                   | 406,000 - 503,000
|East Series I                    |  | 2006                 |  | 116                                     |  | 102                                     |  | 2                           |  | 14                            |  | 31                                        |  | $                   | 265,000 - 300,000
|East Series II                   |  | 2007                 |  | 45                                      |  | 37                                      |  | 1                           |  | 8                             |  | 15                                        |  | $                   | 299,000 - 361,000
|West Park, Las Vegas             |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Villas                           |  | 2006                 |  | 95                                      |  | 91                                      |  | 4                           |  | 4                             |  | 11                                        |  | $                   | 183,000 - 225,000
|Courtyards                       |  | 2006                 |  | 82                                      |  | 79                                      |  | 2                           |  | 3                             |  | 18                                        |  | $                   | 235,000 - 275,000
|Flagstone, Las Vegas             |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Crossings                        |  | 2011                 |  | 77                                      |  | 0                                       |  | 0                           |  | 77                            |  | 0                                         |  | $                   | 229,000 - 264,000
|Commons                          |  | 2011                 |  | 37                                      |  | 0                                       |  | 0                           |  | 37                            |  | 0                                         |  | $                   | 229,000 - 259,000
|Rhapsody, Las Vegas              |  | 2011                 |  | 63                                      |  | 0                                       |  | 0                           |  | 63                            |  | 0                                         |  | $                   | 179,000 - 209,000
|The Fields at Aliente, Las Vegas |  | 2010                 |  | 60                                      |  | 0                                       |  | 0                           |  | 60                            |  | 0                                         |  | $                   | 197,000 - 225,000
|Nye County:                      |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Mountain Falls, Pahrump:         |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|Cascata                          |  | 2005                 |  | 147                                     |  | 137                                     |  | 0                           |  | 10                            |  | 0                                         |  | $                   | 216,000 - 238,000
|Tramonto                         |  | 2005                 |  | 212                                     |  | 174                                     |  | 2                           |  | 38                            |  | 8                                         |  | $                   | 176,000 - 211,000
|Move up Product                  |  | 2011                 |  | 91                                      |  | 0                                       |  | 0                           |  | 91                            |  | 0                                         |  | $                   | 194,000 - 229,000
|Bella Sera                       |  | 2005                 |  | 129                                     |  | 110                                     |  | 0                           |  | 19                            |  | 4                                         |  | $                   | 217,000 - 257,000
|Cascata Ancora                   |  | 2007                 |  | 118                                     |  | 72                                      |  | 2                           |  | 46                            |  | 16                                        |  | $                   | 99,000 - 148,000 
|Entrata                          |  | 2007                 |  | 99                                      |  | 26                                      |  | 0                           |  | 73                            |  | 3                                         |  | $                   | 142,000 - 164,000
|Future Projects                  |  | 2014                 |  | 1,925                                   |  | 0                                       |  | 0                           |  | 1,925                         |  | 0                                         |  |                     | Various          
|                                 |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|NEVADA TOTAL                     |  | 3,961                |  | 1,439                                   |  | 13                                      |  | 2,522                       |  | 131                           |  |                                           | 
|                                 |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  
|GRAND TOTALS                     |  |                      |  | 15,166                                  |  | 4,729                                   |  | 194                         |  | 9,124                         |  | 915                                       |  |                     |                  
|                                 |  |                      |  |                                         |  |                                         |  |                             |  |                               |  |                                           |  |                     |                  



|(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, 2009, 190 represent homes completed or under construction and 4
represent homes not yet under construction.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Lots owned as of December 31, 2009 include lots in backlog at December 31, 2009.
|--- | --------------------------------------------------------------------------------



|(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, 2009. The Company consolidated the purchase price of the lots in
accordance with certain accounting principles, and considers the lots owned at December 31, 2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Construction Services  Description of Projects and Communities Under Development

The following table presents project information relating to each of the Companys projects that it
develops, sells and markets for third parties.



|                                 |  |                      |  |                                      |  |                                         |  |                        |  |                                           |  |                     |                  
|-------------------------------- |  | -------------------- |  | ------------------------------------ |  | --------------------------------------- |  | ---------------------- |  | ----------------------------------------- |  | ------------------- | -----------------
|Project (County or City)         |  | Year ofFirstDelivery |  | EstimatedNumber ofHomes atCompletion |  | CumulativeUnits Closedas ofDec
31, 2009 |  | Backlog atDec 31, 2009 |  | Homes Closedfor theYear EndedDec 31, 2009 |  | Sales PriceRange(5)
|                                
|SOUTHERN CALIFORNIA             
|Construction Management Projects
|San Diego County:                |  |                      |  |                                      |  |                                         |  |                        |  |                                           |  |                     |                  
|ORA Sunset Cove                  |  | 2008                 |  | 47                                   |  | 47                                      |  | 0                      |  | 26                                        |  | $                   | 425,000 - 435,000
|ORA Maybeck                      |  | 2008                 |  | 74                                   |  | 41                                      |  | 31                     |  | 23                                        |  | $                   | 623,000 - 685,000
|Levanto (1)                      |  | 2009                 |  | 90                                   |  | 90                                      |  | 0                      |  | 90                                        |  |                     | N/A              
|Orange County:                   |  |                      |  |                                      |  |                                         |  |                        |  |                                           |  |                     |                  
|ORA Verandas                     |  | 2008                 |  | 57                                   |  | 49                                      |  | 8                      |  | 37                                        |  | $                   | 580,000 - 635,000
|ORA Ainsley Park                 |  | 2010                 |  | 84                                   |  | 0                                       |  | 0                      |  | 0                                         |  | $                   | 500,000 - 590,000
|                                 |  |                      |  |                                      |  |                                         |  |                        |  |                                           |  |                     |                  
|SOUTHERN CALIFORNIA TOTAL        |  | 352                  |  | 227                                  |  | 39                                      |  | 176                    |  |                                           | 
|                                 |  |                      |  |                                      |  |                                         |  |                        |  |                                           |  |                     |                  



|(1) | Represents an apartment complex of 90 units that the Company was contracted to build by an affiliate of the Company. See Note 11 of Notes
to Consolidated Financial Statements for further discussion.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, 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 the internet via email lists and interest lists, as well as its website at
www.lyonhomes.com. In general, the Companys advertising emphasizes each projects strengths, the quality and value of its products and its reputation in the marketplace.

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 to sell its homes. In some cases, outside brokers are also involved in the selling of the Companys homes, particularly in the Arizona and Nevada markets. 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 21% during 2009. Cancellation rates are subject to a variety of factors beyond the Companys control such as the downturn in the homebuilding industry and current
economic conditions. The Companys and its joint ventures inventory of completed and unsold homes was 39 homes as of December 31, 2009.



9



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##### Table of Contents

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, 2010, unless amended or 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 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 Mortgage

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.

In March 2009, the Company entered into a joint venture operating agreement with a
lending institution, in which the Company would receive approximately 50% of the earnings of the joint venture. The joint venture was created to service the Companys homebuyers by having access to a larger mortgage portfolio provided by the
lending institution. The lending institution 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



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land with entitlements, the Company believes that the moratoriums would adversely affect the Company only if they arose from unforeseen health, safety and welfare issues such as insufficient
water or sewage facilities. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. However, these are normally locked-in when the Company receives entitlements.

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.

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.

Competition

The homebuilding industry is highly competitive, particularly in the low and medium-price range where the Company currently
concentrates its activities. 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.

Corporate Organization and Personnel

The Company has organized its operations into four geographic divisions  Southern California, Northern California,
Arizona and Nevada. Each division has a management team led by a division president. Each of the Companys operating divisions has responsibility for the Companys homebuilding and development operations within the geographical boundaries
of that division.

The Companys executive officers and divisional presidents average more than 20 years
of experience in the homebuilding and development industries within California or the Southwestern United States. 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, 2009, the Company employed
195 full-time and 4 part-time employees, including corporate staff, supervisory personnel of construction projects, maintenance crews to service completed projects, as well as persons engaged in administrative, finance and accounting, engineering,
land acquisition, 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, 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 any 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.



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|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.

HOMEBUILDING OPERATIONS

Adverse changes in general economic conditions could reduce the demand for homes and, as a result, could negatively impact the
Companys results of operations.

The homebuilding industry continues to experience uncertainty and
reduced demand for new homes in certain markets, which negatively impacted the Companys financial and operating results during the year ending December 31, 2009. Increased instability in the credit markets has contributed to the decline
in demand for new housing. The conditions experienced during 2009 include, among other things: the existence of a national recession; increases in unemployment levels; continuing concerns over the effects of asset valuations on the banking system
and credit markets; reduced availability of mortgage loan financing; reduced consumer confidence; the absence of home price stability; and continued declines in the value of new homes in certain markets.

If the downturn in the homebuilding and mortgage lending industries continues or intensifies, or if the national economy
weakens further and the recession continues or intensifies, the Company could continue to experience declines in the market value of the Companys inventory and demand for the Companys homes, which could have a significant negative impact
on the Companys gross margins and financial and operating results. Additionally, if energy costs should increase, demand for the Companys homes could be adversely impacted, and the cost of building homes may increase, both of which could
have a significant negative impact on the Companys results of operations.

Revenues and margins may continue to
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. An important segment of the Companys 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.

From 2006 and into 2009, the homebuilding industry experienced continued decreased demand for housing, which has resulted in a steady decline in new home orders, home closings, and average sales prices
for the Company. The Company has reduced sales prices and offered greater incentives to buyers to compete for sales. However, in certain markets, home pricing is stabilizing, incentives are being reduced and gross margins are increasing partially
due to decreased construction costs. If the decreased demand for housing continues, the Company may need to continue the trend of reducing sales prices to meet competitive and market pressures.

Disruptions in the financial markets could adversely affect demand for the Companys products or access to capital.

The homebuilding industry can be greatly affected by macro economic factors, including changes in national, regional, and
local economic conditions, as well as potential homebuyers perceptions of such economic factors. These factors, including employment levels, income, prices, and credit availability and interest rates affecting homeowners, can adversely affect
the residential real estate market. As discussed in this and prior reports, the residential real estate market has been particularly challenging over the last several quarters. The recent disruptions in the overall economy and, in particular, the
credit and financial markets, have further deteriorated this environment and could further reduce consumer income, liquidity, credit and confidence in the economy, and result in further reductions in new and existing home sales. Softness or
deterioration of the credit markets or the residential real estate market could be severely harmful to the Companys financial position and results of operations and could adversely affect the Companys liquidity or its ability to comply
with the covenants under its indentures and credit facilities. There can be no assurances that recent or future government responses to the disruptions in the financial markets will restore consumer confidence, stabilize such markets or increase
liquidity and the availability of credit to consumers and businesses.



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

The Company is highly leveraged and, subject to
restrictions, the Company may incur substantial additional indebtedness. The Companys high level of indebtedness could have detrimental 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 secured term loan,
senior notes and other indebtedness, which will reduce the funds available for other purposes;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company has 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | substantially all of the Companys actively selling projects are pledged as security for the Companys senior secured term loan and a
default on the 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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, support operations, and meet other obligations. If the Company does not have the resources to meet these and other obligations, 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 may restrict the Company from pursuing any
of these alternatives.

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 as a result of declining customer credit quality, tightening of mortgage loan underwriting standards, or other factors. Most buyers finance their home purchases through third-party lenders providing
mortgage financing. Over the last several months, many third-party lenders have significantly increased underwriting standards, and many subprime and other alternate mortgage products are no longer available in the marketplace in spite of a decrease
in mortgage rates. If these trends continue and mortgage loans continue to be difficult to obtain, the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes will be adversely affected, which will
adversely affect the Companys results of operations through reduced home sales revenue, gross margin and cash flow.

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 U.S. generally accepted accounting principles, and some of those write-downs could be
material.



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In 2009, the Company incurred impairment losses on real estate assets in the
amount of $45.3 million. The impairments were primarily attributable to slower than anticipated home sales and lower than anticipated net revenue in the impaired projects. At two of the Companys projects, impairment loss was primarily
attributable to an increase in interest cost allocated to the project related to the addition of the Senior Secured Term Loan at 14% interest. In addition, the Company decreased base sales prices and increased certain incentives related to the
projects, which is a strategy to improve sales absorption rates. The Company was required to write-down the book value of certain real estate assets in accordance with FASB ASC 360, as defined in Note 5 of Notes to Consolidated Financial
Statements. The impairment losses have a material adverse effect on the Companys financial position. A continued slump in the housing market could result in additional writedowns. Any additional material write-downs of assets could have
a material adverse effect on the Companys financial condition and earnings.

Increases in the Companys
cancellation rate could have a negative impact on the Companys home sales revenue and home building gross margins.

During the years ended December 31, 2009, 2008 and 2007, the Companys cancellation rates were 21%, 28% and 33%, respectively. which can negatively impact the number of closed homes, net new
home orders, home sales revenue and the Companys results of operations, as well as the number of homes in backlog. Home order cancellations can result from a number of factors, including declines, and/or slow appreciation, in the market value
of homes, increases in the supply of homes available to be purchased, increased competition, higher mortgage interest rates, homebuyers inability to sell their existing homes, homebuyers inability to obtain suitable financing, including
providing sufficient down payments, and adverse changes in economic conditions. High levels of home order cancellations would have a negative impact on the Companys home sales revenue and financial and operating results.

The Company may be unable to maintain compliance with the financial covenants contained in its Senior Secured Term Loan.

The Companys Senior Secured Term Loan imposes restrictions on operations, limits the amount of borrowings under its
other sources, and requires the Company to comply with various financial covenants. The financial covenants include a minimum net worth requirement and certain asset loan-to-value ratios. In addition, the Company pledged a significant portion of its
cash to the lender.

Certain of these financial ratios could be negatively impacted by declining market
conditions, reduced homebuilding gross margins, impairment losses on real estate assets and losses realized on the bulk sales of land. (See Item 7, Managements Discussion and Analysis of Financial Condition, Financial Condition and
Liquidity, Senior Secured Term Loan for further discussion).

There can be no assurance that the Company
will remain in compliance with the financial covenants contained in the Senior Secured Term Loan if market conditions decline. If the Company is unable to comply with any one or more of these financial covenants, and is unable to obtain a waiver for
the noncompliance, the Company could be notified of default incurring additional borrowings. In addition, the Companys obligations to repay indebtedness outstanding under the Senior Secured Term Loan could be accelerated in full. Any of these
events could materially impact the Companys liquidity and ability to conduct its operations.

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. The Companys current financial position may make it more difficult for the Company to obtain capital for development projects, particularly if the Company has difficulty meeting
its current financial ratio covenants. 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.

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.



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If land is not available at reasonable prices, the Companys homes sales revenue and
results of operations could be negatively impacted and/or the Company could be required to scale back the Companys operations in a given market.

The Companys operations depend on the Companys ability to obtain land for the development of the Companys residential communities at reasonable prices and with terms that meet the
Companys underwriting criteria. The Companys ability to obtain land for new residential communities may be adversely affected by changes in the general availability of land, the willingness of land sellers to sell land at reasonable
prices given the deterioration in market conditions, competition for available land, availability of financing to acquire land, zoning, regulations that limit housing density, and other market conditions. If the supply of land appropriate for
development of residential communities continues to be limited because of these factors, or for any other reason, the number of homes that the Companys homebuilding subsidiaries build and sell may continue to decline. Additionally, the ability
of the Company to open new projects could be impacted if the Company elects not to purchase lots under option contracts. To the extent that the Company is unable to purchase land timely or enter into new contracts for the purchase of land at
reasonable prices, due to the lag time between the time the Company acquires land and the time the Company begins selling homes, the Companys home sales revenue and results of operations could be negatively impacted and/or the Company could be
required to scale back the Companys operations in a given market.

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 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 four geographic regions: Southern California, Northern California, Arizona and Nevada. Because the Companys operations are concentrated in these
geographic areas, the economic downturn in these markets has caused housing prices and sales to decline, which has caused 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, homebuying customers,
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.



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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;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | inventory impairment charges due to market impact on sales prices;
| | - |  | ------------------------------------------------------------------



| |  |  | 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.

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 divisional markets. In particular, the Company is dependent upon the services of General William Lyon, Chairman of the Board and Chief Executive Officer, and William H. Lyon, President and Chief Operating Officer, as well as the
services of the division presidents and division management teams and personnel in the corporate office. 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.



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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.

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.

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 potential 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 for the Companys operations 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 the Companys business, financial condition and results of operations from such increased costs or from liability for significant uninsurable or underinsured claims.

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 some 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.



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

The Companys Senior Secured Term Loan and construction loans are secured by
liens on the real estate under development that is financed by those 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
| | - |  | -----------------------------------------------------------------------------



| |  |  | 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 and the Companys secured term loan impose significant operating and financial restrictions, which may prevent the Company from capitalizing on business
opportunities and taking some corporate actions.

The indentures for the senior notes and the credit
agreement governing the Companys secured term loan 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;
| | - |  | ------------



18



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##### Table of Contents

| |  |  | 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 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.

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.

CONSTRUCTION SERVICES

Supply and labor shortages and other risks could increase costs and delay completion.

Construction services operations could be adversely affected by fluctuating prices and limited supplies of building materials
as well as the cost and availability of trades personnel. These prices and supplies may be adversely affected by natural disasters and adverse weather conditions, which could cause increased costs and delays in construction that could have an
adverse effect upon the Companys construction services operations.

The Company is subject to changes in the demand
for construction projects.

Individual markets can be sensitive to overall capital spending trends in the
economy, financing and capital availability for real estate and competitive pressures on the availability and pricing of construction projects. These factors can result in a reduction in the supply of suitable projects, increased competition and
reduced margins on construction contracts.

The timing and funding of contracts and other factors could lead to
unpredictable operating results.

Construction services operations are also subject to other risks and
uncertainties, including the timing of new contracts and the funding of such awards; the length of time over which construction contracts are to be performed; cancellations of, or changes in the scope of, existing contracts; and the ability to meet
performance or schedule guarantees and cost overruns.



19



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##### Table of Contents

REGULATORY

The Company may not be able to benefit from net operating loss (NOL) carryforwards.

At December 31, 2009, the Company had gross federal and state net operating loss carry forwards totaling approximately $39.2 million and $329.8 million, respectively. Federal
net operating loss carry forwards will expire in 2028; state net operating loss carry forwards begin to expire in 2013. The Company will only receive tax benefits for the NOL carry forwards if there is future taxable income before the applicable NOL
expiration period. The Company has fully reserved against all of its deferred tax assets, including the NOL carry forward that was carried on the Companys financial statements, due to the possibility that the Company may not have taxable
income. However, these deferred tax assets will be available to the Company if there is sufficient future taxable income.



|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

None.



|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.



|Item 3. | Legal Proceedings
|------- | -----------------

Litigation Arising from General Lyons Tender Offer

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 was subsequently 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 then directors of the Company as defendants. These complaints allege, among other things, that the defendants had 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 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. A special committee of the Companys Board of Directors 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.



20



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##### Table of Contents

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 then 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 pending final resolution of all matters in the Delaware Action.

On April 23, 2006, the 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, plaintiff in the California Action appealed the fee award in the Consolidated Delaware Action to the Supreme Court of the State of Delaware. Thereafter, the Delaware Supreme Court remanded the matter to the Chancery Court for
further proceedings and, on April 2, 2009, the Chancery Court issued its decision on remand denying the fee award sought by the California plaintiff. On April 30, 2009, the California plaintiff again appealed the fee award to the Delaware
Supreme Court. On January 14, 2010, the Delaware Supreme court affirmed the order of the Chancery Court.

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. | Reserved
|------- | --------



21



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##### 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 8 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. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition and Liquidity and Note 8 of Notes to Consolidated Financial Statements.



22



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##### 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, 2009 and 2008 and
for the years ended December 31, 2009, 2008 and 2007 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, 2007, 2006 and 2005 and for the years ended December 31, 2006 and 2005, has 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, |         
|                                                                    |  | 2009                                      |          |   | 2008 |   |           | 2007 |  |   | 2006       |   |  | 2005 |           
|                                                                    |  | (dollars in thousands)                    |         
|                                                                    |  | (note 8)                                  |         
|Statement of Operations Data:                                       |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|Operating revenue                                                   |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|Home sales                                                          |  | $                                         | 253,874  |   |      | $ | 468,452   |      |  | $ | 1,002,549  |   |  | $    | 1,478,694  |   |  | $ | 1,745,067  |  
|Lots, land and other sales(1)                                       |  |                                           | 21,220   |   |      |   | 39,512    |      |  |   | 102,808    |   |  |      | 13,527     |   |  |   | 111,316    |  
|Construction services(2)                                            |  |                                           | 34,149   |   |      |   | 18,114    |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                                                    |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|                                                                    |  |                                           | 309,243  |   |      |   | 526,078   |      |  |   | 1,105,357  |   |  |      | 1,492,221  |   |  |   | 1,856,383  |  
|                                                                    |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|Operating costs                                                     |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|Cost of saleshomes                                                 |  |                                           | (219,486 | ) |      |   | (439,276  | )    |  |   | (873,228   | ) |  |      | (1,160,614 | ) |  |   | (1,307,027 | )
|Cost of saleslots, land and other(1)                               |  |                                           | (131,640 | ) |      |   | (47,599   | )    |  |   | (205,603   | ) |  |      | (16,524    | ) |  |   | (44,774    | )
|Impairment loss on real estate assets(3)                            |  |                                           | (45,269  | ) |      |   | (135,311  | )    |  |   | (231,120   | ) |  |      | (39,895    | ) |  |   | (4,600     | )
|Impairment loss on goodwill(4)                                      |  |                                           |         |   |      |   | (5,896    | )    |  |   |           |   |  |      |           |   |  |   |           |  
|Construction services(2)                                            |  |                                           | (28,486  | ) |      |   | (15,431   | )    |  |   |           |   |  |      |           |   |  |   |           |  
|Sales and marketing                                                 |  |                                           | (17,636  | ) |      |   | (40,441   | )    |  |   | (66,703    | ) |  |      | (72,349    | ) |  |   | (59,422    | )
|General and administrative                                          |  |                                           | (21,027  | ) |      |   | (27,645   | )    |  |   | (37,472    | ) |  |      | (61,390    | ) |  |   | (90,045    | )
|Other                                                               |  |                                           | (6,580   | ) |      |   | (4,461    | )    |  |   | (903       | ) |  |      | (6,502     | ) |  |   | (2,450     | )
|                                                                    |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|                                                                    |  |                                           | (470,124 | ) |      |   | (716,060  | )    |  |   | (1,415,029 | ) |  |      | (1,357,274 | ) |  |   | (1,508,318 | )
|                                                                    |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|Equity in (loss) income of unconsolidated joint ventures            |  |                                           | (420     | ) |      |   | (3,877    | )    |  |   | 304        |   |  |      | 3,242      |   |  |   | 4,301      |  
|Operating (loss) income                                             |  |                                           | (161,301 | ) |      |   | (193,859  | )    |  |   | (309,368   | ) |  |      | 138,189    |   |  |   | 352,366    |  
|Gain on retirement of debt(5)                                       |  |                                           | 78,144   |   |      |   | 54,044    |      |  |   |           |   |  |      |           |   |  |   |           |  
|Interest expense, net of amounts capitalized(6)                     |  |                                           | (35,902  | ) |      |   | (24,440   | )    |  |   |           |   |  |      |           |   |  |   |           |  
|Financial advisory expenses                                         |  |                                           |         |   |      |   |          |      |  |   |           |   |  |      | (3,165     | ) |  |   | (2,191     | )
|Other (expense) income, net                                         |  |                                           | (3,802   | ) |      |   | 579       |      |  |   | 3,744      |   |  |      | 5,599      |   |  |   | 2,176      |  
|                                                                    |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|(Loss) income before benefit (provision) for income taxes           |  |                                           | (122,861 | ) |      |   | (163,676  | )    |  |   | (305,624   | ) |  |      | 140,623    |   |  |   | 352,351    |  
|Benefit(provision) for income taxes                                 |  |                                           | 101,908  |   |      |   | 41,592    |      |  |   | (32,658    | ) |  |      | (48,931    | ) |  |   | (124,149   | )
|                                                                    |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|Consolidated net (loss) income                                      |  |                                           | (20,953  | ) |      |   | (122,084  | )    |  |   | (338,282   | ) |  |      | 91,692     |   |  |   | 228,202    |  
|Less: net loss (income)  noncontrolling interest                   |  |                                           | 428      |   |      |   | 10,446    |      |  |   | (11,126    | ) |  |      | (16,914    | ) |  |   | (37,571    | )
|                                                                    |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net(loss) income                                                    |  | $                                         | (20,525  | ) |      | $ | (111,638  | )    |  | $ | (349,408   | ) |  | $    | 74,778     |   |  | $ | 190,631    |  
|                                                                    |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|Balance Sheet Data:                                                 |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|Cash and cash equivalents                                           |  | $                                         | 117,587  |   |      | $ | 67,017    |      |  | $ | 73,197     |   |  | $    | 38,732     |   |  | $ | 52,369     |  
|Real estate inventories                                             |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|Owned(3)                                                            |  |                                           | 523,336  |   |      |   | 754,489   |      |  |   | 1,061,660  |   |  |      | 1,431,753  |   |  |   | 1,303,476  |  
|Not owned                                                           |  |                                           | 55,270   |   |      |   | 107,763   |      |  |   | 144,265    |   |  |      | 200,667    |   |  |   | 115,772    |  
|Total assets                                                        |  |                                           | 860,099  |   |      |   | 1,044,843 |      |  |   | 1,375,328  |   |  |      | 1,878,595  |   |  |   | 1,691,002  |  
|Total debt                                                          |  |                                           | 590,290  |   |      |   | 670,905   |      |  |   | 814,485    |   |  |      | 851,314    |   |  |   | 672,536    |  
|Equity                                                              |  |                                           | 158,199  |   |      |   | 241,541   |      |  |   | 338,772    |   |  |      | 735,254    |   |  |   | 770,072    |  
|Operating Data (including consolidated joint ventures) (unaudited): |  |                                           |          |   |      |   |           |      |  |   |            |   |  |      |            |   |  |   |            |  
|Number of net new home orders                                       |  |                                           | 869      |   |      |   | 1,221     |      |  |   | 1,855      |   |  |      | 2,202      |   |  |   | 3,321      |  
|Number of homes closed                                              |  |                                           | 915      |   |      |   | 1,260     |      |  |   | 2,182      |   |  |      | 2,887      |   |  |   | 3,196      |  
|Average sales price of homes closed                                 |  | $                                         | 278      |   |      | $ | 372       |      |  | $ | 460        |   |  | $    | 512        |   |  | $ | 546        |  
|Cancellation rates                                                  |  |                                           | 21       | % |      |   | 28        | %    |  |   | 33         | % |  |      | 33         | % |  |   | 16         | %
|Backlog at end of period, number of homes(7)                        |  |                                           | 194      |   |      |   | 240       |      |  |   | 279        |   |  |      | 606        |   |  |   | 1,291      |  
|Backlog at end of period, aggregate sales value(7)                  |  | $                                         | 56,472   |   |      | $ | 80,750    |      |  | $ | 107,893    |   |  | $    | 295,505    |   |  | $ | 691,627    |  



|(1) | On December 24, 2009, the Company consummated the sale of certain real property (comprising approximately 165 acres) in San Bernardino County,
California; San Diego County California; Clark County, Nevada; and Maricopa County, Arizona, for an aggregate sales price of $13.6 million. The book value of these properties on the closing date as reflected on the consolidated balance sheet of the
Company and its subsidiaries was approximately $84.2 million. The Company entered into these transactions to generate cash flow, to reduce overall debt and to re-invest the cash by purchasing land in certain of its improving markets. The best
economic value to the Company of these lots was to sell them in their current condition as opposed to holding the lots and eventually building and selling homes. The Company continues to evaluate land values to determine whether to hold for
development or to sell at current prices.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



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##### Table of Contents

On December 26, 2007 and January 7, 2008, the Company entered into
ten separate agreements with various affiliates of one of its equity partners (the Equity Partner Agreements). Pursuant to the Equity Partner Agreements, the Company agreed to sell to the equity partner affiliates 604 residential lots
and 5 model homes in 10 communities in Orange County, San Diego County and Ventura County, California for an aggregate sales price of $90.6 million in cash. The sale of 404 of the residential lots and the 5 model homes closed on December 27,
2007 (for an aggregate consideration of approximately $65.9 million) and the remainder of the residential lots closed on January 9, 2008. Prior to the sale, the collective net book value of these lots (as reflected on the Companys
financial statements) was approximately $210.7 million, resulting in a total loss on the sales transactions of $120.1. The loss of $40.3 million related to the portion of the land sales which closed in January 2008 has been reflected in the
Consolidated Statement of Operations as Impairment Loss on Real Estate Assets for the year ended December 31, 2007.

On December 27, 2007, the Company sold certain land in San Diego County, California for $12.0 million in cash to a limited liability corporation owned indirectly by Frank T. Suryan, Jr. as Trustee of
the Suryan Family Trust. Mr. Suryan is Chairman and Chief Executive Officer of Lyon Capital Ventures, a company wholly owned by Frank T. Suryan, Jr., General William Lyon, Chairman and Chief Executive Officer of the Company, and two trusts
whose sole beneficiary is William H. Lyon, President of the Company. The Company received a report from a third-party valuation and financial advisory services firm as to the reasonableness of the sales price in the transaction. Further, the
transaction was unanimously approved by all disinterested members of the Board of Directors. Prior to the sale, the net book value of this land (as reflected on the Companys financial statements) was approximately $18.7 million, resulting in a
loss on the transaction of $6.7 million.



|(2) | The Company accounts for construction management agreements using the Percentage of Completion Method in accordance with FASB ASC Topic 605
Revenue Recognition. Under ASC 605, the Company records revenues and expenses as work on a contract progresses, and based on the percentage of costs incurred to date compared to the total estimated costs of the contract. Based on the
provisions of ASC 605, the Company has recorded construction services revenues and expenses of $34.1 million and $28.5 million, respectively for the year ended December 31, 2009 and $18.1 million and $15.4 million, respectively, for the year
ended December 31, 2008, in the accompanying consolidated statement of operations. The Company entered into construction management agreements to build and market homes in 5 separate communities. For such services, the Company will receive fees
(generally 5 percent of the sales price, as defined) and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The results of operations for the years ended December 31, 2009, 2008, 2007, 2006 and 2005, include non-cash charges of $45.3 million, $135.3
million, $231.1 million, $39.9 million and $4.6 million to record impairment losses on real estate assets held by the Company at certain of its homebuilding projects. The impairments were primarily attributable to slower than anticipated home
sales and lower than anticipated net revenue. At two of the Companys projects at the end of 2009, impairment loss was primarily attributable to an increase in interest cost allocated to the project related to the addition of the Senior Secured
Term Loan at 14% interest. In addition, the Company decreased base sales prices and increased certain incentives related to the projects, which is a strategy to improve sales absorption rates. 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 charges are reflected as impairment loss on real
estate assets in the accompanying consolidated statements of operations. The Company accounts for its real estate inventories under FASB ASC Topic 360, Property, Plant and Equipment,which is described more fully below in the section entitled
Impairment on Real Estate Inventories.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | 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 FASB ASC Topic 350, IntangiblesGoodwill and Other.The Company reviewed goodwill for impairment on an annual basis or when indicators of impairment exist. Evaluating goodwill for impairment involves the determination of the
fair value of the Companys reporting units in which the Company has recorded goodwill. A reporting unit is a component of an operating segment for which discrete financial information is available and reviewed by the Companys management
on a regular basis. Inherent in the determination of fair value are judgments and assumptions, including the interpretation of current economic conditions and market valuations. Due to deterioration in market conditions, the Company recorded an
impairment charge on goodwill of $5.9 million during the year ended December 31, 2008. The Company did not incur impairment charges on goodwill during the years ended December 31, 2009, 2007, 2006 and 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | On June 10, 2009, the Companys wholly-owned subsidiary, William Lyon Homes, Inc., a California corporation (California Lyon),
consummated a cash tender offer (the Tender Offer) to purchase a portion of its outstanding Senior Notes, on the terms and subject to the conditions set forth in its offer to purchase, as amended. The principal amount of Senior Notes
purchased by California Lyon on settlement of the Tender Offer totaled $53.2 million, including $29.1 million of the 75/8% Senior Notes due 2012, $2.4 million of the 103/4% Senior Notes due 2013, and $21.7 million of the 71/2% Senior Notes due 2014. The aggregate Tender Offer
consideration paid totaled $14.9 million, plus accrued interest. The net gain resulting from the Tender Offer, after closing costs, was $37.0 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Also, during 2009, the Company purchased, in privately negotiated transactions, a total of $103.7 million principal amount of
its outstanding Senior Notes at a cost of $61.2 million, plus accrued interest. The net gain resulting from the purchases, after giving effect to amortization of related deferred loan costs was $41.1 million.

In October 2008, the Company purchased, in privately negotiated transactions, $71.9 million principal amount of its
outstanding Senior Notes at a cost of $16.7 million, plus accrued interest. The net gain resulting from the purchases, after giving effect to amortization of related deferred loan costs was $54.0 million.



|(6) | During the years ended December 31, 2009 and 2008, the Company reported interest expense, due to a decrease in real estate assets which qualify
for interest capitalization during the 2009 and 2008 periods.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | 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, 2009, 190
represent homes completed or under construction and 4 represent homes not yet under construction. Backlog as of all dates is unaudited.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | The FASB issued guidance now codified as FASB ASC Topic 810, Consolidation, which addresses the consolidation of variable interest entities
(VIEs). Under this guidance, 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. Accordingly, the
assets, liabilities and operations of these joint ventures have been consolidated with the Companys financial statements for the periods presented. The adoption of this guidance has not affected the Companys consolidated net income.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### 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 72,000 homes.
The Company conducts its homebuilding operations through four reportable operating segments: Southern California, Northern California, Arizona and Nevada. For the year ended December 31, 2009, on a consolidated basis the Company had revenues
from home sales of $253.9 million and delivered 915 homes, which includes $5.6 million of revenue and 17 delivered homes from consolidated 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. 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, 2009 and 2008. Because the Company already recognizes its proportionate share of joint venture earnings and
losses under the equity method of accounting, the adoption of the accounting for variable interest entities 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 evaluates
homebuilding assets for impairments when indicators of potential impairments are present. Indicators of potential impairment include but are not limited to a decrease in housing market values and sales absorption rates. Given the current market
conditions in the homebuilding industry, the Company evaluates all homebuilding assets for impairments each quarter. Comparing the 2009 period to the 2008 period, homebuilding revenues decreased 46% to $253.9 million in the 2009 period from $468.5
million in the 2008 period, the average sales price for homes closed decreased 25% to $277,500 in the 2009 period from $371,800 in the 2008 period and net new home orders decreased 29% to 869 in the 2009 period from 1,221 in the 2008 period. During
2009, the Company recorded impairment losses on real estate assets of $45.3 million. If the Company continues to experience reduced absorption rates and reduced sales prices, the potential for additional inventory impairment will increase.

Results of Operations

Beginning in 2006 and continuing into the beginning of 2009, the homebuilding industry experienced decreased demand for housing and declining sales prices. These conditions were the result of an erosion
of homebuyer confidence which was driven by increases in unemployment, limited availability of mortgage financing due to stress in the mortgage and credit markets, price instability, increasing foreclosures and increased levels of housing inventory
in the market. In certain of the Companys markets, however, the Company has experienced steadying sales absorption rates, a decrease in sales incentives and an increase in base pricing, while homebuilding costs continue to decrease. In
Southern California, net new home orders per average sales location increased to 50.0 during the year ended December 31, 2009 from 30.8 for the same period in 2008. In Arizona, net new home orders per average sales location increased to 49.3
during the year ended December 31, 2009 from 45.8 for the same period in 2008. In addition, the Companys cancellation rate decreased to 21% in the 2009 period compared to 28% in the 2008 period, particularly impacted by Southern
California of 19% in the 2009 period compared to 30% in the 2008 period and Arizona of 13% in the 2009 period compared to 22% in the 2008 period. In addition, the Company experienced increased homebuilding gross margin percentages of 13.5% in the
2009 period compared to 6.2% in the 2008 period particularly impacted by Southern California gross margins of 15.6% in the 2009 period compared to 7.5% in the 2008 period and Northern California gross margins of 13.8% in the 2009 period compared to
(2.6)% in the 2008 period. On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was enacted into law, which extended and expanded the current homebuyer federal tax credit until April 30, 2010. While the ultimate impact
of this legislation is not yet determinable, the Company believes that it has had a modest stimulative impact on the demand for new housing in its markets. It is possible that when this tax credit expires, it could have a negative impact on the
demand for new housing.

Comparisons of Years Ended December 31, 2009 and 2008

On a combined basis, the number of net new home orders for the year ended December 31, 2009 decreased 29% to 869 homes
from 1,221 homes for the year ended December 31, 2008. The number of homes closed on a combined basis for the year ended December 31, 2009 decreased 27% to 915 homes from 1,260 homes for the year ended December 31, 2008. The



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##### Table of Contents

cancellation rate of buyers who contracted to buy a home but did not close escrow at the Companys projects was approximately 21% during 2009 and 28% during 2008. The inventory of completed
and unsold homes was 39 homes as of December 31, 2009, compared to 80 homes as of December 31, 2008.

On a combined basis, the backlog of homes sold but not closed as of December 31, 2009 was 194 homes, down 19% from 240 homes as of December 31, 2008. 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, 2009 was $56.5 million, down 30% from $80.8 million as of December 31, 2008.

The Companys average number of sales locations decreased for the year ended December 31, 2009 to 25, down 43% from 44 for the year ended December 31, 2008. In
addition, the Company temporarily suspended the development of certain projects, which will be re-opened when management believes economic conditions stabilize. The Companys number of new home orders per average sales location increased from
27.8 for the year ended December 31, 2008 to 34.8 for the year ended December 31, 2009.



|                              |  |                        |   |  |                     |   |  |        |    |  |     |   
|----------------------------- |  | ---------------------- | - |  | ------------------- | - |  | ------ | -- |  | --- | --
|                              |  | Year EndedDecember 31, |   |  | Increase (Decrease) |  
|                              |  | 2009                   |   |  | 2008                |   |  | Amount |    |  | %   |   
|Number of Net New Home Orders |  |                        |   |  |                     |   |  |        |    |  |     |   
|Southern California           |  | 450                    |   |  | 586                 |   |  | (136   | )  |  | (23 | )%
|Northern California           |  | 102                    |   |  | 238                 |   |  | (136   | )  |  | (57 | )%
|Arizona                       |  | 197                    |   |  | 183                 |   |  | 14     |    |  | 8   | % 
|Nevada                        |  | 120                    |   |  | 214                 |   |  | (94    | )  |  | (44 | )%
|                              |  |                        |   |  |                     |   |  |        |    |  |     |   
|Total                         |  | 869                    |   |  | 1,221               |   |  | (352   | )  |  | (29 | )%
|                              |  |                        |   |  |                     |   |  |        |    |  |     |   
|Cancellation Rate             |  | 21                     | % |  | 28                  | % |  | (7     | )% |  |     |   
|                              |  |                        |   |  |                     |   |  |        |    |  |     |   

Three of the Companys homebuilding segments experienced declines in net new
home orders during the year ended December 31, 2009. The decrease in new home orders during the 2009 period in these three segments was attributable to a decrease in the number of sales locations. However, the Companys Arizona segment
experienced a slight increase in new home orders during this same period. This is primarily due to (i) a decrease in the cancellation rate in Arizona to 13% in 2009 from 22% in 2008 and (ii) due to the federal income tax credit for first
time home buyers.

Cancellation rates during the year ended December 31, 2009 decreased to 21% in the
2009 period from 28% during the 2008 period. The decline resulted from a decrease in the cancellation rate in three of the Companys homebuilding segments. In Southern California to 19% in the 2009 period from 30% in the 2008 period, in
Northern California to 28% in the 2009 period from 29% in the 2008 period, in Arizona to 13% in the 2009 period from 22% in the 2008 period and an increase in Nevada to 30% in the 2009 period from 28% in the 2008 period. The decrease in cancellation
rates, period over period, could result in continued future stabilization in certain of the homebuilding markets in which the Company operates.



|                                  |  |                        |  |                     |  |        |   |  |     |   
|--------------------------------- |  | ---------------------- |  | ------------------- |  | ------ | - |  | --- | --
|                                  |  | Year EndedDecember 31, |  | Increase (Decrease) | 
|                                  |  | 2009                   |  | 2008                |  | Amount |   |  | %   |   
|Average Number of Sales Locations |  |                        |  |                     |  |        |   |  |     |   
|Southern California               |  | 9                      |  | 19                  |  | (10    | ) |  | (53 | )%
|Northern California               |  | 4                      |  | 10                  |  | (6     | ) |  | (60 | )%
|Arizona                           |  | 4                      |  | 4                   |  |       |   |  |    | % 
|Nevada                            |  | 8                      |  | 11                  |  | (3     | ) |  | (27 | )%
|                                  |  |                        |  |                     |  |        |   |  |     |   
|Total                             |  | 25                     |  | 44                  |  | (19    | ) |  | (43 | )%
|                                  |  |                        |  |                     |  |        |   |  |     |   

The average number of sales locations decreased in each homebuilding segment,
except for Arizona, during the year ended December 31, 2009, primarily due to (i) temporarily suspending the development of certain projects throughout the Company and (ii) final deliveries in certain projects.



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##### Table of Contents

|                    |  |              |  |                     |  |        |   |  |     |   
|------------------- |  | ------------ |  | ------------------- |  | ------ | - |  | --- | --
|                    |  | December 31, |  | Increase (Decrease) | 
|                    |  | 2009         |  | 2008                |  | Amount |   |  | %   |   
|Backlog (units)     |  |              |  |                     |  |        |   |  |     |   
|Southern California |  | 158          |  | 134                 |  | 24     |   |  | 18  | % 
|Northern California |  | 6            |  | 48                  |  | (42    | ) |  | (88 | )%
|Arizona             |  | 17           |  | 34                  |  | (17    | ) |  | (50 | )%
|Nevada              |  | 13           |  | 24                  |  | (11    | ) |  | (46 | )%
|                    |  |              |  |                     |  |        |   |  |     |   
|Total               |  | 194          |  | 240                 |  | (46    | ) |  | (19 | )%
|                    |  |              |  |                     |  |        |   |  |     |   

The Companys backlog at December 31, 2009 decreased 19% from levels at
December 31, 2008, primarily resulting from a decrease in the average number of sales locations, as described above, and a decrease in the number of net new home orders. The decrease in backlog during this period reflects a decrease in net new
order activity of 29% to 869 homes in the 2009 period compared to 1,221 homes in the 2008 period and a decrease in number of homes closed by 27% to 915 in the 2009 period from 1,260 in the 2008 period.



|                    |  |              |        |                     |   |        |  |   |         |   |  |     |   
|------------------- |  | ------------ | ------ | ------------------- | - | ------ |  | - | ------- | - |  | --- | --
|                    |  | December 31, |        | Increase (Decrease) |  
|                    |  | 2009         |        | 2008                |   | Amount |  |   | %       |  
|Backlog (dollars)   |  |              |        |                     |   |        |  |   |         |   |  |     |   
|Southern California |  | $            | 48,681 |                     | $ | 55,065 |  | $ | (6,384  | ) |  | (12 | )%
|Northern California |  |              | 2,479  |                     |   | 13,669 |  |   | (11,190 | ) |  | (82 | )%
|Arizona             |  |              | 2,716  |                     |   | 6,177  |  |   | (3,461  | ) |  | (56 | )%
|Nevada              |  |              | 2,596  |                     |   | 5,839  |  |   | (3,243  | ) |  | (56 | )%
|                    |  |              |        |                     |   |        |  |   |         |   |  |     |   
|Total               |  | $            | 56,472 |                     | $ | 80,750 |  | $ | (24,278 | ) |  | (30 | )%
|                    |  |              |        |                     |   |        |  |   |         |   |  |     |   

The dollar amount of backlog of homes sold but not closed on a combined basis as
of December 31, 2009 was $56.5 million, down 30% from $80.8 million as of December 31, 2008. The significant decrease in backlog during this period reflects a decrease in net new order activity of 29% to 869 homes in the 2009 period
compared to 1,221 homes in the 2008 period. In addition, the dollar amount of backlog is affected by recent average sales prices for new home orders, and the Company experienced a decrease of 13% in the average sales price of homes in backlog to
$291,100 as of December 31, 2009 compared to $336,500 as of December 31, 2008. The product mix at the Companys projects has shifted in 2009. There are no homes in backlog greater than $500,000 per unit at December 31, 2009,
compared to 48 homes in backlog greater than $500,000 per unit at December 31, 2008.

In Southern
California, the dollar amount of backlog decreased 12% to $48.7 million as of December 31, 2009 from $55.1 million as of December 31, 2008, which is attributable to a 23% decrease in net new home orders in Southern California to 450 homes
in the 2009 period compared to 586 homes in the 2008 period, and a 25% decrease in the average sales price of homes in backlog to $308,100 as of December 31, 2009 compared to $410,900 as of December 31, 2008. In Southern California, the
cancellation rate decreased to 19% for the period ended December 31, 2009 from 30% for the period ended December 31, 2008.

In Northern California, the dollar amount of backlog decreased 82% to $2.5 million as of December 31, 2009 from $13.7 million as of December 31, 2008, which is attributable to a 57% decrease in
net new home orders in Northern California to 102 homes in the 2009 period compared to 238 homes in the 2008 period, and a decrease in homes in backlog to 6 homes at December 31, 2009 from 48 homes at December 31, 2008. The decrease in
homes in backlog is due to a lack of open projects in the division. At December 31, 2009, Northern California had 2 open projects with 42 homes to sell. These decreases were offset by an increase of 45% in the average sales price of homes in
backlog to $413,800 as of December 31, 2009 compared to $284,800 as of December 31, 2008, which is primarily due to product mix of remaining projects. In Northern California the cancellation rate decreased slightly to 28% for the period
ended December 31, 2009 from 29% for the period ended December 31, 2008.

In Arizona, the dollar
amount of backlog decreased 56% to $2.7 million as of December 31, 2009 from $6.2 million as of December 31, 2008, which is attributable to a 50% decrease in homes in backlog to 17 homes at December 31, 2009 from 34 homes at
December 31, 2008 and to a 12% decrease of in the average sales price of homes in backlog to $159,800 as of December 31, 2009 compared to $181,700 as of December 31, 2008. In Arizona, the cancellation rate decreased to 13% for the
period ended December 31, 2009 from 22% for the period ended December 31, 2008.



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##### Table of Contents

In Nevada, the dollar amount of backlog decreased 56% to $2.6 million as of
December 31, 2009 from $5.8 million as of December 31, 2008, which is attributable to a 46% decrease in homes in backlog to 13 homes at December 31, 2009 from 24 homes at December 31, 2008 and a 18% decrease in the average sales
price of homes in backlog to $199,700 as of December 31, 2009 compared to $243,300 as of December 31, 2008. In Nevada, the cancellation rate increased to 30% for the period ended December 31, 2009 from 28% for the period ended
December 31, 2008.

The decrease in the dollar amount of backlog of homes sold but not closed as
described above generally results in a reduction in operating revenues in the subsequent period as compared to the previous period. Revenue from sales of homes decreased 46% to $253.9 million during the period ended December 31, 2009 from
$468.5 million during the period ended December 31, 2008. A decrease in homebuilding revenues on a project basis is a potential indicator for impairment. If market prices and home values decrease in certain of the Companys projects and
cancellation rates increase in the future, the Companys revenue and liquidity would likely be negatively impacted.



|                       |  |                        |  |                     |  |        |   |  |     |   
|---------------------- |  | ---------------------- |  | ------------------- |  | ------ | - |  | --- | --
|                       |  | Year EndedDecember 31, |  | Increase (Decrease) | 
|                       |  | 2009                   |  | 2008                |  | Amount |   |  | %   |   
|Number of Homes Closed |  |                        |  |                     |  |        |   |  |     |   
|Southern California    |  | 426                    |  | 594                 |  | (168   | ) |  | (28 | )%
|Northern California    |  | 144                    |  | 233                 |  | (89    | ) |  | (38 | )%
|Arizona                |  | 214                    |  | 216                 |  | (2     | ) |  | (1  | )%
|Nevada                 |  | 131                    |  | 217                 |  | (86    | ) |  | (40 | )%
|                       |  |                        |  |                     |  |        |   |  |     |   
|Total                  |  | 915                    |  | 1,260               |  | (345   | ) |  | (27 | )%
|                       |  |                        |  |                     |  |        |   |  |     |   

During the year ended December 31, 2009, the number of homes closed decreased
27%. The decrease was primarily driven by a decrease in the average number of sales locations to 25 in 2009 from 44 in the 2008 period and by the Company temporarily suspending the development of certain projects as discussed above.



|                    |  |                        |         |                     |   |         |  |   |          |   |  |     |   
|------------------- |  | ---------------------- | ------- | ------------------- | - | ------- |  | - | -------- | - |  | --- | --
|                    |  | Year EndedDecember 31, |         | Increase (Decrease) |  
|                    |  | 2009                   |         | 2008                |   | Amount  |  |   | %        |  
|Home Sales Revenue  |  |                        |         |                     |   |         |  |   |          |   |  |     |   
|Southern California |  | $                      | 141,884 |                     | $ | 280,611 |  | $ | (138,727 | ) |  | (49 | )%
|Northern California |  |                        | 43,211  |                     |   | 80,292  |  |   | (37,081  | ) |  | (46 | )%
|Arizona             |  |                        | 39,619  |                     |   | 49,188  |  |   | (9,569   | ) |  | (19 | )%
|Nevada              |  |                        | 29,160  |                     |   | 58,361  |  |   | (29,201  | ) |  | (50 | )%
|                    |  |                        |         |                     |   |         |  |   |          |   |  |     |   
|Total               |  | $                      | 253,874 |                     | $ | 468,452 |  | $ | (214,578 | ) |  | (46 | )%
|                    |  |                        |         |                     |   |         |  |   |          |   |  |     |   

The decrease in homebuilding revenue of 46% to $253.9 million during the year
ended December 31, 2009 from $468.5 million during the year ended December 31, 2008 is primarily attributable to a decrease in the number of homes closed to 915 during the 2009 period from 1,260 during the 2008 period and a decrease in the
average sales price of homes closed to $277,500 during the 2009 period from $371,800 during the 2008 period.



|                                    |  |                        |         |                     |   |         |  |   |          |   |  |     |   
|----------------------------------- |  | ---------------------- | ------- | ------------------- | - | ------- |  | - | -------- | - |  | --- | --
|                                    |  | Year EndedDecember 31, |         | Increase (Decrease) |  
|                                    |  | 2009                   |         | 2008                |   | Amount  |  |   | %        |  
|Average Sales Price of Homes Closed |  |                        |         |                     |   |         |  |   |          |   |  |     |   
|Southern California                 |  | $                      | 333,100 |                     | $ | 472,400 |  | $ | (139,300 | ) |  | (29 | )%
|Northern California                 |  |                        | 300,100 |                     |   | 344,600 |  |   | (44,500  | ) |  | (13 | )%
|Arizona                             |  |                        | 185,100 |                     |   | 227,700 |  |   | (42,600  | ) |  | (19 | )%
|Nevada                              |  |                        | 222,600 |                     |   | 268,900 |  |   | (46,300  | ) |  | (17 | )%
|                                    |  |                        |         |                     |   |         |  |   |          |   |  |     |   
|Total                               |  | $                      | 277,500 |                     | $ | 371,800 |  | $ | (94,300  | ) |  | (25 | )%
|                                    |  |                        |         |                     |   |         |  |   |          |   |  |     |   



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##### Table of Contents

The average sales price of homes closed during the year ending
December 31, 2009 decreased in each segment due to increased levels of sales incentives in response to lower demand for new homes and a change in product mix.



|                                            |  |                        |   |  |                    |    |  |      |   
|------------------------------------------- |  | ---------------------- | - |  | ------------------ | -- |  | ---- | --
|                                            |  | Year EndedDecember 31, |   |  | Increase(Decrease) |   
|                                            |  | 2009                   |   |  | 2008               |    | 
|Homebuilding Gross Margin (Loss) Percentage |  |                        |   |  |                    |    |  |      |   
|Southern California                         |  | 15.6                   | % |  | 7.5                | %  |  | 8.1  | % 
|Northern California                         |  | 13.8                   | % |  | (2.6               | )% |  | 16.4 | % 
|Arizona                                     |  | 7.0                    | % |  | 12.7               | %  |  | (5.7 | )%
|Nevada                                      |  | 12.2                   | % |  | 7.0                | %  |  | 5.2  | % 
|                                            |  |                        |   |  |                    |    |  |      |   
|Total                                       |  | 13.5                   | % |  | 6.2                | %  |  | 7.3  | % 
|                                            |  |                        |   |  |                    |    |  |      |   

Homebuilding gross margin (loss) percentage during the year ended December 31, 2009
increased to 13.5% from 6.2% during the year ended December 31, 2008 which is primarily attributable to home closings in projects where previous impairment losses had been incurred, which reduced each projects land basis and by a decrease
in the average cost per home closed of 31% from $348,600 in the 2008 period to $239,900 in the 2009 period offset by a decrease in the average sales price of homes closed of 25% from $371,800 in the 2008 period to $277,500 in the 2009 period.

Homebuilding gross margins may be negatively impacted by a weak economic environment, which includes
homebuyers reluctance to purchase new homes, increase in foreclosure rates, tightening of mortgage loan origination requirements, high cancellation rates, which could affect our ability to maintain existing home prices and/or home sales
incentive levels and continued deterioration in the demand for new homes in our markets, among other things.

Lots, Land and Other

Land sales revenue was $21.2 million during the year ended
December 31, 2009, compared with $39.5 million for the year ended December 31, 2008. During 2009 and 2008, in response to the slow-down in the homebuilding industry, the Company entered into certain land sales transactions to improve its
liquidity and to reduce its overall debt. On December 24, 2009, the Company consummated the sale of certain real property (comprising approximately 165 acres) in San Bernardino County, California; San Diego County, California; Clark County,
Nevada; and Maricopa County, Arizona, for an aggregate sales price of $13.6 million. The aggregate book value of these properties on the closing date as reflected on the consolidated balance sheet of the Company and its subsidiaries was
approximately $84.2 million. The Company entered into these land sales transactions to generate cash flow, to reduce overall debt and to re-invest the cash by purchasing land in certain of its improving markets. The Company determined that the best
economic value to the Company of these lots was to sell them in their current condition as opposed to holding the lots and eventually building and selling homes. The Company continues to evaluate its options and the marketplace with respect to
developing lots.

During the years ended December 31, 2009 and 2008, the Company recorded gross loss
related to land sales of $(110.4) million and $(8.1) million, respectively. Included in these amounts are the write-off of land deposits and pre-acquisition costs of $37.9 million and $6.6 million, respectively, related to future projects which the
Company has concluded are not currently economically viable. The write-off of land deposits and pre-acquisition costs of $37.9 million occurred during the first quarter of the year ended December 31, 2009 are attributable to projects held in
three of its land banking arrangements. In the fourth quarter of 2009, for one of these land banking arrangements, the Company subsequently purchased the remaining 51 lots for the contracted price after the Company had written off the deposits that
would have been included in the land basis of these lots. Management of the Company determined that the remaining purchase prices of the lots in the arrangements were priced above current market values.

Construction Services Revenue

Construction services revenue, which is all recognized in Southern California, was $34.1 million during the year ended December 31, 2009, compared with $18.1 million in the 2008
period. See Note 1 to Notes to Consolidated Financial Statements for further discussion.



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|                                                                  |  |                        |        |                    |   |         |  |   |         |  
|----------------------------------------------------------------- |  | ---------------------- | ------ | ------------------ | - | ------- |  | - | ------- | -
|                                                                  |  | Year EndedDecember 31, |        | Increase(Decrease) |  
|                                                                  |  | 2009                   |        | 2008               |  
|Impairment Loss on Real Estate Assets                             |  |                        |        |                    |   |         |  |   |         |  
|Land under development and homes completed and under construction |  |                        |        |                    |   |         |  |   |         |  
|Southern California                                               |  | $                      | 19,518 |                    | $ | 39,925  |  | $ | (20,407 | )
|Northern California                                               |  |                        | 6,144  |                    |   | 24,063  |  |   | (17,919 | )
|Arizona                                                           |  |                        |       |                    |   | 1,086   |  |   | (1,086  | )
|Nevada                                                            |  |                        | 6,254  |                    |   | 18,100  |  |   | (11,846 | )
|                                                                  |  |                        |        |                    |   |         |  |   |         |  
|Total                                                             |  | $                      | 31,916 |                    | $ | 83,174  |  | $ | (51,258 | )
|                                                                  |  |                        |        |                    |   |         |  |   |         |  
|Land held-for-sale or sold                                        |  |                        |        |                    |   |         |  |   |         |  
|Southern California                                               |  | $                      |       |                    | $ |        |  | $ |        |  
|Northern California                                               |  |                        |       |                    |   | 27,394  |  |   | (27,394 | )
|Arizona                                                           |  |                        |       |                    |   | 13,170  |  |   | (13,170 | )
|Nevada                                                            |  |                        | 13,353 |                    |   | 11,573  |  |   | 1,780   |  
|                                                                  |  |                        |        |                    |   |         |  |   |         |  
|Total                                                             |  |                        | 13,353 |                    |   | 52,137  |  |   | (38,784 | )
|                                                                  |  |                        |        |                    |   |         |  |   |         |  
|Total Impairment Loss on Real Estate Assets                       |  | $                      | 45,269 |                    | $ | 135,311 |  | $ | (90,042 | )
|                                                                  |  |                        |        |                    |   |         |  |   |         |  

The impairment loss related to land under development and homes completed and under
construction incurred during the year ended December 31, 2009, primarily resulted from decreases in home sales prices, due to increased sales incentives, and the continued deterioration in the homebuilding industry. At two of the Companys
projects, impairment loss was primarily attributable to an increase in interest cost allocated to the project related to the addition of the Senior Secured Term Loan at 14% interest. In addition, the Company decreased base sales prices and increased
certain incentives related to the projects, which is a strategy to improve sales absorption rates. During the 2009 period, the Company increased the discount rates used in the estimated discounted cash flow assessments to a range of 19% to 27%.
These rates resulted from an increase in the leverage component of our discount rate related to the interest cost on the Senior Secured Term Loan (14%) and a decrease in risk-related discount rates in California projects due to improving market
conditions, including: (i) a decrease in the cancellation rate in Southern California to 19% in the 2009 period from 30% in the 2008 period, (ii) an increase of 8.1% in the Southern California gross margin percentage and (iii) an
increase in the number of net home order per sale location from 30.8 in the 2008 period to 50.0 in the 2009 period.

The impairment loss related to land held-for-sale or sold primarily resulted from significant decreases in the fair market values of new homes being sold, as this has caused corresponding declines in the fair market values of land held by
the Company. Also contributing to these impairments was the decision that the best economic value to the Company of these lots was to sell them in their current condition as opposed to holding the lots and eventually building and selling homes. The
Company continues to evaluate land values to determine whether to hold for development or to sell at current prices, which may lead to additional impairment on real estate assets.



|                            |  |                        |        |                     |   |        |  |   |         |   |  |     |   
|--------------------------- |  | ---------------------- | ------ | ------------------- | - | ------ |  | - | ------- | - |  | --- | --
|                            |  | Year EndedDecember 31, |        | Increase (Decrease) |  
|                            |  | 2009                   |        | 2008                |   | Amount |  |   | %       |  
|Sales and Marketing Expense |  |                        |        |                     |   |        |  |   |         |   |  |     |   
|Homebuilding                |  |                        |        |                     |   |        |  |   |         |   |  |     |   
|Southern California         |  | $                      | 9,537  |                     | $ | 23,909 |  | $ | (14,372 | ) |  | (60 | )%
|Northern California         |  |                        | 3,499  |                     |   | 8,742  |  |   | (5,243  | ) |  | (60 | )%
|Arizona                     |  |                        | 2,350  |                     |   | 3,265  |  |   | (915    | ) |  | (28 | )%
|Nevada                      |  |                        | 2,250  |                     |   | 4,525  |  |   | (2,275  | ) |  | (50 | )%
|                            |  |                        |        |                     |   |        |  |   |         |   |  |     |   
|Total                       |  | $                      | 17,636 |                     | $ | 40,441 |  | $ | (22,805 | ) |  | (56 | )%
|                            |  |                        |        |                     |   |        |  |   |         |   |  |     |   

Sales and marketing expense decreased $22.8 million to $17.6 million in the 2009
period from $40.4 million in the 2008 period primarily due to (i) a decrease of $3.6 million in sales model operating costs and (ii) a decrease of $9.3 million in advertising, due to the decrease in the average number of sales locations to
25 in the 2009 period from 44 in the 2008 period. In addition, direct selling expenses decreased approximately $9.6 million, including $4.9 million in sales commissions due to



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the reduction in units closed and reduction in revenue from home sales in 2009 as compared to 2008, a decrease of $4.0 million in commissions paid to outside brokers in 2009 as compared to 2008,
and a decrease of $0.8 million in seller closing costs in 2009 as compared to 2008.



|                                    |  |                        |        |                     |   |        |  |   |        |   |  |     |   
|----------------------------------- |  | ---------------------- | ------ | ------------------- | - | ------ |  | - | ------ | - |  | --- | --
|                                    |  | Year EndedDecember 31, |        | Increase (Decrease) |  
|                                    |  | 2009                   |        | 2008                |   | Amount |  |   | %      |  
|General and Administrative Expenses |  |                        |        |                     |   |        |  |   |        |   |  |     |   
|Homebuilding                        |  |                        |        |                     |   |        |  |   |        |   |  |     |   
|Southern California                 |  | $                      | 3,982  |                     | $ | 5,694  |  | $ | (1,712 | ) |  | (30 | )%
|Northern California                 |  |                        | 2,317  |                     |   | 3,704  |  |   | (1,387 | ) |  | (37 | )%
|Arizona                             |  |                        | 2,358  |                     |   | 3,672  |  |   | (1,314 | ) |  | (36 | )%
|Nevada                              |  |                        | 2,558  |                     |   | 2,708  |  |   | (150   | ) |  | (6  | )%
|Corporate                           |  |                        | 9,812  |                     |   | 11,867 |  |   | (2,055 | ) |  | (17 | )%
|                                    |  |                        |        |                     |   |        |  |   |        |   |  |     |   
|Total                               |  | $                      | 21,027 |                     | $ | 27,645 |  | $ | (6,618 | ) |  | (24 | )%
|                                    |  |                        |        |                     |   |        |  |   |        |   |  |     |   

General and administrative expenses decreased $6.6 million, or 24%, in the 2009
period to $21.0 million from $27.6 million in the 2008 period primarily as a result of a decrease in salaries and benefits expense of $4.0 million and a $1.3 million decrease in bonus expense. As the number of active projects decline, the Company
reduced staffing levels to support operations to 194 full time employees by the end of 2009 from 391 at the end of 2008. The bonus expense incurred in the 2008 and 2009 periods was a decision by management to award bonuses to employees in order to
encourage employee retention and reward performance.

Other Items

Other operating costs increased to $6.6 million in the 2009 period compared to $4.5 million in the 2008 period. The increase
is due to property tax expense incurred on projects declined in which development is temporarily suspended of $5.4 million in the 2009 period, compared with $2.0 million in the 2008 period. This increase was primarily driven by the increase in the
number of projects put on hold as of December 31, 2009. In addition, operating losses realized by golf course operations decreased to $1.2 million in the 2009 period from $1.3 million in the 2008 period.

Equity in loss of unconsolidated joint ventures decreased to $0.4 million in the 2009 period from $3.9 million in the 2008
period, primarily due to (i) an impairment loss on real estate assets of $4.5 million recorded at one of the Companys joint venture projects, of which $2.25 million was allocated to the Company and to the other member of the joint venture
during the 2008 period compared with no impairment recorded during the 2009 period and (ii) a decrease in joint venture activity.

As described previously, during 2009, the Company purchased, $156.9 million principal amount of its outstanding Senior Notes at a cost of $77.0 million, plus accrued interest. The net gain resulting
from the purchase, after giving effect to amortization of related deferred loan costs was $78.1 million. In October 2008, the Company purchased, in privately negotiated transactions, $71.9 million principal amount of its outstanding Senior Notes at
a cost of $16.7 million, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs was $54.0 million.

During the year ended December 31, 2009, the Company incurred interest related to its outstanding debt of $48.8 million and capitalized $12.9 million, resulting in net interest
expense of $35.9 million. During the year ended December 31, 2008, the Company incurred interest related to its outstanding debt of $66.7 million and capitalized $42.3 million, resulting in net interest expense of $24.4 million. The year over
year increase in net interest expense is due to a decrease in real estate assets which qualify for interest capitalization during the 2009 period.

Other loss primarily consists of the loss on the sale of fixed asset of $3.0 million in the 2009 period due to the sale of the Companys aircraft as described more fully in Note 7 of Notes to
Consolidated Financial Statements, with no comparable amount in the 2008 period.

The noncontrolling
interest in loss of consolidated entities decreased to $0.4 million in the 2009 period compared to $10.4 million in the 2008 period, primarily due to a decrease in the number of joint venture homes closed to 17 in the 2009 period from 64 in 2008. In
2008, the noncontrolling interest in loss was attributable to impairment loss on real estate assets of $23.6 million recorded at two consolidated entities, of which $10.4 million was allocated to the minority member and $13.2 million was
allocated to the Company.



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|                                                          |  |                        |          |   |                     |   |          |        |  |   |         |   |  |     |   
|--------------------------------------------------------- |  | ---------------------- | -------- | - | ------------------- | - | -------- | ------ |  | - | ------- | - |  | --- | --
|                                                          |  | Year EndedDecember 31, |          |   | Increase (Decrease) |  
|                                                          |  | 2009                   |          |   | 2008                |   |          | Amount |  |   | %       |  
|(Loss) Income Before Benefit (Provision) for Income Taxes |  |                        |          |   |                     |   |          |        |  |   |         |   |  |     |   
|Homebuilding                                              |  |                        |          |   |                     |   |          |        |  |   |         |   |  |     |   
|Southern California                                       |  | $                      | (57,716  | ) |                     | $ | (74,908  | )      |  | $ | 17,192  |   |  | (23 | )%
|Northern California                                       |  |                        | (37,853  | ) |                     |   | (68,913  | )      |  |   | 31,060  |   |  | (45 | )%
|Arizona                                                   |  |                        | (21,451  | ) |                     |   | (17,746  | )      |  |   | (3,605  | ) |  | 20  | % 
|Nevada                                                    |  |                        | (70,915  | ) |                     |   | (37,265  | )      |  |   | (33,650 | ) |  | 90  | % 
|Corporate                                                 |  |                        | 65,074   |   |                     |   | 35,256   |        |  |   | 29,818  |   |  | 58  | % 
|                                                          |  |                        |          |   |                     |   |          |        |  |   |         |   |  |     |   
|Total                                                     |  | $                      | (122,861 | ) |                     | $ | (163,676 | )      |  | $ | 40,815  |   |  | 25  | % 
|                                                          |  |                        |          |   |                     |   |          |        |  |   |         |   |  |     |   

In Southern California, (loss) income before benefit (provision) for income taxes
decreased 23% to $(57.7) million in the 2009 period from $(74.9) million in the 2008 period. The decrease in loss is primarily attributable to (i) a decrease in impairment loss on real estate assets to $19.5 million in the 2009 period, from
$39.9 million in the 2008 period, (ii) a decrease in revenues from home sales to $141.9 million in the 2009 period, from $280.6 million in the 2008 period, (iii) loss on land sales of $24.0 million in the 2009 period compared to a loss of
$6.1 million in the 2008 period, and (iv) a decrease in sales and marketing expense to $9.5 million in the 2009 period from $23.9 million in the 2008 period.

In Northern California, (loss) income before benefit (provision) for income taxes decreased 45% to $(37.9) million in the 2009 period from $(68.9) million in the 2008 period. The
decrease in loss is primarily attributable to (i) a decrease in impairment loss on real estate assets to $6.1 million in the 2009 period from $51.5 million in the 2008 period, (ii) a decrease in revenues from home sales to $43.2 million in
the 2009 period from $80.3 million in the 2008 period, and (iii) a decrease in sales and marketing expense to $3.5 million in the 2009 period from $8.7 million in the 2008 period.

In Arizona, (loss) income before benefit (provision) for income taxes increased to a loss of $(21.5) million in the 2009
period from a loss of $(17.8) million in the 2008 period. The change is primarily attributable to the loss on land sales of $14.0 million in the 2009 period compared to $0.8 million in the 2008 period, offset by (i) a decrease in impairment
loss on real estate assets from $14.3 million in the 2008 period to zero in the 2009 period, (ii) a decrease in revenues from home sales to $39.6 million in the 2009 period from $49.2 million in the 2008 period and (iii) a decrease in
sales and marketing expense to $2.4 million in the 2009 period from $3.3 million in the 2008 period.

In
Nevada, (loss) income before benefit (provision) for income taxes increased 90% to $(70.9) million in the 2009 period from $(37.3) million in the 2008 period. The increase in loss is primarily attributable to (i) a loss on land sales of $43.0
million in the 2009 period with no comparable loss in the 2008 period, (ii) a decrease in impairment loss on real estate assets to $19.6 million in the 2009 period from $29.7 million in the 2008 period, (iii) a decrease in revenues from
home sales to $29.2 million in the 2009 period from $58.4 million in the 2008 period and (iv) a decrease in sales and marketing expense to $2.3 million in the 2009 period from $4.5 million in the 2008 period.

The Corporate segment is a non-homebuilding segment where the Company develops and implements strategic initiatives and
supports the Companys operating divisions by centralizing key administrative functions such as finance and treasury, information technology, tax planning, internal audit, risk management and litigation and human resources. The Company records
the gain from retirement of senior notes and income tax provisions and benefits at the corporate level.

Income Taxes

On November 6, 2009, an expanded carry back election was signed into law as
part of the Worker, Homeownership, and Business Assistance Act of 2009. As a result of this legislation, the Company elected to carry back for five years the taxable losses generated in 2009. The Company recorded a deferred tax asset and related
income tax benefit of $101.8 million. The recorded deferred tax asset reflects the anticipated tax refund for the carry back of the estimated 2009 tax loss to 2004 and 2005. As of December 31, 2009, the deferred tax asset was reclassified to
income tax refunds receivable and the tax benefit was recorded as benefit from provision for income taxes in the accompanying consolidated balance sheet and statement of operations.

Net Loss

As a result of the foregoing factors, net loss for the year ended December 31, 2009 was $20.5 million compared to net loss for the year ended December 31, 2008 of $111.6 million.



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|                                |  |              |  |                     |  |        |   |  |     |   
|------------------------------- |  | ------------ |  | ------------------- |  | ------ | - |  | --- | --
|                                |  | December 31, |  | Increase (Decrease) | 
|                                |  | 2009         |  | 2008                |  | Amount |   |  | %   |   
|Lots Owned and Controlled       |  |              |  |                     |  |        |   |  |     |   
|Lots Owned                      |  |              |  |                     |  |        |   |  |     |   
|Southern California             |  | 1,139        |  | 1,607               |  | (468   | ) |  | (29 | )%
|Northern California             |  | 478          |  | 1,166               |  | (688   | ) |  | (59 | )%
|Arizona                         |  | 4,985        |  | 5,993               |  | (1,008 | ) |  | (17 | )%
|Nevada                          |  | 2,522        |  | 2,839               |  | (317   | ) |  | (11 | )%
|                                |  |              |  |                     |  |        |   |  |     |   
|Total                           |  | 9,124        |  | 11,605              |  | (2,481 | ) |  | (21 | )%
|                                |  |              |  |                     |  |        |   |  |     |   
|Lots Controlled(1)              |  |              |  |                     |  |        |   |  |     |   
|Southern California             |  | 439          |  | 406                 |  | 33     |   |  | 8   | % 
|Arizona                         |  | 767          |  | 321                 |  | 446    |   |  | 139 | % 
|                                |  |              |  |                     |  |        |   |  |     |   
|Total                           |  | 1,206        |  | 727                 |  | 479    |   |  | 66  | % 
|                                |  |              |  |                     |  |        |   |  |     |   
|Total Lots Owned and Controlled |  | 10,330       |  | 12,332              |  | (2,002 | ) |  | (16 | )%
|                                |  |              |  |                     |  |        |   |  |     |   



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

Total lots owned and controlled has decreased 16% from 12,332 lots owned and controlled at
December 31, 2008 to 10,330 lots at December 31, 2009. The decrease is primarily due to the closing of 915 homes during the 2009 period and the strategic sale of land in California during the period, offset by certain lot acquisitions
during the period.

Comparisons of Years Ended December 31, 2008 and 2007

On a combined basis, the number of net new home orders for the year ended December 31, 2008 decreased 34% to 1,221 homes
from 1,855 homes for the year ended December 31, 2007. The number of homes closed on a combined basis for the year ended December 31, 2008 decreased 42% to 1,260 homes from 2,182 homes for the year ended December 31, 2007. The
cancellation rate of buyers who contracted to buy a home but did not close escrow at the Companys projects was approximately 28% during 2008 and 33% during 2007. The inventory of completed and unsold homes was 80 homes as of December 31,
2008.

On a combined basis, the backlog of homes sold but not closed as of December 31, 2008 was 240
homes, down 14% from 279 homes as of December 31, 2007. 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, 2008 was $80.8
million, down 25% from $107.9 million as of December 31, 2007.

The Companys average number of
sales locations decreased to 44 for the year ended December 31, 2008, compared to 57 for the year ended December 31, 2007. The Companys number of new home orders per average sales location decreased from 32.5 for the year ended
December 31, 2007 to 27.8 for the year ended December 31, 2008.



|                              |  |                        |   |  |                     |   |  |        |    |  |     |   
|----------------------------- |  | ---------------------- | - |  | ------------------- | - |  | ------ | -- |  | --- | --
|                              |  | Year EndedDecember 31, |   |  | Increase (Decrease) |  
|                              |  | 2008                   |   |  | 2007                |   |  | Amount |    |  | %   |   
|Number of Net New Home Orders |  |                        |   |  |                     |   |  |        |    |  |     |   
|Southern California           |  | 586                    |   |  | 1,069               |   |  | (483   | )  |  | (45 | %)
|Northern California           |  | 238                    |   |  | 256                 |   |  | (18    | )  |  | (7  | %)
|Arizona                       |  | 183                    |   |  | 296                 |   |  | (113   | )  |  | (38 | %)
|Nevada                        |  | 214                    |   |  | 234                 |   |  | (20    | )  |  | (9  | %)
|                              |  |                        |   |  |                     |   |  |        |    |  |     |   
|Total                         |  | 1,221                  |   |  | 1,855               |   |  | (634   | )  |  | (34 | %)
|                              |  |                        |   |  |                     |   |  |        |    |  |     |   
|Cancellation Rate             |  | 28                     | % |  | 33                  | % |  | (5     | )% |  |     |   
|                              |  |                        |   |  |                     |   |  |        |    |  |     |   

Each of the Companys homebuilding segments experienced declines in net new
home orders during the year ended December 31, 2008 and most notably in Southern California and Arizona. Net new home orders during the year ended December 31, 2008 in each of the Companys segments were negatively impacted by the
unstable economic conditions and continued down-turn in the homebuilding industry in the 2008 period. Net new home orders during the twelve months ended December 31, 2008 decreased 34% on a consolidated basis, mostly due to the decline in
housing demand as discussed previously.



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##### Table of Contents

Cancellation rates during the year ended December 31, 2008 decreased to
28% in the 2008 period from 33% during the 2007 period. The decline resulted from a decrease in the cancellation rate in Southern California to 30% in the 2008 period from 31% in the 2007 period, in Northern California to 29% in the 2008 period from
38% in the 2007 period, in Arizona to 22% in the 2008 period from 33% in the 2007 period and in Nevada to 28% in the 2008 period from 33% in the 2007 period. Although the cancellation rates declined in each operating segment, the rates continue to
reflect the impact of the uncertain economic conditions and the lack of homebuyer confidence is consistent in all markets.



|                                  |  |                        |  |                     |  |        |   |  |     |   
|--------------------------------- |  | ---------------------- |  | ------------------- |  | ------ | - |  | --- | --
|                                  |  | Year EndedDecember 31, |  | Increase (Decrease) | 
|                                  |  | 2008                   |  | 2007                |  | Amount |   |  | %   |   
|Average Number of Sales Locations |  |                        |  |                     |  |        |   |  |     |   
|Southern California               |  | 19                     |  | 29                  |  | (10    | ) |  | (34 | )%
|Northern California               |  | 10                     |  | 13                  |  | (3     | ) |  | (23 | )%
|Arizona                           |  | 4                      |  | 5                   |  | (1     | ) |  | (20 | )%
|Nevada                            |  | 11                     |  | 10                  |  | 1      |   |  | 10  | % 
|                                  |  |                        |  |                     |  |        |   |  |     |   
|Total                             |  | 44                     |  | 57                  |  | (13    | ) |  | (23 | )%
|                                  |  |                        |  |                     |  |        |   |  |     |   

The average number of sales locations decreased in each homebuilding segment
during the year ended December 31, 2008, primarily due to (i) managements on-going efforts to manage cash outflows through, among other things, limiting the purchase of new lots, (ii) temporarily suspending the development of
thirteen projects throughout the Company and (iii) the close-out of projects.



|                    |  |              |  |                     |  |        |   |  |     |   
|------------------- |  | ------------ |  | ------------------- |  | ------ | - |  | --- | --
|                    |  | December 31, |  | Increase (Decrease) | 
|                    |  | 2008         |  | 2007                |  | Amount |   |  | %   |   
|Backlog (units)     |  |              |  |                     |  |        |   |  |     |   
|Southern California |  | 134          |  | 142                 |  | (8     | ) |  | (6  | )%
|Northern California |  | 48           |  | 43                  |  | 5      |   |  | 12  | % 
|Arizona             |  | 34           |  | 67                  |  | (33    | ) |  | (49 | )%
|Nevada              |  | 24           |  | 27                  |  | (3     | ) |  | (11 | )%
|                    |  |              |  |                     |  |        |   |  |     |   
|Total               |  | 240          |  | 279                 |  | (39    | ) |  | (14 | )%
|                    |  |              |  |                     |  |        |   |  |     |   

The Companys backlog at December 31, 2008 decreased 14% from levels at
December 31, 2007, primarily resulting from a deterioration in demand for new homes. The decrease in backlog during this period reflects a decrease in net new order activity of 34% to 1,221 homes in the 2008 period compared to 1,855 homes in
the 2007 period and a decrease in number of homes closed by 42% to 1,260 in the 2008 period from 2,182 in the 2007 period.



|                    |  |              |        |                     |   |         |  |   |         |   |  |     |   
|------------------- |  | ------------ | ------ | ------------------- | - | ------- |  | - | ------- | - |  | --- | --
|                    |  | December 31, |        | Increase (Decrease) |  
|                    |  | 2008         |        | 2007                |   | Amount  |  |   | %       |  
|Backlog (dollars)   |  |              |        |                     |   |         |  |   |         |   |  |     |   
|Southern California |  | $            | 55,065 |                     | $ | 71,792  |  | $ | (16,727 | ) |  | (23 | )%
|Northern California |  |              | 13,669 |                     |   | 13,674  |  |   | (5      | ) |  |    | % 
|Arizona             |  |              | 6,177  |                     |   | 15,627  |  |   | (9,450  | ) |  | (61 | )%
|Nevada              |  |              | 5,839  |                     |   | 6,800   |  |   | (961    | ) |  | (14 | )%
|                    |  |              |        |                     |   |         |  |   |         |   |  |     |   
|Total               |  | $            | 80,750 |                     | $ | 107,893 |  | $ | (27,143 | ) |  | (25 | )%
|                    |  |              |        |                     |   |         |  |   |         |   |  |     |   

The dollar amount of backlog of homes sold but not closed on a combined basis as
of December 31, 2008 was $80.8 million, down 25% from $107.9 million as of December 31, 2007. The significant decrease in backlog during this period reflects a decrease in net new order activity of 34% to 1,221 homes in the 2008 period
compared to 1,855 homes in the 2007 period. In addition, the dollar amount of backlog is affected by recent average sales prices for new home orders, and the Company experienced a decrease of 13% in the average sales price of homes in backlog to
$336,500 as of December 31, 2008 compared to $386,700 as of December 31, 2007. An increase in the Companys cancellation rates generally has an adverse effect on the Companys backlog.



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##### Table of Contents

In Southern California, the dollar amount of backlog decreased 23% to $55.1
million as of December 31, 2008 from $71.8 million as of December 31, 2007, which is attributable to a decrease of 45% in net new home orders in Southern California to 586 homes in the 2008 period compared to 1,069 homes in the 2007
period, and a decrease of 19% in the average sales price of homes in backlog to $410,900 as of December 31, 2008 compared to $505,600 as of December 31, 2007. In Southern California, the cancellation rate decreased to 30% for the period
ended December 31, 2008 from 31% for the period ended December 31, 2007.

In Northern California,
the dollar amount of backlog was unchanged at $13.7 million as of December 31, 2008 and $13.7 million as of December 31, 2007, which is attributable to a (i) decrease of 7% in net new home orders in Northern California to 238 homes in
the 2008 period compared to 256 homes in the 2007 period, (ii) a decrease of 10% in the average sales price of homes in backlog to $284,800 as of December 31, 2008 compared to $318,000 as of December 31, 2007 and (iii) an
increase in homes in backlog to 48 homes at December 31, 2008 from 43 homes at December 31, 2007. In Northern California the cancellation rate decreased to 29% for the period ended December 31, 2008 from 38% for the period ended
December 31, 2007.

In Arizona, the dollar amount of backlog decreased 61% to $6.2 million as of
December 31, 2008 from $15.6 million as of December 31, 2007, which is attributable to a decrease of 38% in net new home orders in Arizona to 183 homes in the 2008 period compared to 296 homes in the 2007 period, and a decrease of 22% in
the average sales price of homes in backlog to $181,700 as of December 31, 2008 compared to $233,200 as of December 31, 2007. In Arizona, the cancellation rate decreased to 22% for the period ended December 31, 2008 from 33% for the
period ended December 31, 2007.

In Nevada, the dollar amount of backlog decreased 14% to $5.8 million as
of December 31, 2008 from $6.8 million as of December 31, 2007, which is attributable to a decrease of 9% in net new home orders in Nevada to 214 homes in the 2008 period compared to 234 homes in the 2007 period, and a decrease of 3% in
the average sales price of homes in backlog to $243,300 as of December 31, 2008 compared to $251,900 as of December 31, 2007. In Nevada, the cancellation rate decreased to 28% for the period ended December 31, 2008 from 33% for the
period ended December 31, 2007.

The decrease in the dollar amount of backlog of homes sold but not
closed as described above generally results in a reduction in operating revenues in the subsequent period as compared to the previous period. Revenue from sales of homes decreased 53% to $468.5 million during the period ended December 31, 2008
from $1.002 billion during the period ended December 31, 2007. A decrease in homebuilding revenues on a project basis is a potential indicator for impairment. If current market prices and home values continue to decrease and cancellation rates
increase in the future, the Companys revenue and liquidity would likely be negatively impacted, and the Company may be required to assess its homebuilding assets for further impairment.



|                       |  |                        |  |                     |  |        |   |  |     |   
|---------------------- |  | ---------------------- |  | ------------------- |  | ------ | - |  | --- | --
|                       |  | Year EndedDecember 31, |  | Increase (Decrease) | 
|                       |  | 2008                   |  | 2007                |  | Amount |   |  | %   |   
|Number of Homes Closed |  |                        |  |                     |  |        |   |  |     |   
|Southern California    |  | 594                    |  | 1,242               |  | (648   | ) |  | (52 | )%
|Northern California    |  | 233                    |  | 253                 |  | (20    | ) |  | (8  | )%
|Arizona                |  | 216                    |  | 420                 |  | (204   | ) |  | (49 | )%
|Nevada                 |  | 217                    |  | 267                 |  | (50    | ) |  | (19 | )%
|                       |  |                        |  |                     |  |        |   |  |     |   
|Total                  |  | 1,260                  |  | 2,182               |  | (922   | ) |  | (42 | )%
|                       |  |                        |  |                     |  |        |   |  |     |   

During the year ended December 31, 2008, the number of homes closed decreased
42%, with the largest decrease in the Southern California and Arizona segments. The number of homes closed during the year was impacted by the uncertain economic conditions and continued down-turn in the homebuilding industry.



|                    |  |                        |         |                     |   |           |  |   |          |   |  |     |   
|------------------- |  | ---------------------- | ------- | ------------------- | - | --------- |  | - | -------- | - |  | --- | --
|                    |  | Year EndedDecember 31, |         | Increase (Decrease) |  
|                    |  | 2008                   |         | 2007                |   | Amount    |  |   | %        |  
|Home Sales Revenue  |  |                        |         |                     |   |           |  |   |          |   |  |     |   
|Southern California |  | $                      | 280,611 |                     | $ | 696,655   |  | $ | (416,044 | ) |  | (60 | )%
|Northern California |  |                        | 80,292  |                     |   | 102,432   |  |   | (22,140  | ) |  | (22 | )%
|Arizona             |  |                        | 49,188  |                     |   | 114,903   |  |   | (65,715  | ) |  | (57 | )%
|Nevada              |  |                        | 58,361  |                     |   | 88,559    |  |   | (30,198  | ) |  | (34 | )%
|                    |  |                        |         |                     |   |           |  |   |          |   |  |     |   
|Total               |  | $                      | 468,452 |                     | $ | 1,002,549 |  | $ | (534,097 | ) |  | (53 | )%
|                    |  |                        |         |                     |   |           |  |   |          |   |  |     |   



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##### Table of Contents

The decrease in homebuilding revenue of 53% to $468.5 million during the
year ended December 31, 2008 from $1.002 billion during the year ended December 31, 2007 is primarily attributable to a decrease in the number of homes closed to 1,260 during the 2008 period from 2,182 during the 2007 period and a decrease
in the average sales price of homes closed to $371,800 during the 2008 period from $459,500 during the 2007 period.



|                                    |  |                        |         |                     |   |         |  |   |         |   |  |     |   
|----------------------------------- |  | ---------------------- | ------- | ------------------- | - | ------- |  | - | ------- | - |  | --- | --
|                                    |  | Year EndedDecember 31, |         | Increase (Decrease) |  
|                                    |  | 2008                   |         | 2007                |   | Amount  |  |   | %       |  
|Average Sales Price of Homes Closed |  |                        |         |                     |   |         |  |   |         |   |  |     |   
|Southern California                 |  | $                      | 472,400 |                     | $ | 560,900 |  | $ | (88,500 | ) |  | (16 | )%
|Northern California                 |  |                        | 344,600 |                     |   | 404,900 |  |   | (60,300 | ) |  | (15 | )%
|Arizona                             |  |                        | 227,700 |                     |   | 273,600 |  |   | (45,900 | ) |  | (17 | )%
|Nevada                              |  |                        | 268,900 |                     |   | 331,700 |  |   | (62,800 | ) |  | (19 | )%
|                                    |  |                        |         |                     |   |         |  |   |         |   |  |     |   
|Total                               |  | $                      | 371,800 |                     | $ | 459,500 |  | $ | (87,700 | ) |  | (19 | )%
|                                    |  |                        |         |                     |   |         |  |   |         |   |  |     |   

The average sales price of homes closed during the year ending December 31,
2008 decreased in each segment due to increased levels of sales incentives in response to lower demand for new homes, increased levels of competition, and increased home foreclosure levels.



|                                     |  |                        |    |  |                    |   |  |       |   
|------------------------------------ |  | ---------------------- | -- |  | ------------------ | - |  | ----- | --
|                                     |  | Year EndedDecember 31, |    |  | Increase(Decrease) |  
|                                     |  | 2008                   |    |  | 2007               |   | 
|Homebuilding Gross Margin Percentage |  |                        |    |  |                    |   |  |       |   
|Southern California                  |  | 7.5                    | %  |  | 11.5               | % |  | (4.0  | )%
|Northern California                  |  | (2.6                   | )% |  | 11.0               | % |  | (13.6 | )%
|Arizona                              |  | 12.7                   | %  |  | 24.6               | % |  | (11.9 | )%
|Nevada                               |  | 7.0                    | %  |  | 10.6               | % |  | (3.6  | )%
|                                     |  |                        |    |  |                    |   |  |       |   
|Total                                |  | 6.2                    | %  |  | 12.9               | % |  | (6.7  | )%
|                                     |  |                        |    |  |                    |   |  |       |   

Homebuilding gross margin percentage during the year ended December 31, 2008 decreased
to 6.2% from 12.9% during the year ended December 31, 2007 which is primarily attributable to a decrease in the average sales price of homes closed of 19% from $459,500 in the 2007 period to $371,800 in the 2008 period offset by a 13% decrease
in the average cost per home closed to $349,000 in the 2008 period from $400,000 in the 2007 period.

Homebuilding gross margins may be negatively impacted by a weak economic environment, which includes homebuyers reluctance to purchase new homes, increase in foreclosure rates, tightening of mortgage loan origination requirements,
continued high cancellation rates, which could affect our ability to maintain existing home prices and/or home sales incentive levels and continued deterioration in the demand for new homes in our markets, among other things.

Lots, Land and Other

Land sales revenue was $39.5 million during the year ended December 31, 2008, compared with $102.8 million for the year ended December 31, 2007. During 2007 and 2008, in response to the
slow-down in the homebuilding industry, the Company entered into certain land sales transactions to improve its liquidity and to reduce its overall debt. On December 26, 2007 and January 7, 2008, the Company entered into separate
agreements with various affiliates of one of its joint venture equity partners (the Equity Partner Agreements). Pursuant to the Equity Partner Agreements, the Company agreed to sell to the affiliates 604 residential lots and 5 model
homes in 10 communities in Orange County, San Diego County and Ventura County, California for an aggregate purchase price of $90.6 million in cash. The purchase and sale of 404 of the residential lots and the 5 model homes closed on
December 27, 2007 (for an aggregate consideration of approximately $65.9 million) and the remainder of the residential lots closed on January 9, 2008. During the years ended December 31, 2008 and 2007, the Company recorded gross
(loss) related to land sales of $(8.1) million and $(102.8) million, respectively. Included in these amounts are the write-off of land deposits and pre-acquisition costs of $6.6 million and $19.8 million, respectively, related to future projects
which the Company has concluded are not currently economically viable.

Construction Services Revenue

Construction services revenue, which is all recorded in Southern California, was $18.1 million in the 2008
period with no comparable amount in the 2007 period. See Note 1 to Notes to Consolidated Financial Statements for further discussion.



36



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##### Table of Contents

|                                                                  |  |                        |         |                    |   |         |  |   |          |  
|----------------------------------------------------------------- |  | ---------------------- | ------- | ------------------ | - | ------- |  | - | -------- | -
|                                                                  |  | Year EndedDecember 31, |         | Increase(Decrease) |  
|                                                                  |  | 2008                   |         | 2007               |  
|Impairment Loss on Real Estate Assets                             |  |                        |         |                    |   |         |  |   |          |  
|Land under development and homes completed and under construction |  |                        |         |                    |   |         |  |   |          |  
|Southern California                                               |  | $                      | 39,925  |                    | $ | 105,480 |  | $ | (65,555  | )
|Northern California                                               |  |                        | 24,063  |                    |   | 35,653  |  |   | (11,590  | )
|Arizona                                                           |  |                        | 1,086   |                    |   |        |  |   | 1,086    |  
|Nevada                                                            |  |                        | 18,100  |                    |   | 43,586  |  |   | (25,486  | )
|                                                                  |  |                        |         |                    |   |         |  |   |          |  
|Total                                                             |  | $                      | 83,174  |                    | $ | 184,719 |  | $ | (101,545 | )
|                                                                  |  |                        |         |                    |   |         |  |   |          |  
|Land Held-for-Sale or Sold                                        |  |                        |         |                    |   |         |  |   |          |  
|Southern California                                               |  | $                      |        |                    | $ | 41,145  |  | $ | (41,145  | )
|Northern California                                               |  |                        | 27,394  |                    |   | 5,256   |  |   | 22,138   |  
|Arizona                                                           |  |                        | 13,170  |                    |   |        |  |   | 13,170   |  
|Nevada                                                            |  |                        | 11,573  |                    |   |        |  |   | 11,573   |  
|                                                                  |  |                        |         |                    |   |         |  |   |          |  
|Total                                                             |  |                        | 52,137  |                    |   | 46,401  |  |   | 5,736    |  
|                                                                  |  |                        |         |                    |   |         |  |   |          |  
|Total Impairment Loss on Real Estate Assets                       |  | $                      | 135,311 |                    | $ | 231,120 |  | $ | (95,809  | )
|                                                                  |  |                        |         |                    |   |         |  |   |          |  

The impairment loss related to land under development and homes completed and under
construction incurred during the year ended December 31, 2008, primarily resulted from decreases in home sales prices, due to increased sales incentives, and the continued deterioration in the homebuilding industry. In addition, during the 2008
period, the Company increased the discount rates used in the estimated discounted cash flow assessments from a range of 14% to 20% to a range of 17% to 23%. This change resulted from an increase in risks and uncertainties in the homebuilding
industry due to the on-going deterioration in the market value of land and homes as well as homebuyer confidence in the economy.

The impairment loss related to land held-for-sale or sold primarily resulted from significant decreases in the fair market values of new homes being sold, as this has caused corresponding declines in the
fair market values of land held by the Company. Also contributing to these impairments was the decision that the best economic value to the Company of these lots was to sell them in their current condition as opposed to holding the lots and
eventually building and selling homes. The Company continues to evaluate land values to determine whether to hold for development or to sell at current prices, which may lead to additional impairment on real estate assets.



|                             |  |                        |        |                     |   |        |  |   |         |   |  |     |   
|---------------------------- |  | ---------------------- | ------ | ------------------- | - | ------ |  | - | ------- | - |  | --- | --
|                             |  | Year EndedDecember 31, |        | Increase (Decrease) |  
|                             |  | 2008                   |        | 2007                |   | Amount |  |   | %       |  
|Sales and Marketing Expenses |  |                        |        |                     |   |        |  |   |         |   |  |     |   
|Homebuilding                 |  |                        |        |                     |   |        |  |   |         |   |  |     |   
|Southern California          |  | $                      | 23,909 |                     | $ | 40,165 |  | $ | (16,256 | ) |  | (40 | )%
|Northern California          |  |                        | 8,742  |                     |   | 11,650 |  |   | (2,908  | ) |  | (25 | )%
|Arizona                      |  |                        | 3,265  |                     |   | 8,074  |  |   | (4,809  | ) |  | (60 | )%
|Nevada                       |  |                        | 4,525  |                     |   | 6,814  |  |   | (2,289  | ) |  | (34 | )%
|                             |  |                        |        |                     |   |        |  |   |         |   |  |     |   
|Total                        |  | $                      | 40,441 |                     | $ | 66,703 |  | $ | (26,262 | ) |  | (39 | )%
|                             |  |                        |        |                     |   |        |  |   |         |   |  |     |   

Sales and marketing expense decreased $26.3 million to $40.4 million in the 2008
period from $66.7 million in the 2007 period primarily due to (i) a decrease of $2.3 million in sales model operating costs and (ii) a decrease of $9.6 million in advertising, due to the decrease in the number of models and a decrease in
the average number of sales locations to 44 in the 2008 period from 57 in the 2007 period. In addition, direct selling expenses decreased approximately $14.4 million, including $3.5 million in sales commissions due to the reduction in units closed
and reduction in revenue from home sales in 2008 as compared to 2007 and a decrease of $7.9 million in commissions paid to outside brokers in 2008 as compared to 2007.



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##### Table of Contents

|                                    |  |                        |        |                     |   |        |  |   |        |   |  |     |   
|----------------------------------- |  | ---------------------- | ------ | ------------------- | - | ------ |  | - | ------ | - |  | --- | --
|                                    |  | Year EndedDecember 31, |        | Increase (Decrease) |  
|                                    |  | 2008                   |        | 2007                |   | Amount |  |   | %      |  
|General and Administrative Expenses |  |                        |        |                     |   |        |  |   |        |   |  |     |   
|Homebuilding                        |  |                        |        |                     |   |        |  |   |        |   |  |     |   
|Southern California                 |  | $                      | 5,694  |                     | $ | 8,841  |  | $ | (3,147 | ) |  | (36 | )%
|Northern California                 |  |                        | 3,704  |                     |   | 5,677  |  |   | (1,973 | ) |  | (35 | )%
|Arizona                             |  |                        | 3,672  |                     |   | 4,904  |  |   | (1,232 | ) |  | (25 | )%
|Nevada                              |  |                        | 2,708  |                     |   | 3,854  |  |   | (1,146 | ) |  | (30 | )%
|Corporate                           |  |                        | 11,867 |                     |   | 14,196 |  |   | (2,329 | ) |  | (16 | )%
|                                    |  |                        |        |                     |   |        |  |   |        |   |  |     |   
|Total                               |  | $                      | 27,645 |                     | $ | 37,472 |  | $ | (9,827 | ) |  | (26 | )%
|                                    |  |                        |        |                     |   |        |  |   |        |   |  |     |   

General and administrative expenses decreased $9.8 million, or 26%, in the 2008
period to $27.6 million from $37.5 million in the 2007 period primarily as a result of a decrease in salaries and benefits expense of $11.8 million, offset by an increase in bonus expense of $1.4 million. As the number of active projects and the
number of sales orders continues to decline, the Company has reduced staffing levels to support current operations. The bonus expense incurred in the 2008 period was a decision by management to award bonuses to employees in order to encourage
employee retention, which was determined on a subjective basis.

Other Items

Other operating costs increased to $4.5 million in the 2008 period compared to $0.9 million in the 2007 period. The increase
is due to property tax expense incurred on projects in which development is temporarily suspended of $2.0 million in the 2008 period, with no comparable amount in the 2007 period. In addition, operating losses realized by golf course operations
increased to $1.3 million in the 2008 period from $0.9 million in the 2007 period.

Equity in loss of
unconsolidated joint ventures increased to $3.9 million in the 2008 period from $0.3 million in the 2007 period, primarily due to an impairment loss on real estate assets of $4.5 million recorded at one of the Companys joint venture projects,
of which $2.25 million was allocated to the Company and to the other member of the joint venture.

Noncontrolling interest in loss (income) of consolidated entities decreased to noncontrolling interest in loss of $10.4 million in the 2008 period compared to noncontrolling interest in income of $(11.1) million in the 2007 period,
primarily due to a decrease in the number of joint venture homes closed to 64 in the 2008 period from 219 in 2007. The noncontrolling interest in loss was attributable to impairment loss on real estate assets of $23.6 million recorded at two
consolidated entities, of which $10.4 million was allocated to the minority member and $13.2 million was allocated to the Company.

In October 2008, the Company purchased, in privately negotiated transactions, $71.9 million principal amount of its outstanding Senior Notes at a cost of $16.7 million, plus accrued interest. The net gain
resulting from the purchase, after giving effect to amortization of related deferred loan costs was $54.0 million.

During the year ended December 31, 2008, the Company incurred interest related to its outstanding debt of $66.7 million and capitalized $42.3 million, resulting in net interest expense of $24.4 million, with no comparable amount in the
2007 period, due to a decrease in real estate assets which qualify for interest capitalization during the 2008 period.



|                                                          |  |                        |          |   |                     |   |          |        |  |   |         |   |  |      |   
|--------------------------------------------------------- |  | ---------------------- | -------- | - | ------------------- | - | -------- | ------ |  | - | ------- | - |  | ---- | --
|                                                          |  | Year EndedDecember 31, |          |   | Increase (Decrease) |  
|                                                          |  | 2008                   |          |   | 2007                |   |          | Amount |  |   | %       |  
|(Loss) Income Before Benefit (Provision) for Income Taxes |  |                        |          |   |                     |   |          |        |  |   |         |   |  |      |   
|Homebuilding                                              |  |                        |          |   |                     |   |          |        |  |   |         |   |  |      |   
|Southern California                                       |  | $                      | (74,908  | ) |                     | $ | (212,597 | )      |  | $ | 137,689 |   |  | 65   | % 
|Northern California                                       |  |                        | (68,913  | ) |                     |   | (51,418  | )      |  |   | (17,495 | ) |  | (34  | )%
|Arizona                                                   |  |                        | (17,846  | ) |                     |   | 21,158   |        |  |   | (39,004 | ) |  | (184 | )%
|Nevada                                                    |  |                        | (37,265  | ) |                     |   | (45,918  | )      |  |   | 8,653   |   |  | 19   | % 
|Corporate                                                 |  |                        | 35,256   |   |                     |   | (16,849  | )      |  |   | 52,105  |   |  | 309  | % 
|                                                          |  |                        |          |   |                     |   |          |        |  |   |         |   |  |      |   
|Total                                                     |  | $                      | (163,676 | ) |                     | $ | (305,624 | )      |  | $ | 141,948 |   |  | 46   | % 
|                                                          |  |                        |          |   |                     |   |          |        |  |   |         |   |  |      |   



38



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##### Table of Contents

In Southern California, (loss) income before benefit (provision) for income
taxes decreased 65% to $(74.9) million in the 2008 period from $(212.6) million in the 2007 period. The decrease in loss is primarily attributable to (i) a decrease in impairment loss on real estate assets to $39.9 million in the 2008 period,
from $146.6 million in the 2007 period, (ii) a decrease in revenues from home sales to $280.6 million in the 2008 period, from $696.7 million in the 2007 period, (iii) a decrease in sales and marketing expense to $23.9 million in the 2008
period from $40.2 million in the 2007 period and (iv) a decrease in general and administrative expenses to $5.7 million in the 2008 period from $8.8 million in the 2007 period.

In Northern California, (loss) income before benefit (provision) for income taxes increased 34% to $(68.9) million in the
2008 period from $(51.4) million in the 2007 period. The increase in loss is primarily attributable to (i) an increase in impairment loss on real estate assets to $51.5 million in the 2008 period from $40.9 million in the 2007 period,
(ii) a decrease in revenues from home sales to $80.3 million in the 2008 period from $102.4 million in the 2007 period, (iii) a decrease in sales and marketing expense to $8.7 million in the 2008 period from $11.7 million in the 2007
period and (iv) a decrease in general and administrative expenses to $3.7 million in the 2008 period from $5.7 million in the 2007 period.

In Arizona, (loss) income before benefit (provision) for income taxes decreased to a loss of $(17.8) million in the 2008 period from income of $21.2 million in the 2007 period. The change is primarily
attributable to (i) an increase in impairment loss on real estate assets to $14.3 million in the 2008 period with no comparable amount in the 2007 period, (ii) a decrease in revenues from home sales to $49.2 million in the 2008 period from
$114.9 million in the 2007 period, offset by (i) a decrease in sales and marketing expense to $3.3 million in the 2008 period from $8.1 million in the 2007 period, and (ii) a 25% decrease in general and administrative expense to $3.7
million in the 2008 period compared to $4.9 million in the 2007 period.

In Nevada, (loss) income before
benefit (provision) for income taxes decreased 19% to $(37.3) million in the 2008 period from $(45.9) million in the 2007 period. The decrease in loss is primarily attributable to (i) a decrease in impairment loss on real estate assets to $29.7
million in the 2008 period from $43.6 million in the 2007 period, (ii) a decrease in revenues from home sales to $58.4 million in the 2008 period from $88.6 million in the 2007 period, (iii) a decrease in sales and marketing expense to
$4.5 million in the 2008 period from $6.8 million in the 2007 period and (iv) a decrease in general and administrative expense to $2.7 million in the 2008 period from $3.9 million in the 2007 period.

Income Taxes

Effective January 1, 2008, the Company and its shareholders made a revocation of the S corporation election. As a result of this revocation, the Company will be taxed as a C
corporation. The shareholders will not be able to elect S corporation status for at least five years. The revocation of the S corporation election will allow taxable losses generated in 2008 to be carried back to the 2006
C corporation year. As a result of the change in tax status, the Company recorded a deferred tax asset and related income tax benefit of $41.6 million as of January 1, 2008. The recorded deferred tax asset reflects the anticipated
tax refund for the carry back of the estimated 2008 tax loss to 2006. In January 2009, the Company received a tax refund for the amount of the deferred tax asset and related tax benefit. As of and during the year ended December 31, 2008, the
deferred tax asset was reclassified to income tax refunds receivable and the tax benefit was recorded as benefit from provision for income taxes in the accompanying consolidated balance sheet and statement of operations.

Effective January 1, 2007, the Company made an election in accordance with federal and state regulations to be taxed as
an S corporation rather than a C corporation. Under this election, the Companys taxable income flows through to and is reported on the personal tax returns of its shareholders. The shareholders are responsible for
paying the appropriate taxes based on this election. The Company does not pay any federal taxes under this election and is only required to pay certain state taxes based on a rate of approximately 1.5% of taxable income. As a result of this
election, the Companys provision for income taxes for the year ended December 31, 2007 includes a reduction of deferred tax assets of $31.9 million due to the elimination of any future tax benefit by the Company from such assets. In
addition, the provision reflects a valuation allowance of $0.8 million.

Net Loss

As a result of the foregoing factors, net loss for the year ended December 31, 2008 was $111.6 million compared to net
loss for the year ended December 31, 2007 of $349.4 million.



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##### Table of Contents

|                                |  |              |  |                     |  |        |   |  |     |   
|------------------------------- |  | ------------ |  | ------------------- |  | ------ | - |  | --- | --
|                                |  | December 31, |  | Increase (Decrease) | 
|                                |  | 2008         |  | 2007                |  | Amount |   |  | %   |   
|Lots Owned and Controlled       |  |              |  |                     |  |        |   |  |     |   
|Lots Owned                      |  |              |  |                     |  |        |   |  |     |   
|Southern California             |  | 1,607        |  | 2,579               |  | (972   | ) |  | (38 | )%
|Northern California             |  | 1,166        |  | 1,763               |  | (597   | ) |  | (34 | )%
|Arizona                         |  | 5,993        |  | 6,226               |  | (233   | ) |  | (4  | )%
|Nevada                          |  | 2,839        |  | 3,056               |  | (217   | ) |  | (7  | )%
|                                |  |              |  |                     |  |        |   |  |     |   
|Total                           |  | 11,605       |  | 13,624              |  | (2,019 | ) |  | (15 | )%
|                                |  |              |  |                     |  |        |   |  |     |   
|Lots Controlled(1)              |  |              |  |                     |  |        |   |  |     |   
|Southern California             |  | 406          |  | 534                 |  | (128   | ) |  | (24 | )%
|Arizona                         |  | 321          |  | 303                 |  | 18     |   |  | 6   | % 
|                                |  |              |  |                     |  |        |   |  |     |   
|Total                           |  | 727          |  | 837                 |  | (110   | ) |  | (13 | )%
|                                |  |              |  |                     |  |        |   |  |     |   
|Total Lots Owned and Controlled |  | 12,332       |  | 14,461              |  | (2,129 | ) |  | (15 | )%
|                                |  |              |  |                     |  |        |   |  |     |   



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

Total lots owned and controlled has decreased 15% from 14,461 lots owned and controlled at
December 31, 2007 to 12,332 lots at December 31, 2008. The decrease is primarily due to the closing of 1,260 homes during the 2008 period and the strategic sale of land in California during the period, offset by certain lot acquisitions
during the period. The Company has implemented a strategy to limit the number of new land acquisitions due to the uncertainty regarding future demand for new homes.

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 a 14% Senior Secured Term Loan due 2014, 75/8% Senior Notes due 2012, 103/4% Senior Notes due 2013 and 71/2% Senior Notes due 2014. 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 cash on hand, income tax refund received in 2010, 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 and run its day-to-day operations.

Beginning in 2006 and continuing into the beginning of 2009, the homebuilding industry has experienced
decreased demand for housing and declining sales prices. These conditions were the result of an erosion of homebuyer confidence which was driven by increases in unemployment, limited availability of mortgage financing due to stress in the mortgage
and credit markets, price instability, increasing foreclosures and increased levels of housing inventory in the market. In certain of the Companys markets, however, the Company has experienced steadying sales absorption rates, a decrease in
sales incentives and an increase in base pricing, while homebuilding costs continue to decrease. In Southern California, net new home orders per average sales location increased to 50.0 during the year ended December 31, 2009 from 30.8 for the
same period in 2008. In Arizona, net new home orders per average sales location increased to 49.3 during the year ended December 31, 2009 from 45.8 for the same period in 2008. In addition, the Companys cancellation rate decreased to 21%
in the 2009 period compared to 28% in the 2008 period, particularly impacted by Southern California of 19% in the 2009 period compared to 30% in the 2008 period and Arizona of 13% in the 2009 period compared to 22% in the 2008 period. In addition,
the Company is experiencing increased homebuilding gross margin percentages of 13.5% in the 2009 period compared to 6.2% in the 2008 period particularly impacted by Southern California of 15.6% in the 2009 period compared to 7.5% in the 2008 period
and Northern California of 13.8% in the 2009 period compared to (2.6)% in the 2008 period.

In response to the
declining demand for housing in the homebuilding industry, and the resulting decrease in homebuilding revenues of 46% from the year ended December 31, 2008 to the year ended December 31, 2009, the management of the Company shifted its
strategy to focus on generating positive cash flow, reducing overall debt levels and improving liquidity. The management of the Company intends to manage cash flow by reducing inventory levels and expenditures for temporarily suspended projects. For
the year ended December 31, 2009, the Company generated $12.9 million of cash flows from operations and repaid a net $74.3 million of notes payable. In addition, the Company repurchased $156.9 million of principal outstanding Senior Notes for a
net purchase price of $77.0 million, plus accrued interest. The net gain resulting from the purchase, after giving effect to amortization of related deferred loan costs was $78.1 million. This repurchase will reduce future interest payments by
approximately $13.4 million per year.



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Further, the Company received a federal income tax refund of approximately
$41.6 million in January 2009 as a result of the carryback of estimated 2008 tax losses to 2006. Then on November 6, 2009, Congress enacted legislation that allows net operating losses realized in either tax year 2008 or 2009 to be carried back
up to five years. Based upon this new legislation, the Company has recorded a federal income tax refund of approximately $101.9 million.

As discussed more fully below, in October 2009, the Company entered into a Senior Secured Term Loan in the amount of $206.0 million of which $131.0 million funded on October 20, 2009 and an
additional $75.0 million was received on December 24, 2009. The Company used a portion of the net proceeds to fully repay the outstanding balances on its Revolving Credit Facilities during the fourth quarter of 2009. As of December 31,
2009, the Revolving Credit Facilities have been retired and there are no available borrowings on the Companys Revolving Credit Facilities.

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, senior secured term loan and other indebtedness.

In 2008, the Company suspended development, sales and marketing activities at certain of its projects which are in the early stages of development. The Company has concluded that
this strategy was necessary under the prevailing market conditions and believes that it will allow the Company to market the properties at some future time when market conditions may have improved. As markets continue to improve, management
continues to evaluate and analyze the market place to potentially activate temporarily suspended projects in 2010 and beyond.

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.

Senior Secured Term Loan

William Lyon Homes, Inc., a California corporation
(California Lyon) and wholly-owned subsidiary of William Lyon Homes is a party to a Senior Secured Term Loan Agreement (the Term Loan Agreement), dated October 20, 2009, with COLFIN WLH Funding, LLC, as Administrative
Agent (Admin Agent), COLFIN WLH Funding, LLC, as Initial Lender and Lead Arranger (COLFIN) and the other Lenders who may become assignees of COLFIN (collectively, with COLFIN, the Lenders).

The Term Loan Agreement provides for a first lien secured loan of $206.0 million (the Term Loan), secured by
substantially all of the assets of California Lyon, the Company (excluding stock in California Lyon) and certain wholly-owned subsidiaries. The Term Loan is guaranteed by the Company.

California Lyon received the first installment of $131.0 million, which funded in October 2009, and its second
installment of $75.0 million, which funded in December 2009. Under the Term Loan Agreement, California Lyon will be restricted from future borrowings, and, if necessary, will be required to repay existing borrowings, in order to maintain required
loan to value ratios such that: (i) the aggregate amount of outstanding loans under the Term Loan Agreement may not exceed 60% of the aggregate value of the properties securing the facility, with valuation based on the lower of appraised value
(if any) and discounted net present value of the cash flows, and (ii) the aggregate amount of secured debt may not exceed 60% of the aggregate value of the properties owned by California Lyon and its subsidiaries, with valuation based on the
lower of appraised value (if any) and discounted net present value of the cash flows and the second installment. California Lyon is currently in compliance with the above requirements following each drawdown. The net proceeds to the Company



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from the first installment of the Term Loan, after giving effect to attorney fees, loan fees and other miscellaneous costs associated with the loan transaction, and repayment of the revolving
credit facilities and purchase of the Senior Notes as described in Note 6 to Notes to Consolidated Financial Statements, was $34.6 million. A portion of the $75.0 million proceeds from the second installment were used to fund additional
land acquisitions in 2009 and 2010.

The Term Loan bears interest at a rate of 14.0%. However, California Lyon
has also agreed that, upon any repayment of any portion of the principal amount under the Term Loan (whether or not at maturity), California Lyon will also pay an exit fee equal to the difference (if positive) between (x) the interest that
would have been accrued and been then payable on the repaid portion if the interest rate under the Term Loan Agreement were 15.625% and (y) the internal rate of return realized by the Lenders on such repaid portion, taking into account all cash
amounts actually received by the Lenders with respect thereto other than any make whole payments described below.

Based on the current outstanding balance of the Term Loan, interest payments are $28.8 million annually.

On any voluntary prepayment of any portion of the Term Loan, California Lyon will be required to make a make whole payment equal to an amount, if positive, of the present value of all future payments of interest which would
become due with respect to such prepaid amount from the date of prepayment thereof through and including the maturity date, discounted at a rate of 14%.

The Term Loan will mature on October 20, 2014; however, in the event that any portion of the outstanding principal amounts (the Repaid Senior Note Principal) of the Senior Notes is repaid
(whether or not at maturity), the Lenders may elect to require California Lyon to repay that portion of the outstanding loan as bears the same ratio to the entire Term Loan outstanding as the Repaid Senior Note Principal bears to the entire amounts
then outstanding under all of the indentures. All or a portion of the Term Loan may also be accelerated upon certain other events described in the Term Loan Agreement. The lenders waived the requirement for such repayment in connection with the
Senior Note repurchases described above.

The Term Loan Agreement requires the Company to maintain a Minimum
Tangible Net Worth (as defined therein) of at least $75.0 million. The Term Loan Agreement also contains covenants that limit the ability of California Lyon and the Company to, without prior approval from Lenders, among other things:
(i) incur liens; (ii) incur additional indebtedness; (iii) transfer or dispose of assets; (iv) merge, consolidate or alter their line of business; (v) guarantee obligations; (vi) engage in affiliated party transactions;
(vii) declare or pay dividends or make other distributions or repurchase stock; (viii) make advances, loans or investments; (ix) repurchase debt (including under the Senior Note indentures) and (x) engage in change of control
transactions.

The Term Loan Agreement contains customary events of default, including, without limitation,
failure to pay when due amounts in respect of the loan or otherwise under the Term Loan Agreement; failure to comply with certain agreements or covenants contained in the Term Loan Agreement for a period of 10 days (or, in some cases, 30 days) after
the administrative agents notice of such non-compliance; acceleration of more than $10.0 million of certain other indebtedness; and certain insolvency and bankruptcy events.

Under the Senior Secured Term Loan, the Company is 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 at least $75.0 million;
| | - |  | ------------------------------------------------------------



| |  |  | A minimum borrowing base such that the indebtedness under the Term Loan does not exceed 60% of the Borrowing Base, with the Borrowing
Base being calculated as (1) the discounted cash flows of each project securing the loan (collateral value), plus (2) restricted cash and (3) escrow proceeds receivable, as defined;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Total secured indebtedness (including the indebtedness under the Term Loan and under all other Construction Notes payable) less than or equal to the
Maximum Permitted Secured Indebtedness under the Term Loan Agreement (which is generally 60% of the total secured debt collateral value as calculated under the Term Loan Agreement, which value generally does not include cash assets); and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Excluded Assets of no more than $25.0 Million, with Excluded Assets being defined generally as the sum total of certain deposit
accounts, payroll accounts, unrestricted cash accounts, and the Companys total investment in joint ventures.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The Companys covenant compliance for the Term Loan at
December 31, 2009 is detailed in the table set forth below (dollars in millions):



|                                                               |  |                           |       |   |                                         |        
|-------------------------------------------------------------- |  | ------------------------- | ----- | - | --------------------------------------- | -------
|Covenant and Other Requirements                                |  | Actual atDecember 31,2009 |       |   | CovenantRequirements atDecember 31,2009
|Tangible Net Worth (1)                                         |  | $                         | 143.3 |   |                                         | > $75.0
|Ratio of Term Loan to Borrowing Base                           |  |                           | 47.5  | % |                                         | < 60%  
|Secured Indebtedness (as a percentage of collateral value) (2) |  |                           | 71.8  | % |                                         | < 60%  
|Excluded Assets (3)                                            |  | $                         | 25.3  |   |                                         | < $25.0



|(1) | Tangible Net Worth was calculated based on the stated amount of equity less intangible assets of $14.9 million as of December 31, 2009.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



|(2) | The Company did not meet this covenant requirement at December 31, 2009, due to the land sales that occurred in December 2009, since the proceeds
had not been reapplied to eligible collateral by that date. The Company received prior approval from the lender to enter into the land sale transactions, whereby both the lender and the Company were aware of the collateral value that would be lost
by selling the underlying assets. The terms of the Secured Term Loan Agreement include a Notice of Default provision whereby the Company is not in Default until the lender notifies the Company of an event of default. The lender has
confirmed that it will not serve the Company a Notice of Default. The Company expects this calculation to be less than 60% by March 31, 2010.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The terms of the Secured Term Loan Agreement include a 30-day period to allow the Company to cure items of possible default. This calculation has
been cured as of January 30, 2010, by reducing the balance in one of the unrestricted cash accounts.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of and for the year ending December 31, 2009, the Company is not in default with the covenants under this loan.

If market conditions deteriorate, the financial covenants contained in the Companys Term Loan will continue to be negatively impacted. Under these circumstances, the lenders
under the Term Loan would need to provide the Company with additional covenant relief if the Company is to avoid future noncompliance with these financial covenants. If the Company is unable to obtain requested covenant relief or is unable to obtain
a waiver for any covenant non-compliance, the Companys obligation to repay indebtedness under the Term Loan and the Senior Notes could be accelerated. The Company can give no assurance that in such an event, the Company would have, or be able
to obtain, sufficient funds to pay all debt that the Company would be required to repay.

Senior Notes

October 2009 Senior Note Repurchases

On October 23, 2009, California Lyon repurchased, in a privately negotiated transaction using the
proceeds of the initial installment under the Loan Agreement, (i) $23.3 million principal amount of its outstanding 103/4% Senior Notes at a cost of $16.3 million plus accrued interest, (ii) $31.6 million principal amount of its
outstanding 75/8% Senior Notes at a cost of $22.1
million plus accrued interest, and (iii) $17.6 million principal amount of its outstanding 71/2% Senior Notes at a cost of $12.3 million plus accrued interest. The Lenders have permitted this repurchase and have waived their right to require any prepayment of the Term Loan in connection
therewith. The net gain resulting from these purchases, after giving effect to amortization of related deferred loan costs and other fees, was approximately $20.5 million.

After giving effect to these Senior Note repurchases, in addition to all prior Senior Note repurchases, California Lyon now has the following principal amounts of Senior Notes
outstanding (in thousands):



|                                         |  |                  |        
|---------------------------------------- |  | ---------------- | -------
|                                         |  | December 31,2009
|75/8% Senior Notes due December 15, 2012 |  | $                | 67,204 
|103/4% Senior Notes due April 1, 2013    |  |                  | 168,158
|71/2% Senior Notes due February 15, 2014 |  |                  | 84,701 
|                                         |  |                  |        
|                                         |  | $                | 320,063
|                                         |  |                  |        

75/8% Senior Notes

On November 22, 2004, California Lyon issued $150.0 million principal amount of 75/8% Senior Notes due 2012 (the 75/8% Senior Notes), resulting in net proceeds to the Company of
approximately $148.5 million. Of the initial $150.0 million, $67.2 million in aggregate principal amount remained as of December 31, 2009 and the date hereof.



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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 $2.6 million.

The 75/8% Senior Notes are 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.

103/4% Senior Notes

On March 17, 2003 California Lyon issued $250.0 million of 103/4% Senior Notes due 2013 (the 103/4% Senior Notes) 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. Of the initial $250.0 million, $168.2 million aggregate principal amount remained outstanding as of December 31, 2009 and the date hereof.

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 $9.0 million.

The 103/4% Senior Notes are 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.

71/2% Senior Notes

On February 6, 2004, California Lyon issued $150.0 million principal amount of 71/2% Senior Notes due 2014 (the 71/2% Senior Notes), resulting in net proceeds to the Company of
approximately $147.6 million. Of the initial $150.0 million, $84.7 million aggregate principal amount remained outstanding as of December 31, 2009 and the date hereof.

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 $3.2 million.

The 71/2% Senior Notes are 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.

General Terms of the Senior Notes

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 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



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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.

As of and for the year ending December 31, 2009 the Company was in compliance with these covenants.

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.

Revolving Credit Facilities

As discussed previously, on October 20, 2009, the Company entered into a Senior Secured Term Loan Agreement with COLFIN
WLH Funding, LLC, and used a portion of the net proceeds to fully repay the Revolving Credit Facilities. As of December 31, 2009, the Revolving Credit Facilities have been retired and there are no available borrowings.

Construction Notes Payable

At December 31, 2009, the Company had construction notes payable amounting to $64.2 million, including $18.9 million on certain consolidated entities. The construction notes
have various maturity dates through 2017 and bear interest at rates ranging from prime plus 0.25% to prime plus 1.0% at December 31, 2009. Interest is calculated on the average daily balance and is paid following the end of each month.

The Company is the sole member of Lyon East Garrison Company I, LLC which is a member with Woodman
Development Company, LLC (the Members) in East Garrison Partners I, LLC (the LLC). The LLC had a non-recourse construction note payable secured by the underlying land parcel, with an outstanding balance of $56.2 million as of
June 30, 2009 related to the acquisition and development of real estate in Monterey County, California. In addition to the non-recourse construction note payable, the Company and affiliates of the other Member entered into a completion
guaranty.

Based on general economic conditions at the time, the Members of the LLC and the construction note
lender determined to temporarily suspend further entitlement and development of the project, at which time it was agreed that certain site improvements would be completed in order to prepare and protect the site for a delay of approximately two
years. The Company and affiliates of the other Member of the LLC concluded that the completion of these site improvements satisfied the obligation under the completion guaranty.

The lender agreed to fund the site improvements under the guaranty; however the lender stopped funding for the improvements,
which left the LLC with unpaid invoices. During this same period, the LLC received several letters from the lender alleging default under the construction loan agreement which the Members contended were invalid based on previous discussions. In
addition, under the terms of the construction loan agreement, the LLC was required to reduce the loan commitment from $75.0 million to $35.0 million by January 31, 2009, which required a $21.2 million pay down.

The LLC did not make the required pay down on January 31, 2009 and was in default under the construction loan
agreement. In September 2009, the lender under the construction note payable sold the note to a third party, at which time the new holder of the note foreclosed on the property owned by the LLC. The lender and the LLC waived all construction
guaranties and obligations under the construction note payable.

Land Banking Arrangements

As a method of acquiring land in staged takedowns, thereby minimizing the use of funds from
the Companys available cash or other corporate financing sources and limiting the Companys risk, the Company transfers its 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 land being purchased. 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 could 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.

In addition, the Company participates in one land banking arrangement, which is not a VIE in accordance with FASB ASC 810,
but is consolidated in accordance with FASB ASC Topic 470, Debt.Under the provisions of FASB ASC 470, the Company has determined it is economically compelled, based on certain factors, to purchase the land in the land banking arrangements.
Therefore, the Company has recorded the remaining purchase price of the land of $55.3 million, which is included in real estate inventories not owned and liabilities from inventories not owned in the accompanying balance sheet as of
December 31, 2009.



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Summary information with respect to the Companys land banking
arrangements is as follows as of December 31, 2009 (dollars in thousands):



|                                                      |  |   |        
|----------------------------------------------------- |  | - | -------
|Total number of land banking projects                 |  |   | 1      
|                                                      |  |   |        
|Total number of lots                                  |  |   | 625    
|                                                      |  |   |        
|Total purchase price                                  |  | $ | 161,465
|                                                      |  |   |        
|Balance of lots still under option and not purchased: |  |   |        
|Number of lots                                        |  |   | 236    
|                                                      |  |   |        
|Purchase price                                        |  | $ | 55,270 
|                                                      |  |   |        
|Forfeited deposits if lots are not purchased          |  | $ | 25,234 
|                                                      |  |   |        

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, 2009 and 2008. Because the
Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of FASB ASC 810, 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). 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. 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, 2009, the Companys investment in and advances to unconsolidated joint ventures was $1.7 million and the venture partners investment in such joint ventures was $1.7 million. As of December 31,
2009, these joint ventures had repaid all financing from construction lenders.

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 12 of Notes to Consolidated Financial Statements.

Cash Flows  Comparison of Years Ended December 31, 2009 and 2008

Net cash provided by operating activities decreased to $12.9 million in the 2009 period from $80.4
million in the 2008 period. The decrease was primarily as a result of (i) a decrease in impairment loss on real estate assets of $90.0 million to $45.3 million in the 2009 period compared to $135.3 million in the 2008 period,
(ii) gain on retirement of debt of $78.1 million in the 2009 period compared to $54.0 million in the 2008 period, (iii) income tax benefit of $101.9 million in the 2009 period compared to income tax benefit of $41.6 million in the 2008
period, and (iv) net loss of $21.0 million in the 2009 period compared to $122.1 million in the 2008 period. The increase in the income tax benefit was the result of the legislation enacted in November 2009 which allows net operating losses
realized in either tax year 2008 or 2009 to be carried back up to five years. As a result of the new legislation the Company recorded a federal income tax benefit of $101.9 million for the year ended December 31, 2009, which the Company
anticipates receiving in the first quarter of 2010.



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The decrease in impairment loss on real estate assets is described in
Results of Operations above. The gain on retirement of debt is attributable to the Senior Note repurchase transactions that occurred during 2009. The details of the transactions are more fully detailed above. The difference between the
benefit from income taxes in the 2009 period and the benefit for income taxes in the 2008 period is described in detail in Note 10 to Notes to Consolidated Financial Statements.

Net cash provided by (used in) investing activities increased to a source of $2.7 million in the 2009 period from a use of
$3.3 million in the 2008 period. The change was primarily as a result of the (i) proceeds from the sale of the Company aircraft of $2.1 million in the 2009 period, as more fully described in Note 11 to the Notes to Consolidated Financial
Statements and (ii) a decrease in investments in and advances to unconsolidated joint ventures of $0.2 million in the 2009 period compared to $3.0 million in the 2008 period.

Net cash provided by (used in) financing activities increased to a source of $35.0 million in the 2009 period from a use of
$83.3 million in the 2008 period, primarily as a result of the net proceeds received from the issuance of the Senior Secured Term Loan of $193.9 million in the 2009 period with no comparable amount in the 2008 period, offset by an increase in the
net cash paid for the repurchase of Senior Notes of $77.0 million in the 2009 period, compared to $16.7 million in the 2008 period.

Cash Flows  Comparison of Years Ended December 31, 2008 and 2007

Net cash provided by operating activities decreased to $80.4 million in the 2008 period from $134.5 million in the 2007 period. The decrease was primarily as a result of (i) a decrease in impairment
loss on real estate assets of $95.8 million to $135.3 million in the 2008 period compared to $231.1 million in the 2007 period, (ii) minority equity in loss of $(10.4) million in the 2008 period compared to minority equity in income of $11.1
million in the 2007 period, (iii) gain on retirement of debt of $54.0 million in the 2008 period with no comparable amount in the 2007 period, (iv) income tax benefit of $41.6 million in the 2008 period compared to income tax provision of
$32.7 million in the 2007 period, (v) an increase in receivables of $9.6 million in the 2008 period compared to an increase in receivables of $81.4 million in the 2007 period and (vi) net loss of $111.6 million in the 2008 period compared
to $349.4 million in the 2007 period.

The decrease in impairment loss on real estate assets is described in
Results of Operations above. The decrease in minority equity in (loss) income is primarily attributable to a decrease in the number of consolidated joint venture homes closed to 64 homes in the 2008 period from 219 in the 2007 period and
an impairment charge on real estate assets in one of the Companys consolidated joint ventures. In conjunction with the impairment charge, the minority loss allocation was approximately $10.0 million. The gain on retirement of debt is
attributable to the repurchase transaction that occurred in October 2008. The details of the transaction are more fully detailed above. The difference between the benefit from income taxes in the 2008 period and the provision for income taxes in the
2007 period are described in detail in Note 11 to Notes to Consolidated Financial Statements.

The
decrease in receivables is attributable to a decrease in escrow proceeds receivable of $10.6 million during the 2008 period from a balance of $19.2 million as of December 31, 2007 to a balance of $8.6 million as of December 31, 2008,
compared to a decrease of $28.1 million during the 2007 period, from a balance of $47.3 million as of December 31, 2006 to a balance of $19.2 million as of December 31, 2007. The large balance as of December 31, 2007 and 2006 was
temporary in nature and primarily due to a significant number of homes closed in the last five days of the year of 122 in 2007 and 192 in 2006 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, 2007 and 2006 was collected within the first few days of the following period.

Net cash provided by (used in) investing activities decreased to a use of $3.3 million in the 2008 period from $8.3 million in the 2007 period. The change was primarily a result of a
decrease in investments in and advances to unconsolidated joint ventures of $3.0 million in the 2008 period compared to $7.1 million in the 2007 period.

Net cash provided by (used in) financing activities decreased to a use of $83.3 million in the 2008 period from $91.8 million in the 2007 period, primarily as a result of minority interest contributions
of $1.0 million in the 2008 period compared to distributions of $26.1 million in the 2007 period, offset by a net payments on notes payable of $67.6 million in the 2008 period compared to $65.7 million in the 2007 period.

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, 6 and 12 of Notes to Consolidated Financial Statements.



47



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Contractual Obligations

The Companys contractual obligations consisted of the following at December 31, 2009 (in thousands):



|                                         |  |           |           |                        |   |                      |  |                      |         |                                  |   |         |  |   |      
|---------------------------------------- |  | --------- | --------- | ---------------------- | - | -------------------- |  | -------------------- | ------- | -------------------------------- | - | ------- |  | - | -----
|                                         |  |           |           | Payments due by period
|                                         |  | Total (1) |           | Less than1 year(2010)  |   | 1-3 years(2011-2012) |  | 3-5 years(2013-2014) |         | More than5 years(2015 andbeyond)
|Other notes payable                      |  | $         | 59,761    |                        | $ | 38,174               |  | $                    | 19,629  |                                  | $ | 139     |  | $ | 1,819
|Senior Secured Term Loan                 |  |           | 343,855   |                        |   | 28,840               |  |                      | 57,680  |                                  |   | 257,335 |  |   |     
|Senior Notes(2)                          |  |           | 421,697   |                        |   | 29,674               |  |                      | 126,348 |                                  |   | 265,675 |  |   |     
|Operating leases                         |  |           | 6,305     |                        |   | 2,914                |  |                      | 3,194   |                                  |   | 197     |  |   |     
|Purchase obligations                     |  |           |           |                        |   |                      |  |                      |         |                                  |   |         |  |   |      
|Land purchases and option commitments(3) |  |           | 160,970   |                        |   | 62,132               |  |                      | 98,838  |                                  |   |        |  |   |     
|Surety Bonds                             |  |           | 109,426   |                        |   | 107,156              |  |                      | 2,270   |                                  |   |        |  |   |     
|Project commitments(4)                   |  |           | 112,365   |                        |   | 85,130               |  |                      | 18,157  |                                  |   | 9,078   |  |   |     
|                                         |  |           |           |                        |   |                      |  |                      |         |                                  |   |         |  |   |      
|Total                                    |  | $         | 1,214,379 |                        | $ | 354,020              |  | $                    | 326,116 |                                  | $ | 532,424 |  | $ | 1,819
|                                         |  |           |           |                        |   |                      |  |                      |         |                                  |   |         |  |   |      



|(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, 2009 and is calculated to the stated maturity
date.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Includes 75/8% Senior Notes, 103/4% Senior Notes and 71/2% Senior Notes combined.
|--- | ---------------------------------------------------------------------------------



|(3) | Represents the Companys obligations in land purchases, lot option agreements and land banking arrangements. If the Company does not purchase
the land under contract, it will forfeit its non-refundable deposit related to the land.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Represents the Companys homebuilding project purchase commitments for developing and building homes in the ordinary course of business.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

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.

Critical Accounting Policies

The Companys financial
statements have been prepared in accordance with U.S. generally accepted accounting principles. 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:



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##### Table of Contents

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 to purchase land, raw land, lots under development, homes under construction, completed homes and model 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 by the budgeted amount of
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 in accordance with FASB ASC Topic 360, Property, Plant & Equipment. ASC Topic 360 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. Indicators of impairment include a decrease in demand for housing due to softening market conditions, competitive pricing pressures which
reduce the average sales price of homes, which includes sales incentives for homebuyers, slowing sales absorption rates, a decrease in home values in the markets in which the Company operates, significant decreases in gross margins and a decrease in
project cash flows for a particular project.

For land and land under development, homes completed and under
construction and model homes, the Company estimates expected cash flows at the project level by maintaining current budgets using recent historical information and current market assumptions. The Company updates project budgets and cash flows of
each real estate project on a quarterly basis to determine whether the estimated remaining undiscounted future cash flows of the project are more or less than the carrying amount (net book value) of the asset. If the undiscounted cash flows are more
than the net book value of the project, then there is no impairment. If the undiscounted cash flows are less than the net book value of the asset, then the asset is deemed to be impaired and is written-down to its fair value.

Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties
(i.e., other than a forced or liquidation sale). Management determines the estimated fair value of each project by determining the present value of estimated future cash flows at discount rates that are commensurate with the risk of each project.
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 future revenues and costs, current market yields as well as future events and
conditions. As described more fully above in the section entitled Real Estate Inventories and Cost of Sales, estimates of revenues and costs are supported by the Companys budgeting process.

Under FASB ASC Topic 360, the Company is required to make certain assumptions to estimate undiscounted future cash flows of
a project, which include: (i) estimated sales prices, including sales incentives, (ii) anticipated sales absorption rates and sales volume, (iii) project costs incurred to date and the estimated future costs of the project based on
the project budget, (iv) the carrying costs related to the time a project is actively selling until it closes the final unit in the project, and (v) alternative strategies including selling the land to a third party or temporarily
suspending development on the project. Each



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##### Table of Contents

project has different assumptions and is based on managements assessment of the current market conditions that exist in each project location. Interest incurred allocated to each project is
included in future cash flows at effective borrowing rates of 9% for the reporting periods ending March 31, June 30 and September 30 and 11% as of December 31, 2009, and 7% for the 2008 period, which would yield discount rates of 19% to 27% for the
2009 period and 17% to 23% for the 2008 period. Interest allocated to each project for cash flows in 2010 and beyond is 11.25% due to the increase in cost of capital from the Senior Secured Term Loan.

The assumptions and judgments used by the Company in the estimation process to determine the future undiscounted cash flows
of a project and its fair value are inherently uncertain and require a substantial degree of judgment. The realization of the Companys real estate inventories is dependent upon future uncertain events and market conditions. Due to the
subjective nature of the estimates and assumptions used in determining the future cash flows of a project, the continued decline in the current housing market, the uncertainty in the banking and credit markets, actual results could differ materially
from current estimates.

These estimates are dependent on specific market or sub-market conditions for each
subdivision. While the Company considers available information to determine what it believes to be its best estimates as of the end of a reporting period, these estimates are subject to change in future reporting periods as facts and circumstances
change. Local market-specific conditions that may impact these estimates for a subdivision include:



| |  |  | historical subdivision results, and actual operating profit, base selling prices and home sales incentives;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | forecasted operating profit for homes in backlog;
| | - |  | -------------------------------------------------



| |  |  | the intensity of competition within a market or sub-market, including publicly available home sales prices and home sales incentives offered by our
competitors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased levels of home foreclosures;
| | - |  | --------------------------------------



| |  |  | the current sales pace for active subdivisions;
| | - |  | -----------------------------------------------



| |  |  | subdivision specific attributes, such as location, availability of lots in the sub-market, desirability and uniqueness of subdivision location and
the size and style of homes currently being offered;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes by management in the sales strategy of a given subdivision; and
| | - |  | -----------------------------------------------------------------------



| |  |  | current local market economic and demographic conditions and related trends and forecasts.
| | - |  | ------------------------------------------------------------------------------------------

These and other local market-specific conditions that may be present are considered by personnel in the Companys
homebuilding divisions as they prepare or update the forecasted assumptions for each subdivision. Quantitative and qualitative factors other than home sales prices could significantly impact the potential for future impairments. The sales objectives
can differ among subdivisions, even within a given sub-market. For example, facts and circumstances in a given subdivision may lead the Company to price its homes with the objective of yielding a higher sales absorption pace, while facts and
circumstances in another subdivision may lead the Company to price its homes to minimize deterioration in home gross margins, even though this could result in a slower sales absorption pace. Furthermore, the key assumptions included in estimated
future undiscounted cash flows may be interrelated. For example, a decrease in estimated base sales price or an increase in home sales incentives may result in a corresponding increase in sales absorption pace. Additionally, a decrease in the
average sales price of homes to be sold and closed in future reporting periods for one subdivision that has not been generating what management believes to be an adequate sales absorption pace may impact the estimated cash flow assumptions of a
nearby subdivision. Changes in key assumptions, including estimated construction and land development costs, absorption pace, selling strategies or discount rates could materially impact future cash flow and fair value estimates. Due to the number
of possible scenarios that would result from various changes in these factors, the Company does not believe it is possible to develop a sensitivity analysis with a level of precision that would be meaningful to an investor.

Management assesses land deposits for impairment when estimated land values are deemed to be less than the agreed upon
contract price. The Company considers changes in market conditions, the timing of land purchases, the ability to renegotiate with land sellers the terms of the land option contract in question, the availability and best use of capital, and other
factors. If land values are determined to be less than the contract price, the future project will not be purchased. The Company records abandoned land deposits and related pre-acquisition costs to cost of sales-land in the consolidated statement of
operations in the period that it is abandoned.



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##### Table of Contents

The following table summarizes inventory impairment charges recorded during
the years ended December 31, 2009, 2008, and 2007:



|                                                                  |  |                         |        |      |   |         |  |   |        
|----------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------- |  | - | -------
|                                                                  |  | Year Ended December 31,
|                                                                  |  | 2009                    |        | 2008 |   | 2007   
|                                                                  |  | (Dollars in thousands) 
|Inventory impairment charges related to:                          |  |                         |        |      |   |         |  |   |        
|Land under development and homes completed and under construction |  | $                       | 31,916 |      | $ | 83,174  |  | $ | 184,719
|Land held for sale or sold                                        |  |                         | 13,353 |      |   | 52,137  |  |   | 46,401 
|                                                                  |  |                         |        |      |   |         |  |   |        
|Total inventory impairment charges                                |  | $                       | 45,269 |      | $ | 135,311 |  | $ | 231,120
|                                                                  |  |                         |        |      |   |         |  |   |        
|Number of projects impaired during the year                       |  |                         | 13     |      |   | 41      |  |   | 42     
|                                                                  |  |                         |        |      |   |         |  |   |        
|Number of projects assessed for impairment during the year        |  |                         | 67     |      |   | 84      |  |   | 84     
|                                                                  |  |                         |        |      |   |         |  |   |        

These charges were included in
impairment loss on real estate assets in the accompanying consolidated statements of operations (See Note 3Notes to Consolidated Financial Statement for a detail of impairment by segment). At two of the Companys projects, impairment loss
was primarily attributable to an increase in interest cost allocated to the project related to the addition of the Senior Secured Term Loan at 14% interest. In addition, the Company decreased base sales prices and increased certain incentives
related to the projects, which is a strategy to improve sales absorption rates. The impairment charges recorded during the periods noted above stemmed from lower home prices which were driven by increased incentives and discounts resulting from
weakened demand experienced during 2007 through 2009. The Company may incur further impairment on real estate inventories in the future, if the homebuilding industry continues to experience the deteriorating market conditions identified above. In
addition, the Company may incur impairments in the future if it is unable to hold its temporarily suspended projects until market conditions improve.

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 FASB ASC Topic 976-605-25, 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 FASB ASC Topic 810, Consolidation.In addition, all joint ventures are reviewed
and analyzed under this guidance to determine whether or not these arrangements are accounted for under the principles of ASC 810 or other accounting rules. Under ASC 810, 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 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 this guidance, 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 FASB ASC 810. Based on the provisions of ASC 810,
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 this
guidance. 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 ASC 810 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.



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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.

Recently Issued Accounting Standards

See Note 1 of Notes to Consolidated Financial Statements for a description of the recently issued accounting
standards.



|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, 2009 of $57.0 million where the interest rate is variable based upon certain bank reference or prime rates. The average prime rate during the year ended December 31, 2009 was 3.25%. If
variable interest rates were to increase by 10%, the estimated impact on the Companys consolidated financial statements would be an increase to loss before benefit from income taxes of $0.4 million, based on amounts outstanding and rates in
effect during the year ended December 31, 2009, but would increase capitalized interest by approximately $0.1 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 86 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 at the reasonable assurance levels as of the end of the period
covered by the Annual Report on Form 10-K for the period ending December 31, 2009. 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.

A material weakness is a deficiency, or a combination of deficiencies in internal control over financial reporting, that creates a more than remote likelihood that a material misstatement of interim or annual financial statements will not
be prevented or detected on a timely basis. Management has concluded that the following material weakness existed at December 31, 2008.

During the year ended December 31, 2008, the Company reviewed all of its homebuilding projects and land held for development for indicators of impairment, both of which are included in real estate
inventories on the Companys consolidated balance sheets. Under the provisions of FASB ASC 360, the Company is required to make certain assumptions to estimate undiscounted future cash flows of a project, which include: (i) estimated sales
prices, including sales incentives, (ii) anticipated sales absorption rates and sales volume, (iii) project costs incurred to date and the estimated future costs of the project based on the project budget, and (iv) the carrying costs
related to the time a project is actively selling until it closes the final unit in the project, and (v) alternative strategies including selling the land to a third party or temporarily suspending development of the project. Each project has
different assumptions and is based on managements assessment of the current market conditions that exist in each project location.



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##### Table of Contents

At December 31, 2008 controls over the financial reporting process for
the validity of assumptions used for the estimated sales price on two projects were not effective. This resulted in a significant additional impairment adjustment to the Companys consolidated financial statements at December 31, 2008.
Specifically, controls were not effective to ensure accounting estimates based on these estimated sales prices were appropriately reviewed, analyzed and challenged by management on a timely basis. This adjustment was appropriately reflected in the
Consolidated Financial Statements in the Annual Report on Form 10-K for the year ending December 31, 2008.

In June 2009, the Company implemented new procedures to address the material weakness on impairment losses on real estate assets. The Company added a weighting factor to add statistical analysis to the subjectivity related to comparable
pricing data in new home pricing, which was appropriately reviewed, analyzed and challenged by management on a timely basis. The enhanced controls were tested in the three month periods ending September 30, 2009 and December 31, 2009. The
Company concluded that, as of December 31, 2009, the enhanced controls implemented were effective in the remediation of the material weakness.

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 and has designed internal controls and procedures to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements and related notes in accordance with
generally accepted accounting principles. Management assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment, our management concluded that, the Company maintained effective internal control over financial reporting as
of December 31, 2009.

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 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.

This annual report does not include an audit report of the Companys registered public accounting firm regarding internal control over financial reporting. The Companys internal controls were
not subject to audit by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.



|Item 9B. | Other Information
|-------- | -----------------

None.



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##### 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 5, 2010. 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          |  | 86  |  | Chairman of the Board of Directors and Chief Executive Officer
|William H. Lyon               |  | 36  |  | Director, President and Chief Operating Officer               
|Douglas K. Ammerman (a, b, c) |  | 58  |  | Director                                                      
|Harold H. Greene (a, b, c)    |  | 71  |  | Director                                                      
|Gary H. Hunt (a, b, c)        |  | 61  |  | Director                                                      
|Alex Meruelo (a, b, c)        |  | 47  |  | 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 The
Presley Companies, the predecessor of the Company, in 1987 and has served in that capacity since November 1999. General Lyon is the Companys Chief Executive Officer. General Lyon also served 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.

WILLIAM H. LYON, President and Chief Operating Officer, son of General 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 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. Effective on March 18, 2009, Mr. Lyon was appointed as
President and Chief Operating Officer of the Company. Mr. Lyon is a member of the Board of Directors of Commercial Bank of California. 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 a
National Partner in Charge  Tax. He is a certified public accountant (inactive). Since 2005, Mr. Ammerman has served as 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. Also, since 2005, he has been a member of the Board of Directors of Quiksilver (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.



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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).
From September 2007 until December 2009, he also served as a director and member of the audit committee and the corporate governance committee of Grubb & Ellis (real estate management).

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 eight offices throughout California. He was also formerly the 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. From September 2007 until December 2009, he also served as a director of Grubb & Ellis.

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, Hunt and Meruelo. 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). The Board has determined that Mr. Greene is an audit committee financial expert as defined by the SEC.

Board Structure.General William Lyon, Chairman of the Board and Chief Executive Officer of the Company is also the majority shareholder, beneficially owning 944 shares of the 1,000
outstanding shares of Company common stock. The Companys securities are not registered on any national security exchange, and the Company is not otherwise required to file public reports under the rules and regulation of the Securities and
Exchange Commission, but is a voluntary filer under the terms of its Senior Notes Indentures (as previously defined). However, as noted below under Director Independence, the Company maintains a majority of independent directors as
determined under the Rules of the New York Stock Exchange.

Given General Lyons long standing
association with the Company, his controlling interest in the Company and his extensive knowledge of and experience with the home building industry, the Board of Directors believes that General Lyons service as both Chairman of the Board and
Chief Executive Officer is in the best interest of the Company and its security holders. General Lyon possesses detailed and in-depth knowledge of the home building industry and the issues facing the Company and is thus best positioned to develop
agendas that ensure that the Boards time and attention are focused on the most critical matters. His combined role enables decisive leadership, ensures clear accountability, and enhances the Companys ability to communicate its message
and strategy clearly and consistently to the Companys security holders and employees.

Although the
Company believes that the combination of the Chairman and Chief Executive Officer roles is appropriate in the current circumstances, the Company has not established this approach as a policy.

The Company strives to compose the Board of directors with a collection of individuals who bring a variety of complementary
skills which, as a group, will possess the appropriate skills and experience to oversee the Companys business. Accordingly, although diversity may be a consideration in the selection of Board members, the Company and the Board of Directors do
not have a formal policy with regard to the consideration of diversity in identifying director nominees.

Risk Oversight.The Board is actively involved in oversight of risks that could affect the Company. The Board satisfies this responsibility through full reports by
each committee chair (principally, the Audit Committee chair) regarding such committees considerations and actions, as well as through regular reports directly from the officers responsible for oversight of particular risks within the Company.

The Audit Committee is primarily responsible for overseeing the risk management function at the Company on
behalf of the Board. In carrying out its responsibilities, the Audit Committee works closely with management. The Audit Committee meets at least quarterly with members of management and, among things, receives an update on managements
assessment of risk exposures (including risks related to liquidity, credit, and operations, among others). The Audit Committee chair provides periodic reports on risk management to the full Board.

In addition to the Audit Committee, the other committees of the Board consider the risks within their areas of
responsibility. For example, the Compensation Committee considers the risks that may be implicated by the Companys executive compensation programs. The Company does not believe that risks relating to its compensation policies and practices are
reasonably likely to have a material adverse effect on the Company.

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 5, 2010 and their current positions.



|                     |  |     |  |                                                                
|-------------------- |  | --- |  | ---------------------------------------------------------------
|Name                 |  | Age |  | Position                                                       
|General William Lyon |  | 86  |  | Chairman of the Board of Directors and Chief Executive Officer 
|William H. Lyon      |  | 36  |  | President and Chief Operating Officer                          
|Matthew R. Zaist     |  | 35  |  | Executive Vice President                                       
|Mary J. Connelly     |  | 58  |  | Senior Vice President and Nevada Division President            
|W. Thomas Hickcox    |  | 57  |  | Senior Vice President and Arizona Division President           
|Richard S. Robinson  |  | 63  |  | Senior Vice President  Finance                                
|Colin T. Severn      |  | 38  |  | Vice President, Chief Financial Officer and Corporate Secretary
|Brian W. Doyle       |  | 46  |  | Vice President and Southern California Division President      
|Gary L.Galindo       |  | 46  |  | Vice President and Northern California Division President      
|Cynthia E. Hardgrave |  | 61  |  | 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 and Mr. William H. Lyon is provided above. See Information Regarding the Directors of William Lyon Homes.



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MATTHEW R. ZAIST, Executive Vice President,
joined William Lyon Homes in 2000 as the Companys CIO. Since joining the Company, Mr. Zaist has served in a number of operational roles including Corporate Vice President - Business Development & Operations. Prior to that
Mr. Zaist served as Project Manager and Director of Land Acquisition for the Companys Southern California Region. In his current role, Mr. Zaist assists William H. Lyon with the overall management of the operations of the Company, is
responsible for all new real estate acquisitions, while also serving as a member of the Companys Land Committee. Mr. Zaist was appointed Executive Vice President in January 2010. Prior to joining William Lyon Homes, Mr. Zaist was a
principal with American Management Systems (now CGI) in their State & Local Government practice. Mr. Zaist holds a B.S. from Rensselaer Polytechnic Institute.

MARY J. CONNELLY, Senior Vice President and Nevada Division 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 25 years experience in the real
estate development and homebuilding industry.

W. THOMAS HICKCOX, Senior Vice
President and Arizona Division 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 25 years
experience in the real estate development and homebuilding industry.

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.

COLIN T. SEVERN, Vice President, Chief
Financial Officer and Corporate Secretary joined the Company in December 2003, and served in the role of Financial Controller until April 3, 2009. Since April 3, 2009, Mr. Severn served as Vice President, Corporate Controller and
Corporate Secretary until his promotion to Chief Financial Officer by approval of the board of directors of the Company on August 11, 2009. Mr. Severn is a member of the Companys Land Committee. Mr. Severn is a CPA (inactive)
and has more than 14 years of experience in real estate accounting and finance, including positions with the public accounting firm of Ernst & Young LLP, Irvine Apartment Communities and Standard Pacific Homes. Mr. Severn holds a B.A
in Business Administration with concentrations in Accounting and Finance from California State University, Fullerton.

BRIAN W. DOYLE, Vice President and Southern California Division President, joined the Company in 1999 when it acquired substantially all of the assets of the former William Lyon Homes, where Mr. Doyle had
served as Director of Sales and Marketing for the Southern California Division after his hire in November 1997. In January 2006, Mr. Doyle became Vice President and Division Manager for the San Diego Division. In January 2008,
Mr. Doyle became Division President for the San Diego/Inland Division. In February 2009, Mr. Doyle became the Southern California Division President. Mr. Doyle has more than 10 years experience in the real estate development and
homebuilding industry.

GARY L. GALINDO, Vice President and Northern California
Division President, joined the Company in 2003 as Director of Land Acquisition for the Northern California Division. In January 2006, Mr. Galindo became Vice President and Division Manager for the Sacramento Division. In January 2008,
Mr. Galindo became the Northern California Division President. Mr. Galindo has more than 10 years experience in the real estate development and homebuilding industry.

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 is a CPA and has more than 25 years experience in real estate tax and audit.

Section 16(a) Beneficial Ownership Reporting Compliance

During 2009, the Company had no class of equity securities registered under Section 12 of the Securities Exchange Act of 1934. Accordingly, no reports were required to be filed
during or with respect to the year ended December 31, 2009 on Form 3, Form 4 and Form 5 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



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of Section 406 of the Sarbanes-Oxley Act. 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 the Company, as the homebuilding industry is highly competitive and is subject to market fluctuations beyond the
Companys control. The goals of the Companys 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, the Company tries to keep its selling, general and administrative (SG&A) costs at competitive levels when compared with other major homebuilders.

The Companys compensation decisions are made by the Compensation Committee, which is composed entirely of independent outside members of the Companys Board of Directors.
The Compensation Committee receives recommendations from the Companys senior executives and consults with outside independent compensation consultants 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 the Companys executive team are involved in the compensation process by assembling data to present to the Compensation Committee and, if
necessary, 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. Because the Company no longer has a class of publicly-traded equity securities outstanding, the Company is no longer subject to
Section 162(m), and therefore it is not a factor in the Companys compensation decisions.

Elements of
Compensation

Salary

The Companys Compensation Committee generally reviews the base salary of the Companys named executive officers annually. In view of the Companys desire to reward
performance and loyalty while keeping SG&A costs competitive, the Company does not regard salary as the principal component of the compensation of its named executive officers. The Company believes that the salaries of its 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. The Company believes 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 correlate each named executive officers bonus directly to the Companys consolidated pre-tax, pre-bonus income (or, in the case of a division
president, to his divisions pre-tax, pre-bonus income), thereby directly rewarding performance.

The
Company believes that the bonus plan for its 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 the Company has (or the
relevant division has) high pre-tax, pre-bonus income. The Company believes that large bonuses for its named executive officers are appropriate if the Company has (or the relevant division has) high pre-tax, pre-bonus income, particularly because in
recent years the Company has not awarded any options or other equity compensation.



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A named executive officers right to receive a bonus is conditioned on
his being actively employed by the Company 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 the Companys named executive
officers.

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. In practice, the Compensation Committee has seldom exercised this discretion in recent years.

Summary Compensation Table

The following table summarizes the annual and long-term
compensation during 2009, 2008 and 2007 of the Companys Principal Executive Officer, 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, 2009 (collectively, the Named Executive Officers).



|                                                                                                                  |  |               |  |                              |  |                |                  |                |   |                 |  |                                                  |      |                                                                       |   |                             |  |           |      |  |   |                  |  |                             
|----------------------------------------------------------------------------------------------------------------- |  | ------------- |  | ---------------------------- |  | -------------- | ---------------- | -------------- | - | --------------- |  | ------------------------------------------------ | ---- | --------------------------------------------------------------------- | - | --------------------------- |  | --------- | ---- |  | - | ---------------- |  | ----------------------------
|Name and Principal Position                                                                                       |  | Year          |  | Salary($)(1)                 |  | Bonus($)(2)(3) |                  | StockAwards($) |   | OptionAwards($) |  | Non-EquityIncentive PlanCompensation($)(1)(2)(3) |      | Change inPension ValueandNonqualifiedDeferredCompensationEarnings
($) |   | All OtherCompensation($)(4) |  | Total ($)
|General William Lyon Chairman of the Board and Chief Executive Officer (Principal Executive Officer)              |  | 20092008 2007 |  | 1,000,0001,000,000 1,000,000 |  | $              |               |                | $ |              |  | $                                                |   |                                                                       | $ |                          |  | $         |   |  | $ |               |  | 1,000,0001,000,000 1,000,000
|                                                                                                                  |  |               |  |                              |  |                |                  |                |  
|Colin T. Severn (5) Vice President, Chief Financial Officer and Corporate Secretary (Principal Financial Officer) |  | 20092008 2007 |  | 156,923103,192 99,231        |  |                | 137,89626,250   |                |   |              |  |                                                  |   |                                                                       |   |                          |  |           |   |  |   | 4,8006,900 6,600 |  | 299,629134,242 105,831      
|                                                                                                                  |  |               |  |                              |  |                |                  |                |  
|William H. Lyon (6) Director, President and Chief Operating Officer                                               |  | 20092008 2007 |  | 341,923350,000 277,000       |  |                |               |                |   |              |  |                                                  |   |                                                                       |   |                          |  |           |   |  |   | 4,8006,900 6,600 |  | 346,723356,900 283,600      
|                                                                                                                  |  |               |  |                              |  |                |                  |                |  
|Richard S. Robinson Senior Vice President - Finance                                                               |  | 20092008 2007 |  | 200,000200,000 200,000       |  |                | 127,896100,000  |                |   |              |  |                                                  |   |                                                                       |   |                          |  |           |   |  |   | 4,8006,900 6,600 |  | 332,696306,900 206,600      
|                                                                                                                  |  |               |  |                              |  |                |                  |                |  
|Brian W. Doyle (7) Vice President and Southern California Region President                                        |  | 20092008 2007 |  | 197,115184,230 165,000       |  |                | 137,89692,500   |                |   |              |  |                                                  |   |                                                                       |   |                          |  |           |   |  |   | 4,8006,900 6,600 |  | 339,811283,630 171,600      



|(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) | Because the Companys results of operations were expected to be in a loss position for the year ending December 31, 2009, and thus
participants would receive no bonus income in 2009, the Plan provided for discretionary bonus awards for certain participants in various management bonus plans.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | At the beginning of each fiscal year, the Board of Directors approves the annual bonus plans, which are recommended by the Compensation Committee
after discussion and review with management of the Company. In the beginning of 2009, due to the conditions in the homebuilding market, the previous years losses and the anticipation that the Companys results of operations would be in a
loss position for the year, management of the Company did not propose a 2009 bonus plan. However, in December 2009, management awarded bonuses on a meritorious and subjective basis to the employees of the Company. The bonus awards were recommended
by the Compensation Committee and approved by the Board of Directors, after review and discussion with Companys management. At the beginning of 2008, the Board of Directors approved the Companys 2008 Senior Executive Bonus Plan (the
Plan) on February 26, 2008. 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 3/4of 1% of the Companys consolidated pre-tax, pre-bonus income; and (iii) the Chief Financial Officer (CFO) is eligible to receive a bonus of 1/2of 1% of the Companys consolidated pre-tax,
pre-bonus income. In addition, under the Plan, each Division 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|(5) | Promoted to Chief Financial Officer on August 11, 2009 with a base annual salary of $200,000.
|--- | ---------------------------------------------------------------------------------------------



|(6) | Effective on March 1, 2007, Mr. Lyon was appointed as Executive Vice President and Chief Administrative Officer. Effective on
March 18, 2009, Mr. Lyon was appointed as President and Chief Operating Officer of the Company. In 2009, William H. Lyon received a base salary of $350,000 until December 2009, when it was increased to $500,000 upon approval by the Board
of Directors, and a monthly car allowance of $400 from the Company.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Promoted to Vice President and Southern California Division President on March 1, 2009 with a base salary of $200,000.
|--- | ----------------------------------------------------------------------------------------------------------------------

At the beginning of each fiscal year, the Board of Directors approves the annual bonus
plans, which are recommended by the Compensation Committee after discussion and review with management of the Company. In the beginning of 2009, due to the conditions in the homebuilding market, the previous years losses and the anticipation
that the Companys results of operations would be in a loss position for the year, management of the Company did not propose a 2009 bonus plan. However, in December 2009, management awarded discretionary bonuses on a meritorious and subjective
basis to the employees of the Company. The bonus awards were recommended by the Compensation Committee of the Board of Directors, after review and discussion with Companys management.

At the beginning of 2008, the Board of Directors approved the Companys 2008 Senior Executive Bonus
Plan (the Plan) on February 26, 2008. 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 3/4of 1% of the Companys consolidated pre-tax, pre-bonus income; and (iii) the Chief Financial Officer (CFO) is eligible to receive a
bonus of 1/2of 1% of the Companys
consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Division 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,
because the Companys results of operations were expected to be in a loss position for the year ending December 31, 2008, and thus participants would receive no bonus income in 2008, the Plan provided for a 2008 bonus for all participants
in each respective bonus plan. Under this 2008 Bonus Plan, bonus ranges (defined as a percent of salary) are varied based on the level of position, but range from a maximum of 25% to 100% of salary for managers.

For the CEO, COO, EVP, CFO, division presidents, executives and managers, awards under bonus plans are generally 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. However, under the 2008
Bonus Plan, 100% of the bonuses awarded for 2008 were paid in January 2009.

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.

Grants of Plan-Based
Awards

Options/SAR Grants in Fiscal Year Ended December 31, 2009

No options were granted during 2009 to any director or Named Executive Officer. No options are outstanding as of
December 31, 2009.

Option Exercises and Stock Vested Table

No exercises of stock options and no vesting of stock occurred during the fiscal year ended December 31, 2009 by any of
the Named Executive Officers. No options are outstanding as of December 31, 2009.



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Executive Deferral Plan

Until December 2007, the Company maintained Executive Deferral Plans which gave its named executive officers the opportunity
to defer a certain percentage of their base salary and bonus. Deferred salary and bonuses were deemed to be invested in one or more hypothetical investment options, which were individually chosen by each named executive officer from a list of
investment alternatives. Each named executive officers deferred compensation account was adjusted to reflect the investment performance of the selected investment, including any appreciation or depreciation.

On December 26, 2007, the Board of Directors of the Company terminated the William Lyon Homes Executive Deferred
Compensation Plan adopted as of February 11, 2002 (the 2002 Plan), effective January 2, 2008. Upon termination of the 2002 Plan, all benefits thereunder were distributed in one lump sum on January 18, 2008.

In addition, on December 26, 2007, the Board of Directors of the Company amended the William Lyon Homes 2004 Executive
Deferred Compensation Plan (the 2004 Plan). Under this amendment (i) no further deferral elections were allowed under the 2004 Plan and (ii) each participant was deemed to have elected to receive the balance of his or her
deferral account under the 2004 Plan in one lump sum distribution. All benefits thereunder were distributed in one lump sum on January 18, 2008.

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, Colin T.
Severn, William H. Lyon, Richard S. Robinson and Brian R. Doyle provide for an annual salary as of December 31, 2009 of $1,000,000, $200,000, $500,000, $200,000 and $200,000 respectively. 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, Gary H. Hunt 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.

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,
2009.

Compensation Committee

Gary H. Hunt, Chairman

Douglas K. Ammerman

Harold H. Greene

Alex Meruelo

Director Compensation

In 2009, outside directors receive an annual fee of $30,000 per year, payable $7,500 per calendar quarter, and $1,250 for
each board meeting attended in person. In addition, the chairperson of the Audit Committee of the Board of Directors receives a fee of $5,000 per year, payable $1,250 per calendar quarter, to serve in such capacity, the chairperson of each other
committee of the Board of Directors received a fee of $3,750 per year, payable $938 per calendar quarter, to serve in such capacity, and other committee members received a fee of $1,000 per year, payable $250 per calendar quarter, per committee for
service on committees of the Board of Directors.



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In 2010, outside directors will 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 received a fee of $2,000 per year, payable $500 per calendar quarter, per committee for service on committees of the Board of Directors.

The following table sets forth information concerning the compensation of the directors during the fiscal year ended December 31, 2009.



|                    |  |                              |        |                |   |                 |   |                                         |   |                                                                       |   |                          |   |          |   |       
|------------------- |  | ---------------------------- | ------ | -------------- | - | --------------- | - | --------------------------------------- | - | --------------------------------------------------------------------- | - | ------------------------ | - | -------- | - | ------
|Name                |  | Fees Earnedor Paidin Cash($) |        | StockAwards($) |   | OptionAwards($) |   | Non-EquityIncentive PlanCompensation($) |   | Change inPension Valueand NonqualifiedDeferredCompensationEarnings($) |   | All OtherCompensation($) |   | Total($)
|Douglas K. Ammerman |  | $                            | 44,000 |                |  |                 |  |                                         |  |                                                                       |  |                          |  |          | $ | 44,000
|Harold H. Greene    |  |                              | 46,500 |                |  |                 |  |                                         |  |                                                                       |  |                          |  |          |   | 46,500
|Gary H. Hunt        |  |                              | 44,502 |                |  |                 |  |                                         |  |                                                                       |  |                          |  |          |   | 44,502
|Alex Meruelo        |  |                              | 44,502 |                |  |                 |  |                                         |  |                                                                       |  |                          |  |          |   | 44,502

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.



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|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 5, 2010. 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 5, 2010     
|                                                             |  | Shares BeneficiallyOwned |  | Percentage of AllCommon Stock
|General William Lyon(1)                                      |  | 946                      |  | 94.6%                        
|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%                        
|Harold H. Greene(1)                                          |  | 0                        |  | 0.00%                        
|Gary H. Hunt(1)                                              |  | 0                        |  | 0.00%                        
|Alex Meruelo(1)                                              |  | 0                        |  | 0.00%                        
|Richard S. Robinson(1)                                       |  | 0                        |  | 0.00%                        
|Colin T. Severn(1)                                           |  | 0                        |  | 0.00%                        
|Brian W. Doyle                                               |  | 0                        |  | 0.00%                        
|All directors and executive officers as a group (14 persons) |  | 946(3)                   |  | 94.6%                        



|(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 54 shares of common stock held by The William Harwell Lyon Separate Property Trust, 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, 2009, the
Company had no securities authorized for issuance under compensation plans.



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

Sale of Real Estate Project to Affiliate of General William Lyon and William H. Lyon.

On December 27, 2007, the Company sold certain land in San Diego County, California for $12.0 million in cash to a
limited liability company owned indirectly by Frank T. Suryan, Jr. as Trustee for the Suryan Family Trust. Mr. Suryan is Chairman and Chief Executive Officer of Lyon Capital Ventures, a company wholly owned by Frank T. Suryan, Jr., General
William Lyon, Chairman and Chief Executive Officer of the Company, and a trust whose sole beneficiary is William H. Lyon, President and Chief Operating Officer of the Company. The Company has received a report from a third-party valuation and
financial advisory services firm as to the reasonableness of the sales price in the transaction. Further, the transaction was unanimously approved by all independent members of the Board of Directors. Prior to the sale, the net book value of this
land (as reflected on the Companys financial statements) was approximately $18.7 million resulting in a loss on the transaction of $6.7 million. In October 2008, in a separately negotiated transaction from the sale of the land to the Company
owned indirectly by the Suryan Family Trust (the Owner), the Company was contracted by and for the Owner to build apartment units for a contract price of $13.5 million, which includes the Companys contractor fee of $0.5 million. As
described in footnote 1  Construction Services, the company accounts for this transaction based on the percentage of completion method, and recorded construction services revenue of $12.6 million and $0.2 million and construction services
costs of $11.6 million and $0.2 million during the years ended December 31, 2009 and 2008, respectively.



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

For the years ended December 31, 2009, 2008 and 2007, the Company incurred reimbursable on-site labor
costs of $197,000, $176,000, and $224,000, respectively, for providing customer service to real estate projects developed by entities controlled by General William Lyon and William H. Lyon, of which $58,000 and $18,000 was due to the Company at
December 31, 2009 and 2008, respectively. The Company earned fees of $36,000, $64,000 and $90,000, respectively, for tax and accounting services performed for entities controlled by General William Lyon and William H. Lyon during the years
ended December 31, 2009, 2008 and 2007.

The Company earned fees of $123,000 during the year ended
December 31, 2009 related to a Human Resources and Payroll Services contract between the Company and an entity controlled by General William Lyon and William H. Lyon.

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

In each of the three years ended December 31, 2009, 2008 and 2007, the Company incurred charges of $0.8 million 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, Use and Sale of Aircraft.

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. 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 expenses incurred by the Company and paid to the Affiliate under the agreement amounted to $0.8 million, $1.6 million,
and $1.4 million during the years ended December 31, 2009, 2008 and 2007, 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, the Company had earned revenue of $53,000, $0.4 million and $0.6 million for charter services provided to
General William Lyon personally, for the years ended December 31, 2009, 2008 and 2007, respectively

On
September 3, 2009, Presley CMR, Inc., a California corporation (Presley CMR) and wholly owned subsidiary of California Lyon, entered into an Aircraft Purchase and Sale Agreement (PSA) with an affiliate of General William
Lyon to sell the aircraft described above. The PSA provides for an aggregate purchase price for the Aircraft of $8.3 million (which value was the appraised fair market value of the Aircraft), which consists of: (i) cash in the amount of $2.1
million which was paid at closing and (ii) a promissory note from the affiliate in the amount of $6.2 million, which is included in receivables in the accompanying consolidated balance sheet. The closing of this sale occurred on
September 9, 2009. The Company recorded a loss on the sale of the Aircraft totaling $3.0 million, which is included in other loss in the accompanying statement of operations.

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 Messrs. William Lyon and William H. Lyon abstaining)
approved the purchase of 579 lots for a total purchase price of $12.6 million from an entity controlled by William Lyon and William H. Lyon. In addition to the purchase price, one-half of the net profits in excess of six percent from the
development are to be paid to the seller. As of December 31, 2004, all lots were purchased under this agreement. During the year ended December 31, 2007, $8.3 million was paid to the seller and a total cumulative amount of $14.0 million
has been paid to the seller as of December 31, 2009.



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Purchase of Land from Joint Ventures.

The Company purchased land for a total purchase price of $17.3 million during the year ended December 31, 2007 from
certain of its joint ventures.

Certain Family Relationships.

William H. Lyon, one of the Companys directors and the President and Chief Operating 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. Mr. Lyons compensation is disclosed in the Summary Compensation Table above.

Terry A. Connelly, who is Senior Vice President and Director of Operations of the Companys Nevada Division, is married
to Mary J. Connelly, President of the Nevada Division. In 2009, Mr. Connelly received a base salary of $160,000 and a monthly car allowance of $400 from the Company. Mr. Connelly earned a bonus of $ 92,750 in 2009.

Director Independence.

The Board of Directors has determined that Douglas K. Ammerman, Harold H. Greene, Gary H. Hunt 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 and Hunt. 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, Hunt and Meruelo. 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 is
chaired by Mr. Hunt and consists of Messrs. Hunt, Ammerman, Greene, and Meruelo. The Board has determined that all committee members are independent under standards established by the SEC and the NYSE.



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|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

The fees for professional services provided by both Ernst & Young and Windes & McClaughry in fiscal year
2009 and by Ernst & Young LLP in fiscal year 2008 were:



|                   |  |      |         |      |   |        
|------------------ |  | ---- | ------- | ---- | - | -------
|Type of Fees       |  | 2009 |         | 2008
|Audit Fees         |  | $    | 494,000 |      | $ | 528,000
|Audit-Related Fees |  |      |        |      |   | 36,500 
|Tax Fees           |  |      | 25,000  |      |   | 95,000 
|                   |  |      |         |      |   |        
|Total Fees         |  | $    | 519,000 |      | $ | 659,500
|                   |  |      |         |      |   |        

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. 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 its
registered public accountants with the maintenance of their independence. The Audit Committee approved all audit and non-audit services provided by Windes & McClaughry in 2009 and by Ernst & Young LLP in 2008 and 2009.



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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                                        |  |       
|Reports of Independent Registered Public Accounting Firms |  | 73, 74
|Consolidated Balance Sheets                               |  | 75    
|Consolidated Statements of Operations                     |  | 76    
|Consolidated Statements of Equity                         |  | 77    
|Consolidated Statements of Cash Flows                     |  | 78    
|Notes to Consolidated Financial Statements                |  | 80    

(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(19)       |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                           
|3.4(19)       |  | Certificate of Amendment of Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                      
|3.5(2)        |  | Bylaws of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                                                          
|4.1(14)       |  | 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(10)       |  | 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(15)       |  | 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(10)       |  | 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(15)       |  | 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(9)        |  | 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(10)       |  | 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).



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                         
|              | 
|4.9(15)       |  | 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(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.                                                                                                                                                                     
|10.2(11)      |  | 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.                                                                                                                                    
|10.3(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.                                                                                                                              
|10.4(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.                                                                                                                                
|10.5(8)       |  | 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.                                                                                                                                                                             
|10.6(16)      |  | 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.                                                                                                                                                                                                                    
|10.7(17)      |  | 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.                                                                                                                                                         
|10.8(21)      |  | Third Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of December 28, 2007, by and between William Lyon Homes, Inc., a
California corporation and California Bank & Trust, a California banking corporation.                                                                                                                                                     
|10.9(21)      |  | Fourth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of January 17, 2008 by and between William Lyon Homes, Inc., a
California corporation and California Bank & Trust, a California banking corporation.                                                                                                                                                      
|10.10(23)     |  | Fifth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of May 20, 2008 by and between William Lyon Homes, Inc., a California
corporation (Borrower), and California Bank & Trust, a California banking corporation (Lender).                                                                                                                                  
|10.11(24)     |  | Sixth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of September 17, 2008, by and between William Lyon Homes, Inc., a
California corporation and California Bank & Trust, a California Banking Corporation.                                                                                                                                                    
|10.12(26)     |  | Side Letter Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of December 17, 2008, by and between William Lyon Homes, Inc.,
a California corporation and California Bank & Trust, a California Banking Corporation.                                                                                                                                               
|10.13(26)     |  | Seventh Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of April 6, 2009, by and between William Lyon Homes, Inc., a
California corporation and California Bank & Trust, a California Banking Corporation.                                                                                                                                                       
|10.14(6)      |  | 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.                                                                                                  
|10.15(6)      |  | Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware
corporation.                                                                                                                                                                                                                                                       
|10.16(7)      |  | 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.                                                                                                                                                                                                  



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|              |  |                                                                                                                                                                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                            
|              | 
|10.17(10)     |  | 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).                                          
|10.18(16)     |  | 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).                                                   
|10.19(18)     |  | 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.                              
|10.20(20)     |  | Fifth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated November 6, 2007 by and between William Lyon Homes, Inc., a California
corporation and JPMorgan Chase Bank, N.A., a national banking association.                              
|10.21(21)     |  | Sixth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated February 20, 2008 by and between William Lyon Homes, Inc., a
California corporation and JPMorgan Chase Bank, N.A., a national banking association.                             
|10.22(23)     |  | Seventh Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of March 12, 2008 by and between William Lyon Homes, Inc., a
California corporation (Borrower) and JPMorgan Chase Bank, N.A., a national banking association (Bank).  
|10.23(23)     |  | Eighth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of June 5, 2008 by and between William Lyon Homes, Inc., a
California corporation (Borrower) and JPMorgan Chase Bank, N.A., a national banking association (Bank).     
|10.24(25)     |  | Ninth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of September 25, 2008 by and between William Lyon Homes, Inc., a
California Corporation (Borrower) and JPMorgan Chase Bank, N.A., a national banking association (Bank).
|10.25(26)     |  | Tenth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated December 19, 2008, by and between JPMorgan Chase Bank, N.A., a
national banking association, and William Lyon Homes, Inc., a California Corporation.                           
|10.26(26)     |  | Eleventh Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated June 3, 2009, by and between JPMorgan Chase Bank, N.A., a national
banking association, and William Lyon Homes, Inc., a California Corporation.                             
|10.27(26)     |  | Twelfth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated November 18, 2009, by and between JPMorgan Chase Bank, N.A., a
national banking association, and William Lyon Homes, Inc., a California Corporation.                         
|10.28(27)     |  | Senior Secured Term Loan Agreement dated as of October 20, 2009 by and between William Lyon Homes, Inc., (Borrower) and COLFIN WLH Funding, LLC,
as Administrative Agent (Admin Agent), COLFIN WLH Funding, LLC, as Initial Lender and Lead Arranger (COLFIN).   
|10.29(12)     |  | Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.                                                                                                                                 
|10.30(12)     |  | 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.                                                             
|10.31(12)     |  | Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and
effective November 5, 1999.                                                                                  
|10.32(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.                                                                      
|10.33(19)     |  | Description of 2007 Cash Bonus Plan.                                                                                                                                                                                                                                   
|10.34(19)     |  | 2007 Senior Executive Bonus Plan.                                                                                                                                                                                                                                      
|10.35(13)     |  | Standard Industrial/Commercial Single-Tenant Lease  Net between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.                                                                                                                
|10.36(5)      |  | The Presley Companies Non-Qualified Retirement Plan for Outside Directors.                                                                                                                                                                                             
|10.37(22)     |  | Third Extension and Modification agreement dated May 19, 2008, by and between Circle G at the Church Farm North Joint Venture, LLC, an Arizona limited
liability company, and California National Bank, a national banking association.                                
|10.38(28)     |  | Aircraft Purchase and Sale Agreement dated as of September 3, 2009 (Effective Date), by and between Presley CMR, Inc., and Martin Aviation, Inc.,
or its designee.                                                                                                   
|10.39(28)     |  | Secured Promissory Note dated September 9, 2009 from Martin Aviation, Inc., a California corporation (Maker) payable to William Lyon Homes, Inc.,
a California corporation (Holder).                                                                               



68



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##### Table of Contents

|              |  |                                                                                                                                                              
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                  
|              | 
|10.40(28)     |  | Aircraft Mortgage and Security Agreement between Martin Aviation, Inc., a California corporation and William Lyon Homes, Inc., dated as of September 9, 2009.
|12.1(29)      |  | Statement of computation of ratio of earnings to fixed charges.                                                                                              
|21.1(29)      |  | List of Subsidiaries of William Lyon Homes, a Delaware corporation.                                                                                          
|31.1(29)      |  | Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                          
|31.2(29)      |  | Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                          
|32.1(29)      |  | 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(29)      |  | 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 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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | 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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | 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.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | 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.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | 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.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | 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.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) |  | 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.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) |  | 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.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(16) |  | 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.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|(17) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed September 27, 2006 and incorporated herein by reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|(18) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed October 27, 2006 and incorporated herein by reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|(19) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by
reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(20) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on November 15, 2007 and incorporated herein by
reference.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|(21) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by
reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(22) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on May 28, 2008 and incorporated herein by reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------



69



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##### Table of Contents

|(23) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008 and
incorporated herein by reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(24) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on September 24, 2008 and incorporated herein by
reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(25) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008 and
incorporated herein by reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(26) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on January 5, 2009 and incorporated herein by reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|(27) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on October 22, 2009 and incorporated herein by reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|(28) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on September 10, 2009 and incorporated herein by
reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(29) |  | Filed herewith.
|---- |  | ---------------



70



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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 29, 2010 |  |  |  | By:                |  | /s/    COLIN T.
SEVERN                 
|               |  |  |  |                    |  | Colin T. Severn                        
|               |  |  |  |                    |  | Vice President, Chief Financial Officer
|               |  |  |  |                    |  | and Corporate Secretary                

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
LYON William Lyon               |  | Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)                    |  | March 29, 2010
|                                               |  |                                                                                                             
|/S/    WILLIAM H.
LYON William H. Lyon         |  | Director, President and Chief Operating Officer                                                              |  | March 29, 2010
|                                               |  |                                                                                                             
|/S/    DOUGLAS K.
AMMERMAN Douglas K. Ammerman |  | Director                                                                                                     |  | March 17, 2010
|                                               |  |                                                                                                             
|/S/    HAROLD H.
GREENE Harold H. Greene       |  | Director                                                                                                     |  | March 25, 2010
|                                               |  |                                                                                                             
|/S/    GARY H.
HUNT Gary H. Hunt               |  | Director                                                                                                     |  | March 24, 2010
|                                               |  |                                                                                                             
|/S/    ALEX
MERUELO Alex Meruelo               |  | Director                                                                                                     |  | March 25, 2010
|                                               |  |                                                                                                             
|/S/    COLIN T.
SEVERN Colin T. Severn         |  | Vice President, Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) |  | March 29, 2010



71



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##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



|                                                          |  |      
|--------------------------------------------------------- |  | -----
|                                                          |  | Page 
|                                                          | 
|William Lyon Homes                                        |  |      
|                                                          | 
|Reports of Independent Registered Public Accounting Firms |  | 73,74
|Consolidated Balance Sheets                               |  | 75   
|Consolidated Statements of Operations                     |  | 76   
|Consolidated Statements of Equity                         |  | 77   
|Consolidated Statements of Cash Flows                     |  | 78   
|Notes to Consolidated Financial Statements                |  | 80   

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.



72



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##### 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 sheet of William Lyon Homes (the Company) as of December 31, 2009, and the related consolidated statements of operations, equity and cash flows for the year then ended. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our 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 the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of William Lyon Homes as of December 31, 2009, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, on January 1, 2009, the Company adopted
Financial Accounting Standard No. 160, later codified in ASC Topic 810-10, Consolidation.

/S/    WINDES & MCCLAUGHRY

Irvine, California

March 29, 2010



73



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##### 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 sheet of William Lyon Homes as of December 31, 2008, and the related consolidated statements of operations, equity and cash flows for each of the two years in the period ended December 31, 2008. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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 financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of William Lyon Homes at December 31, 2008, and the
consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, on January 1, 2009 the Company adopted
     Financial Accounting Standards Statement No. 160, later codified in ASC 810-10, Noncontrolling Interest in Consolidated Financial Statements. The balance sheet as of December 31, 2008 and the consolidated statements
of operations, equity and cash flows for each of the two years in the period then ended have been restated to conform to the adopted accounting standard.

/S/    ERNST & YOUNG LLP

Irvine, California

March 25, 2009,

except for the effects

of the restatement described

in paragraph 18 of Note 1,

as to which the date is

March 29, 2010



74



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##### Table of Contents

WILLIAM LYON HOMES

CONSOLIDATED BALANCE SHEETS

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



|                                                                                                                        |  |              |         |      |   |          
|----------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | ---------
|                                                                                                                        |  | December 31,
|                                                                                                                        |  | 2009         |         | 2008
|ASSETS                                                                                                                 
|Cash and cash equivalents  Note 1                                                                                      |  | $            | 117,587 |      | $ | 67,017   
|Restricted cash  Note 1                                                                                                |  |              | 4,352   |      |   | 5,079    
|Receivables  Note 4                                                                                                    |  |              | 16,294  |      |   | 29,985   
|Income tax refunds receivable  Note 9                                                                                  |  |              | 106,989 |      |   | 46,696   
|Real estate inventories  Notes 2 and 5                                                                                 |  |              |         |      |   |          
|Owned                                                                                                                   |  |              | 523,336 |      |   | 754,489  
|Not owned                                                                                                               |  |              | 55,270  |      |   | 107,763  
|Investments in and advances to unconsolidated joint ventures                                                            |  |              | 1,703   |      |   | 2,769    
|Property and equipment, less accumulated depreciation of $8,195 and $14,124 at December 31, 2009 and 2008,
respectively |  |              | 1,673   |      |   | 14,403   
|Deferred loan costs                                                                                                     |  |              | 14,859  |      |   | 6,264    
|Other assets                                                                                                            |  |              | 18,036  |      |   | 10,378   
|                                                                                                                        |  |              |         |      |   |          
|                                                                                                                        |  | $            | 860,099 |      | $ | 1,044,843
|                                                                                                                        |  |              |         |      |   |          
|LIABILITIES AND EQUITY                                                                                                  |  |              |         |      |   |          
|Accounts payable                                                                                                        |  | $            | 11,046  |      | $ | 16,331   
|Accrued expenses                                                                                                        |  |              | 45,294  |      |   | 62,987   
|Liabilities from inventories not owned                                                                                  |  |              | 55,270  |      |   | 80,079   
|Notes payable  Notes 6 and 7                                                                                           |  |              | 64,227  |      |   | 194,629  
|Senior Secured Term Loan due October 20, 2014  Notes 6 and 7                                                           |  |              | 206,000 |      |   |         
|75/8% Senior Notes due December 15, 2012  Notes 6 and 7                                                                |  |              | 67,204  |      |   | 133,800  
|103/4% Senior Notes due April 1, 2013  Notes 6 and 7                                                                   |  |              | 168,158 |      |   | 218,176  
|71/2% Senior Notes due February 15, 2014  Notes 6 and 7                                                                |  |              | 84,701  |      |   | 124,300  
|                                                                                                                        |  |              |         |      |   |          
|                                                                                                                        |  |              | 701,900 |      |   | 830,302  
|                                                                                                                        |  |              |         |      |   |          
|Commitments and contingencies  Note 11                                                                                 |  |              |         |      |   |          
|                                                                                                                        |  |             
|Equity:                                                                                                                 |  |              |         |      |   |          
|Stockholders equity  Note 8                                                                                           |  |              |         |      |   |          
|Common stock, par value $.01 per share; 3,000 shares authorized; 1,000 shares outstanding at December 31,
2009 and 2008 |  |              |        |      |   |         
|Additional paid-in capital                                                                                              |  |              | 48,867  |      |   | 48,867   
|Retained earnings                                                                                                       |  |              | 101,733 |      |   | 122,258  
|                                                                                                                        |  |              |         |      |   |          
|                                                                                                                        |  |              | 150,600 |      |   | 171,125  
|Noncontrolling interest  Note 2                                                                                        |  |              | 7,599   |      |   | 43,416   
|                                                                                                                        |  |              |         |      |   |          
|                                                                                                                        |  |              | 158,199 |      |   | 214,541  
|                                                                                                                        |  |              |         |      |   |          
|                                                                                                                        |  | $            | 860,099 |      | $ | 1,044,843
|                                                                                                                        |  |              |         |      |   |          

See accompanying notes.



75



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##### Table of Contents

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)



|                                                         |  |                         |          |   |      |   |          |      |  |   |            |  
|-------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | ---------- | -
|                                                         |  | Year Ended December 31, |         
|                                                         |  | 2009                    |          |   | 2008 |   |          | 2007 | 
|Operating revenue                                        |  |                         |          |   |      |   |          |      |  |   |            |  
|Home sales                                               |  | $                       | 253,874  |   |      | $ | 468,452  |      |  | $ | 1,002,549  |  
|Lots, land and other sales                               |  |                         | 21,220   |   |      |   | 39,512   |      |  |   | 102,808    |  
|Construction services  Note 1                           |  |                         | 34,149   |   |      |   | 18,114   |      |  |   |           |  
|                                                         |  |                         |          |   |      |   |          |      |  |   |            |  
|                                                         |  |                         | 309,243  |   |      |   | 526,078  |      |  |   | 1,105,357  |  
|                                                         |  |                         |          |   |      |   |          |      |  |   |            |  
|Operating costs                                          |  |                         |          |   |      |   |          |      |  |   |            |  
|Cost of sales  homes                                    |  |                         | (219,486 | ) |      |   | (439,276 | )    |  |   | (873,228   | )
|Cost of sales  lots, land and other                     |  |                         | (131,640 | ) |      |   | (47,599  | )    |  |   | (205,603   | )
|Impairment loss on real estate assets  Note 5           |  |                         | (45,269  | ) |      |   | (135,311 | )    |  |   | (231,120   | )
|Impairment loss on goodwill  Note 1                     |  |                         |         |   |      |   | (5,896   | )    |  |   |           |  
|Construction services  Note 1                           |  |                         | (28,486  | ) |      |   | (15,431  | )    |  |   |           |  
|Sales and marketing                                      |  |                         | (17,636  | ) |      |   | (40,441  | )    |  |   | (66,703    | )
|General and administrative                               |  |                         | (21,027  | ) |      |   | (27,645  | )    |  |   | (37,472    | )
|Other  Note 10                                          |  |                         | (6,580   | ) |      |   | (4,461   | )    |  |   | (903       | )
|                                                         |  |                         |          |   |      |   |          |      |  |   |            |  
|                                                         |  |                         | (470,124 | ) |      |   | (716,060 | )    |  |   | (1,415,029 | )
|                                                         |  |                         |          |   |      |   |          |      |  |   |            |  
|Equity in (loss) income of unconsolidated joint ventures |  |                         | (420     | ) |      |   | (3,877   | )    |  |   | 304        |  
|                                                         |  |                         |          |   |      |   |          |      |  |   |            |  
|Operating loss                                           |  |                         | (161,301 | ) |      |   | (193,859 | )    |  |   | (309,368   | )
|Gain on retirement of debt  Note 6                      |  |                         | 78,144   |   |      |   | 54,044   |      |  |   |           |  
|Interest expense, net of amounts capitalized  Note 6    |  |                         | (35,902  | ) |      |   | (24,440  | )    |  |   |           |  
|Other (expense) income, net  Note 10                    |  |                         | (3,802   | ) |      |   | 579      |      |  |   | 3,744      |  
|                                                         |  |                         |          |   |      |   |          |      |  |   |            |  
|Loss before benefit from (provision for) income taxes    |  |                         | (122,861 | ) |      |   | (163,676 | )    |  |   | (305,624   | )
|                                                         |  |                         |          |   |      |   |          |      |  |   |            |  
|Benefit from (provision for) income taxes  Note 9       |  |                         | 101,908  |   |      |   | 41,592   |      |  |   | (32,658    | )
|                                                         |  |                         |          |   |      |   |          |      |  |   |            |  
|Consolidated net loss                                    |  |                         | (20,953  | ) |      |   | (122,084 | )    |  |   | (338,282   | )
|Less: net loss (income)  noncontrolling interest        |  |                         | 428      |   |      |   | 10,446   |      |  |   | (11,126    | )
|                                                         |  |                         |          |   |      |   |          |      |  |   |            |  
|Net loss attributable to William Lyon Homes              |  | $                       | (20,525  | ) |      | $ | (111,638 | )    |  | $ | (349,408   | )
|                                                         |  |                         |          |   |      |   |          |      |  |   |            |  

See accompanying notes.



76



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##### Table of Contents

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)



|                                                                                                            |  |              |  |                          |   |                  |   |        |                         |   |          |       |  |   |         |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | - | ---------------- | - | ------ | ----------------------- | - | -------- | ----- |  | - | ------- | - |  | - | -------- | -
|                                                                                                            |  | Common Stock |  | AdditionalPaid-InCapital |   | RetainedEarnings |   |        | Non-ControllingInterest |   |          | Total | 
|                                                                                                            |  |              |  |                          |  
|                                                                                                            |  | Shares       |  | Amount                   |   |                  |   |       
|Balance  December 31, 2006                                                                                 |  | 1            |  | $                        |  |                  | $ | 43,213 |                         | $ | 582,182  |       |  | $ | 109,859 |   |  | $ | 735,254  |  
|Income tax benefit and related interest recognized as the result of the adoption of ASC Topic 810  Note 10 |  |             |  |                          |  |                  |   | 5,654  |                         |   | 1,122    |       |  |   |        |   |  |   | 6,776    |  
|Purchase of consolidated land banking arrangement determinedto be a variable interest entity                |  |             |  |                          |  |                  |   |       |                         |   |         |       |  |   | (38,233 | ) |  |   | (38,233  | )
|Advances to joint venture                                                                                   |  |             |  |                          |  |                  |   |       |                         |   |         |       |  |   | (624    | ) |  |   | (624     | )
|Cash distributions to members of consolidated entities, net                                                 |  |             |  |                          |  |                  |   |       |                         |   |         |       |  |   | (26,119 | ) |  |   | (26,119  | )
|Net (loss) income                                                                                           |  |             |  |                          |  |                  |   |       |                         |   | (349,408 | )     |  |   | 11,126  |   |  |   | (338,282 | )
|                                                                                                            |  |              |  |                          |   |                  |   |        |                         |   |          |       |  |   |         |   |  |   |          |  
|                                                                                                            |  |              |  |                          |   |                 
|Balance  December 31, 2007                                                                                 |  | 1            |  |                          |  |                  |   | 48,867 |                         |   | 233,896  |       |  |   | 56,009  |   |  |   | 338,772  |  
|Cancellation of consolidated land banking arrangementdetermined to be a variable interest
entity            |  |             |  |                          |  |                  |   |       |                         |   |         |       |  |   | (3,186  | ) |  |   | (3,186   | )
|Cash contributions from members of consolidated entities, net                                               |  |             |  |                          |  |                  |   |       |                         |   |         |       |  |   | 1,039   |   |  |   | 1,039    |  
|Net loss                                                                                                    |  |             |  |                          |  |                  |   |       |                         |   | (111,638 | )     |  |   | (10,446 | ) |  |   | (122,084 | )
|                                                                                                            |  |              |  |                          |   |                  |   |        |                         |   |          |       |  |   |         |   |  |   |          |  
|                                                                                                            |  |              |  |                          |   |                 
|Balance  December 31, 2008                                                                                 |  | 1            |  |                          |  |                  |   | 48,867 |                         |   | 122,258  |       |  |   | 43,416  |   |  |   | 214,541  |  
|Cancellation of consolidated land banking arrangementdetermined to be a variable interest
entity            |  |             |  |                          |  |                  |   |       |                         |   |         |       |  |   | (27,684 | ) |  |   | (27,684  | )
|Cash distributions to members of consolidated entities, net                                                 |  |             |  |                          |  |                  |   |       |                         |   |         |       |  |   | (7,705  | ) |  |   | (7,705   | )
|Net loss                                                                                                    |  |             |  |                          |  |                  |   |       |                         |   | (20,525  | )     |  |   | (428    | ) |  |   | (20,953  | )
|                                                                                                            |  |              |  |                          |   |                  |   |        |                         |   |          |       |  |   |         |   |  |   |          |  
|                                                                                                            |  |              |  |                          |   |                 
|Balance  December 31, 2009                                                                                 |  | 1            |  | $                        |  |                  | $ | 48,867 |                         | $ | 101,733  |       |  | $ | 7,599   |   |  | $ | 158,199  |  
|                                                                                                            |  |              |  |                          |   |                  |   |        |                         |   |          |       |  |   |         |   |  |   |          |  

See accompanying notes.



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WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                 |  |                         |          |   |      |   |          |      |  |   |            |  
|-------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | ---------- | -
|                                                                                 |  | Year Ended December 31, |         
|                                                                                 |  | 2009                    |          |   | 2008 |   |          | 2007 | 
|Operating activities                                                             |  |                         |          |   |      |   |          |      |  |   |            |  
|Consolidated net loss                                                            |  | $                       | (20,953  | ) |      | $ | (122,084 | )    |  | $ | (338,282   | )
|Adjustments to reconcile net loss to net cash provided by operating activities:  |  |                         |          |   |      |   |          |      |  |   |            |  
|Depreciation and amortization                                                    |  |                         | 1,493    |   |      |   | 2,218    |      |  |   | 2,460      |  
|Impairment loss on real estate assets                                            |  |                         | 45,269   |   |      |   | 135,311  |      |  |   | 231,120    |  
|Impairment loss on goodwill                                                      |  |                         |         |   |      |   | 5,896    |      |  |   |           |  
|Equity in loss (income) of unconsolidated joint ventures                         |  |                         | 420      |   |      |   | 3,877    |      |  |   | (304       | )
|Distributions of income from unconsolidated joint ventures                       |  |                         |         |   |      |   | 816      |      |  |   |           |  
|Gain on retirement of debt                                                       |  |                         | (78,144  | ) |      |   | (54,044  | )    |  |   |           |  
|Loss on sale of fixed asset                                                      |  |                         | 3,009    |   |      |   |         |      |  |   |           |  
|(Benefit) provision for income taxes                                             |  |                         | (101,908 | ) |      |   | (41,592  | )    |  |   | 32,658     |  
|Net changes in operating assets and liabilities:                                 |  |                         |          |   |      |   |          |      |  |   |            |  
|Restricted cash                                                                  |  |                         | 727      |   |      |   | (5,079   | )    |  |   |           |  
|Receivables                                                                      |  |                         | 19,879   |   |      |   | 9,628    |      |  |   | 81,365     |  
|Income tax refunds receivable                                                    |  |                         | 41,615   |   |      |   | 550      |      |  |   |           |  
|Real estate inventories  owned                                                  |  |                         | 130,436  |   |      |   | 167,516  |      |  |   | 174,318    |  
|Deferred loan costs                                                              |  |                         | 1,720    |   |      |   | 2,501    |      |  |   | 1,613      |  
|Other assets                                                                     |  |                         | (7,658   | ) |      |   | 4,257    |      |  |   | 3,113      |  
|Accounts payable                                                                 |  |                         | (5,285   | ) |      |   | (24,559  | )    |  |   | (9,469     | )
|Accrued expenses                                                                 |  |                         | (17,693  | ) |      |   | (4,799   | )    |  |   | (44,079    | )
|                                                                                 |  |                         |          |   |      |   |          |      |  |   |            |  
|Net cash provided by operating activities                                        |  |                         | 12,927   |   |      |   | 80,413   |      |  |   | 134,513    |  
|                                                                                 |  |                         |          |   |      |   |          |      |  |   |            |  
|Investing activities                                                             |  |                         |          |   |      |   |          |      |  |   |            |  
|Net proceeds from sale of fixed asset                                            |  |                         | 2,063    |   |      |   |         |      |  |   |           |  
|Investment in and advances to unconsolidated joint ventures                      |  |                         | (194     | ) |      |   | (3,003   | )    |  |   | (7,106     | )
|Net cash paid for purchase of partners interest in unconsolidated joint venture |  |                         |         |   |      |   |         |      |  |   | (1,484     | )
|Distributions of capital from unconsolidated joint ventures                      |  |                         | 840      |   |      |   | 212      |      |  |   | 1,095      |  
|Purchases of property and equipment                                              |  |                         | (23      | ) |      |   | (529     | )    |  |   | (766       | )
|                                                                                 |  |                         |          |   |      |   |          |      |  |   |            |  
|Net cash provided by (used in) investing activities                              |  |                         | 2,686    |   |      |   | (3,320   | )    |  |   | (8,261     | )
|                                                                                 |  |                         |          |   |      |   |          |      |  |   |            |  
|Financing activities                                                             |  |                         |          |   |      |   |          |      |  |   |            |  
|Proceeds from borrowings on notes payable                                        |  |                         | 113,467  |   |      |   | 591,427  |      |  |   | 1,699,700  |  
|Principal payments on notes payable                                              |  |                         | (187,718 | ) |      |   | (659,021 | )    |  |   | (1,765,368 | )
|Proceeds from Senior Secured Term Loan                                           |  |                         | 193,904  |   |      |   |         |      |  |   |           |  
|Net cash paid for repurchase of Senior Notes                                     |  |                         | (76,991  | ) |      |   | (16,718  | )    |  |   |           |  
|Noncontrolling interest (distributions) contributions, net                       |  |                         | (7,705   | ) |      |   | 1,039    |      |  |   | (26,119    | )
|                                                                                 |  |                         |          |   |      |   |          |      |  |   |            |  
|Net cash provided by (used in) financing activities                              |  |                         | 34,957   |   |      |   | (83,273  | )    |  |   | (91,787    | )
|                                                                                 |  |                         |          |   |      |   |          |      |  |   |            |  
|Net increase (decrease) in cash and cash equivalents                             |  |                         | 50,570   |   |      |   | (6,180   | )    |  |   | 34,465     |  
|Cash and cash equivalents  beginning of year                                    |  |                         | 67,017   |   |      |   | 73,197   |      |  |   | 38,732     |  
|                                                                                 |  |                         |          |   |      |   |          |      |  |   |            |  
|Cash and cash equivalents  end of year                                          |  | $                       | 117,587  |   |      | $ | 67,017   |      |  | $ | 73,197     |  
|                                                                                 |  |                         |          |   |      |   |          |      |  |   |            |  

See accompanying notes



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WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)



|                                                                                                          |  |                         |         |   |      |   |        |  |   |       
|--------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ |  | - | ------
|                                                                                                          |  | Year Ended December 31,
|                                                                                                          |  | 2009                    |         |   | 2008 |   | 2007  
|Supplemental disclosures of non-cash activities:                                                          |  |                         |         |   |      |   |        |  |   |       
|Decrease in real estate inventories owned and related notes payable in variable interest entity           |  | $                       | 56,151  |   |      | $ |       |  | $ |      
|                                                                                                          |  |                         |         |   |      |   |        |  |   |       
|Issuance of note receivable related to sale of aircraft                                                   |  | $                       | 6,188   |   |      | $ |       |  | $ |      
|                                                                                                          |  |                         |         |   |      |   |        |  |   |       
|Reduction of notes payable to secure land option agreement                                                |  | $                       |        |   |      | $ | 4,709  |  | $ |      
|                                                                                                          |  |                         |         |   |      |   |        |  |   |       
|Net (decrease) increase in real estate inventories  not owned and liabilities from inventories
not owned |  | $                       | (24,809 | ) |      | $ | 33,316 |  | $ | 18,169
|                                                                                                          |  |                         |         |   |      |   |        |  |   |       
|Net (decrease) increase in real estate inventories  not owned and noncontrolling
interest                |  | $                       | (27,684 | ) |      | $ | 3,186  |  | $ | 38,233
|                                                                                                          |  |                         |         |   |      |   |        |  |   |       
|Net change in assets from previously consolidated joint venture                                           |  | $                       |        |   |      | $ |       |  | $ | 2,196 
|                                                                                                          |  |                         |         |   |      |   |        |  |   |       
|Net change in liabilities from previously consolidated joint venture                                      |  | $                       |        |   |      | $ |       |  | $ | 626   
|                                                                                                          |  |                         |         |   |      |   |        |  |   |       
|Reduction of notes payable and real estate inventories-owned from reconveyance of land to land
seller     |  | $                       |        |   |      | $ |       |  | $ | 10,021
|                                                                                                          |  |                         |         |   |      |   |        |  |   |       
|Income tax benefit credited to additional paid-in capital and retained earnings                           |  | $                       |        |   |      | $ |       |  | $ | 6,776 
|                                                                                                          |  |                         |         |   |      |   |        |  |   |       
|Consolidation of net assets from purchase of partners interest in unconsolidated joint
venture           |  | $                       |        |   |      | $ |       |  | $ | 41,778
|                                                                                                          |  |                         |         |   |      |   |        |  |   |       
|Consolidation of net liabilities from purchase of partners interest in unconsolidated joint
venture      |  | $                       |        |   |      | $ |       |  | $ | 40,294
|                                                                                                          |  |                         |         |   |      |   |        |  |   |       

See accompanying notes.



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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.

Financial
Condition and Liquidity

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 Secured Term Loan, Senior Note obligations and other indebtedness may restrict the Company from pursuing any of these alternatives.

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
land deposits, raw land, lots under development, finished lots, homes under construction, completed homes and model 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 estimated cost of homes sold. Selling expenses and other marketing costs are expensed in the period incurred. A provision for warranty costs relating to the Companys limited
warranty plans is included in cost of sales 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, |       
|                                                                |  | 2009         |        |   | 2008 |   |        | 2007 | 
|Warranty liability, beginning of year                           |  | $            | 26,394 |   |      | $ | 30,048 |      |  | $ | 23,364  |  
|Warranty provision during year                                  |  |              | 2,429  |   |      |   | 5,040  |      |  |   | 10,182  |  
|Warranty payments during year                                   |  |              | (8,727 | ) |      |   | (8,853 | )    |  |   | (12,030 | )
|Warranty charges related to pre-existing warranties during year |  |              | 1,269  |   |      |   | 159    |      |  |   | 8,532   |  
|                                                                |  |              |        |   |      |   |        |      |  |   |         |  
|Warranty liability, end of year                                 |  | $            | 21,365 |   |      | $ | 26,394 |      |  | $ | 30,048  |  
|                                                                |  |              |        |   |      |   |        |      |  |   |         |  



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Interest incurred under the Revolving Credit
Facilities, Senior Secured Term Loan, 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. During the years ended
December 31, 2009 and 2008, the Company incurred $35.9 million and $24.4 million, respectively, of interest expense, due to a decrease in real estate assets which qualify for interest capitalization.

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 11, the Company owned an aircraft which was depreciated using the straight-line method
over an estimated useful life of fifteen years. This aircraft was sold on September 3, 2009.

Deferred
Loan Costs

Deferred loan costs are amortized over the term of the applicable loans using a method which
approximates the effective 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 FASB ASC Topic 350, Intangibles  Goodwill and Other. The Company reviewed goodwill for impairment on an annual basis or when indicators of impairment existed. Evaluating goodwill for impairment involved the
determination of the fair value of the Companys reporting units in which the Company had recorded goodwill. A reporting unit is a component of an operating segment for which discrete financial information is available and reviewed by the
Companys management on a regular basis. Inherent in the determination of fair value are judgments and assumptions, including the interpretation of current economic conditions and market valuations.

Due to deterioration in market conditions, the Company recorded an impairment charge on goodwill of $5.9 million during the
year ended December 31, 2008. As of December 31, 2009 and 2008, there is no goodwill recorded on the Companys accompanying consolidated balance sheet.

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 FASB ASC Topic 360-20, Property, Plant and Equipment, Real Estate Sales. When it is determined that the earnings process is not complete, profit is deferred for recognition in
future periods.



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Construction Services

The Company accounts for construction management agreements using the Percentage of Completion Method in accordance
with FASB ASC Topic 605 Revenue Recognition. Under ASC 605, the Company records revenues and expenses as work on a contract progresses, and based on the percentage of costs incurred to date compared to the total estimated costs of the
contract. Based on the provisions of ASC 605, the Company has recorded construction services revenues and expenses of $34.1 million and $28.5 million respectively for the year ended December 31, 2009 and $18.1 million and $15.4 million
respectively, for the year ended December 31, 2008, in the accompanying consolidated statement of operations.

The Company entered into construction management agreements to build, sell and market homes in 3 separate communities. For such services, the Company will receive fees (generally 5 percent of the sales price, as defined) and may, under
certain circumstances, receive additional compensation if certain financial thresholds are achieved. In addition, in October 2008, the Company entered into a contract to build apartment units for a related party at a contract price of $13.5 million,
which includes the Companys contractor fee of $0.5 million. During the year ended December 31, 2009, the Company recorded construction services revenue of $12.6 million and expenses of $11.6 million for this project. For more information
on this agreement, see Note 11.

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.

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. The
Companys cash and cash equivalents balance exceeds federally insurable limits as of December 31, 2009. The Company monitors the cash balances in its operating accounts and adjusts the cash balances as appropriate; however, these cash
balances could be negatively impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, the Company has experienced no loss or lack of access to cash in its operating
accounts.

Restricted Cash

Restricted cash consists of deposits made by the Company to a bank account held with the lenders of two of the Companys revolving credit facilities as collateral for the use of
letters of credit provided by such lenders. Under the terms of the Senior Secured Term Loan disclosed in Note 6, all of the Companys standby letters of credit are secured by cash.

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, 2009 and 2008 and revenues and expenses for each of the three years in the period ended December 31, 2009. Accordingly, actual results could differ from those estimates. The
significant accounting policies using estimates include real estate inventories and cost of sales, impairment of real estate inventories, warranty reserves, loss contingencies, sales and profit recognition, and accounting for variable interest
entities. The current economic environment increases the uncertainty inherent in these estimates and assumptions.

Codification

In 2009, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement
modifies the Generally Accepted Accounting Principles (GAAP) hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification
(ASC), also known collectively as the Codification, is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the
SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification
was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. All accounting references have been updated, as applicable, and therefore SFAS references have been replaced with ASC
references.

Subsequent Events

The Company follows the guidance in ASC Topic 855. Subsequent Events (ASC 855), which provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 sets forth (i) the period after the balance sheet date during which management of a reporting entity
evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its
financial statements, and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. ASC 855 became effective for interim periods ending after June 15, 2009. Pursuant to ASC 855 the
Companys management has evaluated subsequent events through the date that the consolidated financial statements were issued for the period ended December 31, 2009.

Adoption of New Accounting Standard Restating Noncontrolling Interest

On January 1, 2009, the Company adopted Financial Accounting Standards No. 160, later codified in ASC Topic 810-10, Consolidation, which establishes accounting and reporting standards for a
parent companys noncontrolling interest in a subsidiary and for the de-consolidation of a subsidiary. The adoption of this topic requires the Company to record gains or losses upon changes in control, which for the year ending December 31,
2008, restated equity by an increase of $43.4 million. In addition, in the accompanying financial statements, the Company reclassified minority interest to noncontrolling interest, which is a balance of $7.6 million as of December 31, 2009 in the
following portions of the consolidated financial statements:



| |  |  | The consolidated balance sheets, statements of operations, equity and cash flows;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | The condensed consolidating balance sheets and statements of operations by form of ownership, see Note 2;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | The consolidating balance sheets, statements of operations and cash flows by Guarantor categories, see Note 6.
| | - |  | --------------------------------------------------------------------------------------------------------------



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Impact of New Accounting Pronouncements

In 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820),which requires some new
disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in ASC 820-10. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods
within those fiscal years. The Company does not expect the adoption of these provisions to have a material effect on its consolidated financial statements.

In June 2009, the FASB updated certain provisions of ASC 810. These provisions amend the consolidation guidance applicable to variable interest entities and the definition of a
variable interest entity, and require enhanced disclosures to provide more information about an enterprises involvement in a variable interest entity. ASC 810 also requires ongoing assessments of whether an enterprise is the primary
beneficiary of a variable interest entity. These provisions under ASC 810 are effective for the Company on January 1, 2010. The Company does not expect the adoption of these provisions to have a material effect on its consolidated financial
statements.



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Reclassifications

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

Note 2  Consolidation of Variable Interest Entities and Noncontrolling Interests

In January 2003, the FASB issued guidance now codified as FASB ASC Topic 810, Consolidation, which addresses the
consolidation of variable interest entities (VIEs). Under this guidance, 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.

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, 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 this guidance, 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 has computed expected losses and residual returns based on the probability of future cash flow. If the Company has been determined to be the primary beneficiary of the
VIE, the assets, liabilities and operations of the VIE have been consolidated with the Companys financial statements.

Certain joint ventures, lot option agreements and land banking arrangements have been determined to be VIEs under FASB ASC Topic 810 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, 2009 and 2008, and
for the three years in the period ended December 31, 2009. Supplemental consolidating financial information of the Company, specifically including information for the joint ventures and land banking arrangements consolidated under ASC 810, 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 $33.6 million and $47.0 million at December 31, 2009 and 2008, respectively. As of
December 31, 2009, the Companys remaining total contractual obligations for land purchases and option commitments was approximately $161.0 million.

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. The
creditors of the Company have no access to the assets of the VIE. 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.

Land Banking Arrangements

The Company enters into purchase agreements with various land sellers. As a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Companys
available cash or 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 previous land being purchased. 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 could be subject to penalties if the lots were not
purchased. The Company



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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. FASB ASC Topic 810, requires the consolidation of the assets, liabilities and operations of the Companys land banking arrangements that are VIEs, of which none existed at December 31, 2009.

The Company participates in one land banking arrangement, which is not a VIE in accordance with FASB ASC Topic 810, but is
consolidated in accordance with FASB ASC Topic 470, Debt.Under the provisions of FASB ASC Topic 470, the Company has determined it is economically compelled, based on certain factors, to purchase the land in the land banking arrangement. In
addition, the Company reduced real estate inventories not owned and liability from inventory not owned by $15.5 million related to the purchase of lots from this land banking arrangement. Therefore, the Company has recorded the remaining purchase
price of the land of $55.3 million, which is included in real estate inventories not owned and liabilities from inventories not owned in the accompanying consolidated balance sheet as of December 31, 2009.

Summary information with respect to the Companys consolidated land banking arrangement is as follows as of
December 31, 2009 (dollars in thousands):



|                                                      |  |   |        
|----------------------------------------------------- |  | - | -------
|Total number of land banking projects                 |  |   | 1      
|                                                      |  |   |        
|Total number of lots                                  |  |   | 625    
|                                                      |  |   |        
|Total purchase price                                  |  | $ | 161,465
|                                                      |  |   |        
|Balance of lots still under option and not purchased: |  |   |        
|Number of lots                                        |  |   | 236    
|                                                      |  |   |        
|Purchase price                                        |  | $ | 55,270 
|                                                      |  |   |        
|Forfeited deposits if lots are not purchased          |  | $ | 25,234 
|                                                      |  |   |        

During the first three month period of
the year ended December 31, 2009, the Company abandoned its option deposit in three of its consolidated land banking arrangements in which land purchase commitments were required. Management of the Company determined that the remaining purchase
prices of the lots in the arrangements were priced above market values at that time. In two of these arrangements, the Company reduced real estate inventories-not owned and the related noncontrolling interest $27.7 million for the remaining purchase
price of the lots. In the other arrangement, the Company reduced real estate inventories-not owned and liabilities from inventories-not owned $9.3 million for the remaining purchase price for the lots. However, during the three month period ending
December 31, 2009 the Company evaluated the purchase price of the 51 lots under option, and after the write-off of the $9.3 million deposit, the residual value became economically viable and the Company purchased the lots.



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)



|                                                             |  |                   |         |                           |   |                    |  |   |                   |   |  |   |        
|------------------------------------------------------------ |  | ----------------- | ------- | ------------------------- | - | ------------------ |  | - | ----------------- | - |  | - | -------
|                                                             |  | December 31, 2009
|                                                             |  | Wholly-Owned      |         | Variable InterestEntities |   | EliminatingEntries |  |   | ConsolidatedTotal
|                                                            
|ASSETS                                                      
|                                                             |  |                   |         |                          
|Cash and cash equivalents                                    |  | $                 | 115,678 |                           | $ | 1,909              |  | $ |                  |   |  | $ | 117,587
|Restricted cash                                              |  |                   | 4,352   |                           |   |                   |  |   |                  |   |  |   | 4,352  
|Receivables                                                  |  |                   | 12,919  |                           |   | 3,375              |  |   |                  |   |  |   | 16,294 
|Income tax refunds receivable                                |  |                   | 106,989 |                           |   |                   |  |   |                  |   |  |   | 106,989
|Real estate inventories                                      |  |                   |         |                           |   |                    |  |   |                   |   |  |   |        
|Owned                                                        |  |                   | 515,102 |                           |   | 8,234              |  |   |                  |   |  |   | 523,336
|Not owned                                                    |  |                   | 55,270  |                           |   |                   |  |   |                  |   |  |   | 55,270 
|Investments in and advances to unconsolidated joint ventures |  |                   | 1,703   |                           |   |                   |  |   |                  |   |  |   | 1,703  
|Investments in consolidated entities                         |  |                   | 3,748   |                           |   |                   |  |   | (3,748            | ) |  |   |       
|Other assets                                                 |  |                   | 34,568  |                           |   |                   |  |   |                  |   |  |   | 34,568 
|Intercompany receivables                                     |  |                   | 88      |                           |   |                   |  |   | (88               | ) |  |   |       
|                                                             |  |                   |         |                           |   |                    |  |   |                   |   |  |   |        
|                                                             |  | $                 | 850,417 |                           | $ | 13,518             |  | $ | (3,836            | ) |  | $ | 860,099
|                                                             |  |                   |         |                           |   |                    |  |   |                   |   |  |   |        
|                                                            
|LIABILITIES AND EQUITY                                      
|                                                             |  |                   |         |                          
|Accounts payable and accrued expenses                        |  | $                 | 54,257  |                           | $ | 2,083              |  | $ |                  |   |  | $ | 56,340 
|Liabilities from inventories not owned                       |  |                   | 55,270  |                           |   |                   |  |   |                  |   |  |   | 55,270 
|Notes payable                                                |  |                   | 64,227  |                           |   |                   |  |   |                  |   |  |   | 64,227 
|Senior Secured Term Loan due 2014                            |  |                   | 206,000 |                           |   |                   |  |   |                  |   |  |   | 206,000
|75/8% Senior Notes due December 15, 2012                     |  |                   | 67,204  |                           |   |                   |  |   |                  |   |  |   | 67,204 
|103/4% Senior Notes due April 1, 2013                        |  |                   | 168,158 |                           |   |                   |  |   |                  |   |  |   | 168,158
|71/2% Senior Notes due February 15, 2014                     |  |                   | 84,701  |                           |   |                   |  |   |                  |   |  |   | 84,701 
|Intercompany payables                                        |  |                   |        |                           |   | 88                 |  |   | (88               | ) |  |   |       
|                                                             |  |                   |         |                           |   |                    |  |   |                   |   |  |   |        
|Total liabilities                                            |  |                   | 699,817 |                           |   | 2,171              |  |   | (88               | ) |  |   | 701,900
|Owners capital                                              |  |                   |         |                           |   |                    |  |   |                   |   |  |   |        
|William Lyon Homes                                           |  |                   |        |                           |   | 3,748              |  |   | (3,748            | ) |  |   |       
|Noncontrolling interest                                      |  |                   |        |                           |   | 7,599              |  |   | (7,599            | ) |  |   |       
|Equity:                                                      |  |                   |         |                           |   |                    |  |   |                   |   |  |   |        
|Stockholders equity                                         |  |                   | 150,600 |                           |   |                   |  |   |                  |   |  |   | 150,600
|Noncontrolling interest                                      |  |                   |        |                           |   |                   |  |   | 7,599             |   |  |   | 7,599  
|                                                             |  |                   |         |                           |   |                    |  |   |                   |   |  |   |        
|                                                             |  | $                 | 850,417 |                           | $ | 13,518             |  | $ | (3,836            | ) |  | $ | 860,099
|                                                             |  |                   |         |                           |   |                    |  |   |                   |   |  |   |        



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)



|                                                             |  |                   |         |                           |   |                    |  |   |                   |   |  |   |          
|------------------------------------------------------------ |  | ----------------- | ------- | ------------------------- | - | ------------------ |  | - | ----------------- | - |  | - | ---------
|                                                             |  | December 31, 2008
|                                                             |  | Wholly-Owned      |         | Variable InterestEntities |   | EliminatingEntries |  |   | ConsolidatedTotal
|                                                            
|ASSETS                                                      
|                                                             |  |                   |         |                          
|Cash and cash equivalents                                    |  | $                 | 62,770  |                           | $ | 4,247              |  | $ |                  |   |  | $ | 67,017   
|Restricted cash                                              |  |                   | 5,079   |                           |   |                   |  |   |                  |   |  |   | 5,079    
|Receivables                                                  |  |                   | 20,696  |                           |   | 9,289              |  |   |                  |   |  |   | 29,985   
|Income tax refunds receivable                                |  |                   | 46,696  |                           |   |                   |  |   |                  |   |  |   | 46,696   
|Real estate inventories                                      |  |                   |         |                           |   |                    |  |   |                   |   |  |   |          
|Owned                                                        |  |                   | 681,609 |                           |   | 72,880             |  |   |                  |   |  |   | 754,489  
|Not owned                                                    |  |                   | 80,079  |                           |   | 27,684             |  |   |                  |   |  |   | 107,763  
|Investments in and advances to unconsolidated joint ventures |  |                   | 2,769   |                           |   |                    |  |   |                   |   |  |   | 2,769    
|Investments in consolidated entities                         |  |                   | 7,200   |                           |   |                   |  |   | (7,200            | ) |  |   |         
|Other assets                                                 |  |                   | 31,045  |                           |   |                   |  |   |                  |   |  |   | 31,045   
|Intercompany receivables                                     |  |                   | 382     |                           |   | 375                |  |   | (757              | ) |  |   |         
|                                                             |  |                   |         |                           |   |                    |  |   |                   |   |  |   |          
|                                                             |  | $                 | 938,325 |                           | $ | 114,475            |  | $ | (7,957            | ) |  | $ | 1,044,843
|                                                             |  |                   |         |                           |   |                    |  |   |                   |   |  |   |          
|                                                            
|LIABILITIES AND EQUITY                                      
|                                                             |  |                   |         |                          
|Accounts payable and accrued expenses                        |  | $                 | 72,367  |                           | $ | 6,951              |  | $ |                  |   |  | $ | 79,318   
|Liabilities from inventories not owned                       |  |                   | 80,079  |                           |   |                   |  |   |                  |   |  |   | 80,079   
|Notes payable                                                |  |                   | 138,478 |                           |   | 56,151             |  |   |                  |   |  |   | 194,629  
|75/8% Senior Notes due December 15, 2012                     |  |                   | 133,800 |                           |   |                   |  |   |                  |   |  |   | 133,800  
|103/4% Senior Notes due April 1, 2013                        |  |                   | 218,176 |                           |   |                   |  |   |                  |   |  |   | 218,176  
|71/2% Senior Notes due February 15, 2014                     |  |                   | 124,300 |                           |   |                   |  |   |                  |   |  |   | 124,300  
|Intercompany payables                                        |  |                   |        |                           |   | 757                |  |   | (757              | ) |  |   |         
|                                                             |  |                   |         |                           |   |                    |  |   |                   |   |  |   |          
|Total liabilities                                            |  |                   | 767,200 |                           |   | 63,859             |  |   | (757              | ) |  |   | 830,302  
|Owners capital                                              |  |                   |         |                           |   |                    |  |   |                   |   |  |   |          
|William Lyon Homes                                           |  |                   |        |                           |   | 7,200              |  |   | (7,200            | ) |  |   |         
|Noncontrolling interest                                      |  |                   |        |                           |   | 43,416             |  |   | (43,416           | ) |  |   |         
|Equity:                                                      |  |                   |         |                           |   |                    |  |   |                   |   |  |   |          
|Stockholders equity                                         |  |                   | 171,125 |                           |   |                   |  |   |                  |   |  |   | 171,125  
|Noncontrolling interest                                      |  |                   |        |                           |   |                   |  |   | 43,416            |   |  |   | 43,416   
|                                                             |  |                   |         |                           |   |                    |  |   |                   |   |  |   |          
|                                                             |  | $                 | 938,325 |                           | $ | 114,475            |  | $ | (7,957            | ) |  | $ | 1,044,843
|                                                             |  |                   |         |                           |   |                    |  |   |                   |   |  |   |          



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)



|                                                |  |                              |          |   |                           |   |        |                    |  |   |                   |   |  |   |          |  
|----------------------------------------------- |  | ---------------------------- | -------- | - | ------------------------- | - | ------ | ------------------ |  | - | ----------------- | - |  | - | -------- | -
|                                                |  | Year Ended December 31, 2009 |         
|                                                |  | Wholly -Owned                |          |   | Variable InterestEntities |   |        | EliminationEntries |  |   | ConsolidatedTotal |  
|Operating revenue                               |  |                              |          |   |                           |   |        |                    |  |   |                   |   |  |   |          |  
|Sales                                           |  | $                            | 269,473  |   |                           | $ | 5,621  |                    |  | $ |                  |   |  | $ | 275,094  |  
|Construction services                           |  |                              | 34,149   |   |                           |   |       |                    |  |   |                  |   |  |   | 34,149   |  
|Management fees                                 |  |                              | 1,127    |   |                           |   |       |                    |  |   | (1,127            | ) |  |   |         |  
|                                                |  |                              |          |   |                           |   |        |                    |  |   |                   |   |  |   |          |  
|                                                |  |                              | 304,749  |   |                           |   | 5,621  |                    |  |   | (1,127            | ) |  |   | 309,243  |  
|Operating costs                                 |  |                              |          |   |                           |   |        |                    |  |   |                   |   |  |   |          |  
|Cost of sales                                   |  |                              | (346,781 | ) |                           |   | (5,472 | )                  |  |   | 1,127             |   |  |   | (351,126 | )
|Impairment loss on real estate assets           |  |                              | (45,269  | ) |                           |   |       |                    |  |   |                  |   |  |   | (45,269  | )
|Construction services                           |  |                              | (28,486  | ) |                           |   |       |                    |  |   |                  |   |  |   | (28,486  | )
|Sales and marketing                             |  |                              | (17,128  | ) |                           |   | (508   | )                  |  |   |                  |   |  |   | (17,636  | )
|General and administrative                      |  |                              | (21,009  | ) |                           |   | (18    | )                  |  |   |                  |   |  |   | (21,027  | )
|Other                                           |  |                              | (6,580   | ) |                           |   |       |                    |  |   |                  |   |  |   | (6,580   | )
|                                                |  |                              |          |   |                           |   |        |                    |  |   |                   |   |  |   |          |  
|                                                |  |                              | (465,253 | ) |                           |   | (5,998 | )                  |  |   | 1,127             |   |  |   | (470,124 | )
|                                                |  |                              |          |   |                           |   |        |                    |  |   |                   |   |  |   |          |  
|Equity in loss of unconsolidated joint ventures |  |                              | (420     | ) |                           |   |       |                    |  |   |                  |   |  |   | (420     | )
|Equity in income of consolidated entities       |  |                              | 102      |   |                           |   |       |                    |  |   | (102              | ) |  |   |         |  
|                                                |  |                              |          |   |                           |   |        |                    |  |   |                   |   |  |   |          |  
|Operating loss                                  |  |                              | (160,822 | ) |                           |   | (377   | )                  |  |   | (102              | ) |  |   | (161,301 | )
|Gain on retirement of debt                      |  |                              | 78,144   |   |                           |   |       |                    |  |   |                  |   |  |   | 78,144   |  
|Interest expense, net of amounts capitalized    |  |                              | (35,902  | ) |                           |   |       |                    |  |   |                  |   |  |   | (35,902  | )
|Other (expense) income, net                     |  |                              | (3,853   | ) |                           |   | 51     |                    |  |   |                  |   |  |   | (3,802   | )
|                                                |  |                              |          |   |                           |   |        |                    |  |   |                   |   |  |   |          |  
|Loss before benefit from income taxes           |  |                              | (122,433 | ) |                           |   | (326   | )                  |  |   | (102              | ) |  |   | (122,861 | )
|Benefit from income taxes                       |  |                              | 101,908  |   |                           |   |       |                    |  |   |                  |   |  |   | 101,908  |  
|                                                |  |                              |          |   |                           |   |        |                    |  |   |                   |   |  |   |          |  
|Consolidated net loss                           |  |                              | (20,525  | ) |                           |   | (326   | )                  |  |   | (102              | ) |  |   | (20,953  | )
|Net loss - noncontrolling interest              |  |                              |         |   |                           |   |       |                    |  |   | 428               |   |  |   | 428      |  
|                                                |  |                              |          |   |                           |   |        |                    |  |   |                   |   |  |   |          |  
|Net loss attributable to William Lyon Homes     |  | $                            | (20,525  | ) |                           | $ | (326   | )                  |  | $ | 326               |   |  | $ | (20,525  | )
|                                                |  |                              |          |   |                           |   |        |                    |  |   |                   |   |  |   |          |  



88



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)



|                                                |  |                              |          |   |                           |   |         |                    |  |   |                   |   |  |   |          |  
|----------------------------------------------- |  | ---------------------------- | -------- | - | ------------------------- | - | ------- | ------------------ |  | - | ----------------- | - |  | - | -------- | -
|                                                |  | Year Ended December 31, 2008 |         
|                                                |  | Wholly -Owned                |          |   | Variable InterestEntities |   |         | EliminationEntries |  |   | ConsolidatedTotal |  
|Operating revenue                               |  |                              |          |   |                           |   |         |                    |  |   |                   |   |  |   |          |  
|Sales                                           |  | $                            | 485,627  |   |                           | $ | 22,337  |                    |  | $ |                  |   |  | $ | 507,694  |  
|Construction services                           |  |                              | 18,114   |   |                           |   |        |                    |  |   |                  |   |  |   | 18,114   |  
|Management fees                                 |  |                              | 825      |   |                           |   |        |                    |  |   | (825              | ) |  |   |         |  
|                                                |  |                              |          |   |                           |   |         |                    |  |   |                   |   |  |   |          |  
|                                                |  |                              | 504,566  |   |                           |   | 22,337  |                    |  |   | (825              | ) |  |   | 526,078  |  
|Operating costs                                 |  |                              |          |   |                           |   |         |                    |  |   |                   |   |  |   |          |  
|Cost of sales                                   |  |                              | (465,851 | ) |                           |   | (21,849 | )                  |  |   | 825               |   |  |   | (486,875 | )
|Impairment loss on real estate assets           |  |                              | (111,737 | ) |                           |   | (23,574 | )                  |  |   |                  |   |  |   | (135,311 | )
|Impairment loss on goodwill                     |  |                              | (5,896   | ) |                           |   |        |                    |  |   |                  |   |  |   | (5,896   | )
|Construction services                           |  |                              | (15,431  | ) |                           |   |        |                    |  |   |                  |   |  |   | (15,431  | )
|Sales and marketing                             |  |                              | (38,048  | ) |                           |   | (2,393  | )                  |  |   |                  |   |  |   | (40,441  | )
|General and administrative                      |  |                              | (27,598  | ) |                           |   | (47     | )                  |  |   |                  |   |  |   | (27,645  | )
|Other                                           |  |                              | (4,461   | ) |                           |   |        |                    |  |   |                  |   |  |   | (4,461   | )
|                                                |  |                              |          |   |                           |   |         |                    |  |   |                   |   |  |   |          |  
|                                                |  |                              | (669,022 | ) |                           |   | (47,863 | )                  |  |   | 825               |   |  |   | (716,060 | )
|                                                |  |                              |          |   |                           |   |         |                    |  |   |                   |   |  |   |          |  
|Equity in loss of unconsolidated joint ventures |  |                              | (3,877   | ) |                           |   |        |                    |  |   |                  |   |  |   | (3,877   | )
|Equity in loss of consolidated entities         |  |                              | (14,967  | ) |                           |   |        |                    |  |   | 14,967            |   |  |   |         |  
|                                                |  |                              |          |   |                           |   |         |                    |  |   |                   |   |  |   |          |  
|Operating loss                                  |  |                              | (183,300 | ) |                           |   | (25,526 | )                  |  |   | 14,967            |   |  |   | (193,859 | )
|Gain on retirement of debt                      |  |                              | 54,044   |   |                           |   |        |                    |  |   |                  |   |  |   | 54,044   |  
|Interest expense, net of amounts capitalized    |  |                              | (24,440  | ) |                           |   |        |                    |  |   |                  |   |  |   | (24,440  | )
|Other income, net                               |  |                              | 466      |   |                           |   | 113     |                    |  |   |                  |   |  |   | 579      |  
|                                                |  |                              |          |   |                           |   |         |                    |  |   |                   |   |  |   |          |  
|Loss before benefit from income taxes           |  |                              | (153,230 | ) |                           |   | (25,413 | )                  |  |   | 14,967            |   |  |   | (163,676 | )
|Benefit from income taxes                       |  |                              | 41,592   |   |                           |   |        |                    |  |   |                  |   |  |   | 41,592   |  
|                                                |  |                              |          |   |                           |   |         |                    |  |   |                   |   |  |   |          |  
|Consolidated net loss                           |  |                              | (111,638 | ) |                           |   | (25,413 | )                  |  |   | 14,967            |   |  |   | (122,084 | )
|Net loss - noncontrolling interest              |  |                              |         |   |                           |   |        |                    |  |   | 10,446            |   |  |   | 10,446   |  
|                                                |  |                              |          |   |                           |   |         |                    |  |   |                   |   |  |   |          |  
|Net loss attributable to William Lyon Homes     |  | $                            | (111,638 | ) |                           | $ | (25,413 | )                  |  | $ | 25,413            |   |  | $ | (111,638 | )
|                                                |  |                              |          |   |                           |   |         |                    |  |   |                   |   |  |   |          |  



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)



|                                                     |  |                              |            |   |                           |   |         |                    |  |   |                   |   |  |   |            |  
|---------------------------------------------------- |  | ---------------------------- | ---------- | - | ------------------------- | - | ------- | ------------------ |  | - | ----------------- | - |  | - | ---------- | -
|                                                     |  | Year Ended December 31, 2007 |           
|                                                     |  | Wholly -Owned                |            |   | Variable InterestEntities |   |         | EliminationEntries |  |   | ConsolidatedTotal |  
|Operating revenue                                    |  |                              |            |   |                           |   |         |                    |  |   |                   |   |  |   |            |  
|Sales                                                |  | $                            | 1,010,732  |   |                           | $ | 111,967 |                    |  | $ | (17,342           | ) |  | $ | 1,105,357  |  
|Management fees                                      |  |                              | 3,123      |   |                           |   |        |                    |  |   | (3,123            | ) |  |   |           |  
|                                                     |  |                              |            |   |                           |   |         |                    |  |   |                   |   |  |   |            |  
|                                                     |  |                              | 1,013,855  |   |                           |   | 111,967 |                    |  |   | (20,465           | ) |  |   | 1,105,357  |  
|Operating costs                                      |  |                              |            |   |                           |   |         |                    |  |   |                   |   |  |   |            |  
|Cost of sales                                        |  |                              | (1,010,146 | ) |                           |   | (89,150 | )                  |  |   | 20,465            |   |  |   | (1,078,831 | )
|Impairment loss on real estate assets                |  |                              | (231,120   | ) |                           |   |        |                    |  |   |                  |   |  |   | (231,120   | )
|Sales and marketing                                  |  |                              | (60,965    | ) |                           |   | (5,738  | )                  |  |   |                  |   |  |   | (66,703    | )
|General and administrative                           |  |                              | (37,460    | ) |                           |   | (12     | )                  |  |   |                  |   |  |   | (37,472    | )
|Other                                                |  |                              | (903       | ) |                           |   |        |                    |  |   |                  |   |  |   | (903       | )
|                                                     |  |                              |            |   |                           |   |         |                    |  |   |                   |   |  |   |            |  
|                                                     |  |                              | (1,340,594 | ) |                           |   | (94,900 | )                  |  |   | 20,465            |   |  |   | (1,415,029 | )
|                                                     |  |                              |            |   |                           |   |         |                    |  |   |                   |   |  |   |            |  
|Equity in income of unconsolidated joint ventures    |  |                              | 304        |   |                           |   |        |                    |  |   |                  |   |  |   | 304        |  
|Equity in income of consolidated entities            |  |                              | 6,298      |   |                           |   |        |                    |  |   | (6,298            | ) |  |   |           |  
|                                                     |  |                              |            |   |                           |   |         |                    |  |   |                   |   |  |   |            |  
|Operating (loss) income                              |  |                              | (320,137   | ) |                           |   | 17,067  |                    |  |   | (6,298            | ) |  |   | (309,368   | )
|Other income, net                                    |  |                              | 3,387      |   |                           |   | 357     |                    |  |   |                  |   |  |   | 3,744      |  
|                                                     |  |                              |            |   |                           |   |         |                    |  |   |                   |   |  |   |            |  
|(Loss) income before provision for income taxes      |  |                              | (316,750   | ) |                           |   | 17,424  |                    |  |   | (6,298            | ) |  |   | (305,624   | )
|Provision for income taxes                           |  |                              | (32,658    | ) |                           |   |        |                    |  |   |                  |   |  |   | (32,658    | )
|                                                     |  |                              |            |   |                           |   |         |                    |  |   |                   |   |  |   |            |  
|Consolidated Net (loss) income                       |  |                              | (349,408   | ) |                           |   | 17,424  |                    |  |   | (6,298            | ) |  |   | (338,282   | )
|Net income - noncontrolling interest                 |  |                              |           |   |                           |   |        |                    |  |   | (11,126           | ) |  |   | (11,126    | )
|                                                     |  |                              |            |   |                           |   |         |                    |  |   |                   |   |  |   |            |  
|Net (loss) income attributable to William Lyon Homes |  | $                            | (349,408   | ) |                           | $ | 17,424  |                    |  | $ | (17,424           | ) |  | $ | (349,408   | )
|                                                     |  |                              |            |   |                           |   |         |                    |  |   |                   |   |  |   |            |  



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 3  Segment Information

The Company operates one principal homebuilding business. In accordance with FASB ASC Topic 280, Segment Reporting,
the Company has determined that each of its operating divisions is an operating segment. Corporate is a non-operating segment.

The Companys homebuilding operations design, construct and sell a wide range of homes designed to meet the specific needs of each of it markets. In accordance with the aggregation criteria defined
in ASC 280, the Companys homebuilding operating segments have been grouped into four reportable segments: Southern California, consisting of an operating division with operations in Orange, Los Angeles, Riverside, San Bernardino and San
Diego counties; Northern California, consisting of an operating division with operations in Contra Costa, Sacramento, San Joaquin, Santa Clara and Placer counties; Arizona, consisting of an operating division in the Phoenix, Arizona metropolitan
area; and Nevada, consisting of an operations in the Las Vegas, Nevada metropolitan area.

The Companys
mortgage origination operations provided mortgage financing to the Companys homebuyers in substantially all of the markets in which the Company operates. The Companys escrow services operations provided escrow processing services to the
Companys homebuyers in substantially all of the markets in which the Company operates.

Corporate is a
non-operating segment that develops and implements strategic initiatives and supports the Companys operating divisions by centralizing key administrative functions such as finance and treasury, information technology, risk management and
litigation, and human resources.

Segment financial information relating to the Companys homebuilding
operations was as follows (in thousands):



|                                   |  |                         |          |   |      |   |          |      |  |   |           |  
|---------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | --------- | -
|                                   |  | Year Ended December 31, |         
|                                   |  | 2009                    |          |   | 2008 |   |          | 2007 | 
|Homebuilding revenues:             |  |                         |          |   |      |   |          |      |  |   |           |  
|Southern California                |  | $                       | 179,282  |   |      | $ | 323,446  |      |  | $ | 780,213   |  
|Northern California                |  |                         | 43,211   |   |      |   | 95,084   |      |  |   | 102,432   |  
|Arizona                            |  |                         | 51,215   |   |      |   | 49,187   |      |  |   | 134,153   |  
|Nevada                             |  |                         | 35,535   |   |      |   | 58,361   |      |  |   | 88,559    |  
|                                   |  |                         |          |   |      |   |          |      |  |   |           |  
|Total homebuilding                 |  | $                       | 309,243  |   |      | $ | 526,078  |      |  | $ | 1,105,357 |  
|                                   |  |                         |          |   |      |   |          |      |  |   |           |  
|                                   | 
|                                   |  | Year Ended December 31, |         
|                                   |  | 2009                    |          |   | 2008 |   |          | 2007 | 
|Homebuilding pretax (loss) income: |  |                         |          |   |      |   |          |      |  |   |           |  
|Southern California                |  | $                       | (57,716  | ) |      | $ | (74,908  | )    |  | $ | (212,597  | )
|Northern California                |  |                         | (37,853  | ) |      |   | (68,913  | )    |  |   | (51,418   | )
|Arizona                            |  |                         | (21,451  | ) |      |   | (17,746  | )    |  |   | 21,158    |  
|Nevada                             |  |                         | (70,915  | ) |      |   | (37,265  | )    |  |   | (45,918   | )
|Corporate                          |  |                         | 65,074   |   |      |   | 35,256   |      |  |   | (16,849   | )
|                                   |  |                         |          |   |      |   |          |      |  |   |           |  
|Total homebuilding                 |  | $                       | (122,861 | ) |      | $ | (163,676 | )    |  | $ | (305,624  | )
|                                   |  |                         |          |   |      |   |          |      |  |   |           |  



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Homebuilding pretax (loss) income includes the following pretax
inventory and goodwill impairment charges recorded in the following segments:



|                      |  |                              |         |                    |   |         |  |        |        |       |   |        |  |   |        
|--------------------- |  | ---------------------------- | ------- | ------------------ | - | ------- |  | ------ | ------ | ----- | - | ------ |  | - | -------
|                      |  | Year Ended December 31, 2009
|                      |  | SouthernCalifornia           |         | NorthernCalifornia |   | Arizona |  | Nevada |        | Total
|Inventory impairments |  | $                            | 19,518  |                    | $ | 6,144   |  | $      |       |       | $ | 19,607 |  | $ | 45,269 
|                      |  |                              |         |                    |   |         |  |        |        |       |   |        |  |   |        
|Total impairments     |  | $                            | 19,518  |                    | $ | 6,144   |  | $      |       |       | $ | 19,607 |  | $ | 45,269 
|                      |  |                              |         |                    |   |         |  |        |        |       |   |        |  |   |        
|                      | 
|                      |  | Year Ended December 31, 2008
|                      |  | SouthernCalifornia           |         | NorthernCalifornia |   | Arizona |  | Nevada |        | Total
|Inventory impairments |  | $                            | 39,925  |                    | $ | 51,457  |  | $      | 14,256 |       | $ | 29,673 |  | $ | 135,311
|Goodwill impairments  |  |                              | 4,831   |                    |   | 1,065   |  |        |       |       |   |       |  |   | 5,896  
|                      |  |                              |         |                    |   |         |  |        |        |       |   |        |  |   |        
|Total impairments     |  | $                            | 44,756  |                    | $ | 52,522  |  | $      | 14,256 |       | $ | 29,673 |  | $ | 141,207
|                      |  |                              |         |                    |   |         |  |        |        |       |   |        |  |   |        
|                      | 
|                      |  | Year Ended December 31, 2007
|                      |  | SouthernCalifornia           |         | NorthernCalifornia |   | Arizona |  | Nevada |        | Total
|Inventory impairments |  | $                            | 146,625 |                    | $ | 40,909  |  | $      |       |       | $ | 43,586 |  | $ | 231,120
|                      |  |                              |         |                    |   |         |  |        |        |       |   |        |  |   |        
|Total impairments     |  | $                            | 146,625 |                    | $ | 40,909  |  | $      |       |       | $ | 43,586 |  | $ | 231,120
|                      |  |                              |         |                    |   |         |  |        |        |       |   |        |  |   |        

Homebuilding pretax (loss) income
includes the following pretax loss on sales of lots, land and other recorded in the following segments:



|                                      |  |                              |         |   |                    |   |         |         |  |   |         |   |  |       |         |   |  |   |          |  
|------------------------------------- |  | ---------------------------- | ------- | - | ------------------ | - | ------- | ------- |  | - | ------- | - |  | ----- | ------- | - |  | - | -------- | -
|                                      |  | Year Ended December 31, 2009 |        
|                                      |  | SouthernCalifornia           |         |   | NorthernCalifornia |   |         | Arizona |  |   | Nevada  |   |  | Total |        
|Loss on sales of lots, land and other |  |                              |         |   |                    |   |         |         |  |   |         |   |  |       |         |   |  |   |          |  
|Operating revenue                     |  | $                            | 3,250   |   |                    | $ |        |         |  | $ | 11,595  |   |  | $     | 6,375   |   |  | $ | 21,220   |  
|Operating costs                       |  |                              | (27,294 | ) |                    |   | (29,410 | )       |  |   | (25,588 | ) |  |       | (49,348 | ) |  |   | (131,640 | )
|                                      |  |                              |         |   |                    |   |         |         |  |   |         |   |  |       |         |   |  |   |          |  
|Loss on sales of lots, land and other |  | $                            | (24,044 | ) |                    | $ | (29,410 | )       |  | $ | (13,993 | ) |  | $     | (42,973 | ) |  | $ | (110,420 | )
|                                      |  |                              |         |   |                    |   |         |         |  |   |         |   |  |       |         |   |  |   |          |  
|                                      | 
|                                      |  | Year Ended December 31, 2008 |        
|                                      |  | SouthernCalifornia           |         |   | NorthernCalifornia |   |         | Arizona |  |   | Nevada  |   |  | Total |        
|Loss on sales of lots, land and other |  |                              |         |   |                    |   |         |         |  |   |         |   |  |       |         |   |  |   |          |  
|Operating revenue                     |  | $                            | 24,721  |   |                    | $ | 14,791  |         |  | $ |        |   |  | $     |        |   |  | $ | 39,512   |  
|Operating costs                       |  |                              | (30,780 | ) |                    |   | (16,036 | )       |  |   | (783    | ) |  |       |        |   |  |   | (47,599  | )
|                                      |  |                              |         |   |                    |   |         |         |  |   |         |   |  |       |         |   |  |   |          |  
|Loss on sales of lots, land and other |  | $                            | (6,059  | ) |                    | $ | (1,245  | )       |  | $ | (783    | ) |  | $     |        |   |  | $ | (8,087   | )
|                                      |  |                              |         |   |                    |   |         |         |  |   |         |   |  |       |         |   |  |   |          |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|                                             |  |                              |          |   |                    |   |        |         |  |   |              |   |  |       |         |   |  |   |           |  
|-------------------------------------------- |  | ---------------------------- | -------- | - | ------------------ | - | ------ | ------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | --------- | -
|                                             |  | Year Ended December 31, 2007 |         
|                                             |  | SouthernCalifornia           |          |   | NorthernCalifornia |   |        | Arizona |  |   | Nevada       |   |  | Total |        
|(Loss) gain on sales of lots, land and other |  |                              |          |   |                    |   |        |         |  |   |              |   |  |       |         |   |  |   |           |  
|Operating revenue                            |  | $                            | 83,559   |   |                    | $ |       |         |  | $ | 19,249       |   |  | $     |        |   |  | $ | 102,808   |  
|Operating costs                              |  |                              | (184,607 | ) |                    |   | (5,649 | )       |  |   | (15,004      | ) |  |       | (343    | ) |  | $ | (205,603  | )
|                                             |  |                              |          |   |                    |   |        |         |  |   |              |   |  |       |         |   |  |   |           |  
|(Loss) gain on sales of lots, land and other |  | $                            | (101,048 | ) |                    | $ | (5,649 | )       |  | $ | 4,245        |   |  | $     | (343    | ) |  | $ | (102,795  | )
|                                             |  |                              |          |   |                    |   |        |         |  |   |              |   |  |       |         |   |  |   |           |  
|                                             |  |                              |          |  
|                                             |  |                              |          |   |                    |   |        |         |  |   | December 31, |  
|                                             |  |                              |          |   |                    |   |        |         |  |   | 2009         |   |  | 2008  |        
|Homebuilding assets:                         |  |                              |          |   |                    |   |        |         |  |   |              |   |  |       |         |   |  |   |           |  
|Southern California                          |  |                              |          |   |                    |   |        |         |  |   |              |   |  | $     | 324,728 |   |  | $ | 393,754   |  
|Northern California                          |  |                              |          |   |                    |   |        |         |  |   |              |   |  |       | 38,383  |   |  |   | 162,730   |  
|Arizona                                      |  |                              |          |   |                    |   |        |         |  |   |              |   |  |       | 172,518 |   |  |   | 193,796   |  
|Nevada                                       |  |                              |          |   |                    |   |        |         |  |   |              |   |  |       | 60,764  |   |  |   | 134,146   |  
|Corporate(1)                                 |  |                              |          |   |                    |   |        |         |  |   |              |   |  |       | 263,706 |   |  |   | 160,417   |  
|                                             |  |                              |          |   |                    |   |        |         |  |   |              |   |  |       |         |   |  |   |           |  
|Total homebuilding assets                    |  |                              |          |   |                    |   |        |         |  |   |              |   |  | $     | 860,099 |   |  | $ | 1,044,843 |  
|                                             |  |                              |          |   |                    |   |        |         |  |   |              |   |  |       |         |   |  |   |           |  



|(1) | Comprised primarily of cash and receivables.
|--- | --------------------------------------------

Note 4  Receivables

Receivables consist of the
following (in thousands):



|                                                                                                                   |  |              |        |      |   |       
|------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------ | ---- | - | ------
|                                                                                                                   |  | December 31,
|                                                                                                                   |  | 2009         |        | 2008
|Secured promissory note from affiliate, sale of aircraft                                                           |  | $            | 6,188  |      | $ |      
|Development costs receivable from municipality                                                                     |  |              | 3,100  |      |   |      
|Construction management fee receivable                                                                             |  |              | 2,668  |      |   | 1,190 
|Escrow proceeds receivable                                                                                         |  |              | 1,173  |      |   | 8,619 
|First trust deed mortgage notes receivable, pledged as collateral for revolving mortgage warehouse credit
facility |  |              | 320    |      |   | 7,030 
|Other receivables                                                                                                  |  |              | 2,845  |      |   | 13,146
|                                                                                                                   |  |              |        |      |   |       
|                                                                                                                   |  | $            | 16,294 |      | $ | 29,985
|                                                                                                                   |  |              |        |      |   |       



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 5  Real Estate Inventories and Impairment Loss on Real Estate Assets

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



|                                                      |  |              |         |      |   |        
|----------------------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                                      |  | December 31,
|                                                      |  | 2009         |         | 2008
|Inventories owned: (1)                                |  |              |         |      |   |        
|Land deposits                                         |  | $            | 33,582  |      | $ | 47,033 
|Land and land under development                       |  |              | 334,877 |      |   | 477,249
|Homes completed and under construction                |  |              | 100,795 |      |   | 146,838
|Model homes                                           |  |              | 54,082  |      |   | 83,369 
|                                                      |  |              |         |      |   |        
|Total                                                 |  | $            | 523,336 |      | $ | 754,489
|                                                      |  |              |         |      |   |        
|Inventories not owned: (2)                            |  |              |         |      |   |        
|Variable interest entities  land banking arrangement |  | $            |        |      | $ | 27,684 
|Other land options contracts                          |  |              | 55,270  |      |   | 80,079 
|                                                      |  |              |         |      |   |        
|Total inventories not owned                           |  | $            | 55,270  |      | $ | 107,763
|                                                      |  |              |         |      |   |        



|(1) | Beginning in 2008, the Company temporarily suspended all development, sales and marketing activities at certain of its projects which are in various
stages of development. Management of the Company concluded that this strategy was necessary under the prevailing market conditions and would allow the Company to market the properties at some future time when market conditions may have improved. As
markets continue to improve, management continues to evaluate and analyze the marketplace to potentially activate temporarily suspended projects in 2010 and beyond. The Company has incurred costs related to these certain projects of $261.9 million
as of December 31, 2009, of which $165.3 million is included in Land and land under development, $61.3 million is included in Homes completed and under construction and $35.3 million is included in Model homes. The Company may bring certain of
these projects to market in 2010.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Includes the consolidation of certain lot option arrangements and land banking arrangements determined to be VIEs under the provisions of ASC 810 in
which the Company is considered the primary beneficiary (See Note 2 above) and the consolidation of certain land banking arrangements recorded as a product financing arrangement. Amounts are net of deposits.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company accounts for its real estate inventories (including land, construction in progress, completed inventory,
including models, and inventories not owned) under FASB ASC 360.

FASB ASC 360 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. Indicators of
impairment include a decrease in demand for housing due to softening market conditions, competitive pricing pressures which reduce the average sales prices of homes including an increase in sales incentives and decreased base pricing offered to
buyers, slowing sales absorption rates, decreases in home values in the markets in which the Company operates, significant decreases in gross margins and a decrease in project cash flows for a particular project.

For land, construction in progress, completed inventory, including model homes, and inventories not owned, the Company
estimates expected cash flows at the project level by maintaining current budgets using recent historical information and current market assumptions. The Company updates project budgets and cash flows of each real estate project on a quarterly basis
to determine whether the estimated remaining undiscounted future cash flows of the project are more or less than the carrying amount (net book value) of the asset. If the undiscounted cash flows are more than the net book value of the project, then
there is no impairment. If the undiscounted cash flows are less than the net book value of the asset, then the asset is deemed to be impaired and is written-down to its fair value.

Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties
(i.e., other than a forced or liquidation sale). Management determines the estimated fair value of each project by determining the present value of estimated future cash flows at discount rates that are commensurate with the risk of each project.
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 future revenues and costs, as well as future events and conditions. Estimates
of revenues and costs are supported by the Companys budgeting process, and are based on recent sales in backlog, pricing required to get the desired pace of sales, pricing of competitive projects, incentives offered by competitors and current
estimates of costs of development and construction.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Under the provisions of FASB ASC 360, the Company is required to make
certain assumptions to estimate undiscounted future cash flows of a project, which include: (i) estimated sales prices, including sales incentives, (ii) anticipated sales absorption rates and sales volume, (iii) project costs incurred
to date and the estimated future costs of the project based on the project budget, (iv) the carrying costs related to the time a project is actively selling until it closes the final unit in the project, and (v) alternative strategies
including selling the land to a third party or temporarily suspending development at the project. Each project has different assumptions and is based on managements assessment of the current market conditions that exist in each project
location. The Companys assumptions include moderate absorption increases in certain projects beginning in 2009. In addition, the Company has assumed some moderate reduction in sales incentives in certain projects in certain markets beginning
in 2009.

The assumptions and judgments used by the Company in the estimation process to determine the future
undiscounted cash flows of a project and its fair value are inherently uncertain and require a substantial degree of judgment. The realization of the Companys real estate inventories is dependent upon future uncertain events and market
conditions. Due to the subjective nature of the estimates and assumptions used in determining the future cash flows of a project, the continued decline in the current housing market, the uncertainty in the banking and credit markets, actual results
could differ materially from current estimates.

Management assesses land deposits for impairment when
estimated land values are deemed to be less than the agreed upon contract price. The Company considers changes in market conditions, the timing of land purchases, the ability to renegotiate with land sellers the terms of the land option contracts in
question, the availability and best use of capital, and other factors. The Company records abandoned land deposits and related preacquisition costs in cost of sales -lots, land and other in the consolidated statement of operations in the period that
it is abandoned.

The following table summarizes inventory impairments recorded during the years ended
December 31, 2009, 2008, and 2007:



|                                                                  |  |                         |        |      |   |         |  |   |        
|----------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------- |  | - | -------
|                                                                  |  | Year Ended December 31,
|                                                                  |  | 2009                    |        | 2008 |   | 2007   
|                                                                  |  | (dollars in thousands) 
|Inventory impairments related to:                                 |  |                         |        |      |   |         |  |   |        
|Land under development and homes completed and under construction |  | $                       | 31,916 |      | $ | 83,174  |  | $ | 184,719
|Land held for sale or sold                                        |  |                         | 13,353 |      |   | 52,137  |  |   | 46,401 
|                                                                  |  |                         |        |      |   |         |  |   |        
|Total inventory impairments                                       |  | $                       | 45,269 |      | $ | 135,311 |  | $ | 231,120
|                                                                  |  |                         |        |      |   |         |  |   |        
|Number of projects impaired during the year                       |  |                         | 13     |      |   | 41      |  |   | 42     
|                                                                  |  |                         |        |      |   |         |  |   |        
|Number of projects assessed for impairment during the year        |  |                         | 67     |      |   | 84      |  |   | 84     
|                                                                  |  |                         |        |      |   |         |  |   |        

These charges were included in
impairment loss on real estate assets in the accompanying consolidated statements of operations (See Note 3 - Notes to Consolidated Financial Statement for a detail of impairment by segment). The impairment charges recorded during the periods noted
above stemmed from lower home prices which were driven by increased incentives and discounts resulting from weakened demand experienced during 2007 through 2009. The Company may incur impairment on real estate inventories in the future, if the
markets in which the Company operates continue to experience the deteriorating market conditions.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



On December 24, 2009, the Company consummated the sale of certain
real property (comprising approximately 165 acres) in San Bernardino County, California; San Diego County, California; Clark County, Nevada; and Maricopa County, Arizona, for an aggregate sales price of $13.6 million. The approximate book value of
these properties on the closing date as reflected on the consolidated balance sheet of the Company and its subsidiaries was approximately $84.2 million. During 2009, the Company entered into these transactions to generate cash flow, to reduce
overall debt and to re-invest the cash by purchasing land in certain of its improving markets. The best economic value to the company of these lots was to sell them in their current condition as opposed to holding the lots and eventually building
and selling homes. The Company continues to evaluate its option and the marketplace with respect to developing lots.

On December 26, 2007 and January 7, 2008, the Company entered into ten separate agreements with various affiliates of one of its equity partners (the Equity Partner Agreements). Pursuant to the Equity Partner
Agreements, the Company agreed to sell to the equity partner affiliates 604 residential lots and 5 model homes in 10 communities in Orange County, San Diego County and Ventura County, California for an aggregate sales price of $90.7 million in cash.
The purchase and sale of 404 of the residential lots and the 5 model homes closed on December 27, 2007 (for an aggregate consideration of approximately $65.9 million and the remainder of the residential lots closed on January 9, 2008.
Prior to the sale, the collective net book value of these lots (as reflected on the Companys financial statements) was approximately $210.7 million, resulting in a total loss on the sales transactions of $120.0 million. The loss of $40.3
million related to the portion of the land sales which closed in January 2008 has been reflected in the Consolidated Statement of Operations as Impairment Losses on Real Estate Assets for the year ended December 31, 2007.

On December 27, 2007, the Company sold certain land in San Diego County, California for $12.0 million in cash to a
limited liability corporation owned indirectly by Frank T. Suryan, Jr., as Trustee of the Suryan Family Trust. Mr. Suryan is Chairman and Chief Executive Officer of Lyon Capital Ventures, a company wholly-owned by Frank T. Suryan, Jr., General
William Lyon, Chairman and Chief Executive Officer of the Company, and two trusts whose sole beneficiary is William H. Lyon, Executive Vice President and Chief Administrative Officer of the Company. The Company has received a report from a
third-party valuation and financial advisory services firm as to the reasonableness of the sales price in the transaction. Further, the transaction was unanimously approved by all independent members of the Board of Directors. Prior to the sale, the
net book value of this land (as reflected on the Companys financial statements) was approximately $18.7 million resulting in a loss on the transaction of $6.7 million.

Note 6  Notes Payable and Senior Notes

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



|                                                                                                                                                |  |              |         |      |   |        
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                                                                                                                                |  | December 31,
|                                                                                                                                                |  | 2009         |         | 2008
|Notes payable:                                                                                                                                  |  |              |         |      |   |        
|Revolving credit facilities                                                                                                                     |  | $            |        |      | $ | 72,044 
|Construction notes payable                                                                                                                      |  |              | 64,227  |      |   | 116,316
|Collateralized mortgage obligations under revolving mortgage warehouse credit facilities, secured by first trust
deed mortgage notes receivable |  |              |        |      |   | 6,269  
|                                                                                                                                                |  |              |         |      |   |        
|                                                                                                                                                |  |              | 64,227  |      |   | 194,629
|                                                                                                                                                |  |              |         |      |   |        
|Senior Notes:                                                                                                                                   |  |              |         |      |   |        
|Senior Secured Term Loan Due October 20, 2014                                                                                                   |  |              | 206,000 |      |   |       
|75/8% Senior Notes due December 15, 2012                                                                                                        |  |              | 67,204  |      |   | 133,800
|103/4% Senior Notes due April 1, 2013                                                                                                           |  |              | 168,158 |      |   | 218,176
|71/2% Senior Notes due February 15, 2014                                                                                                        |  |              | 84,701  |      |   | 124,300
|                                                                                                                                                |  |              |         |      |   |        
|                                                                                                                                                |  |              | 526,063 |      |   | 476,276
|                                                                                                                                                |  |              |         |      |   |        
|                                                                                                                                                |  | $            | 590,290 |      | $ | 670,905
|                                                                                                                                                |  |              |         |      |   |        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



During the year ended December 31, 2009, the Company incurred
interest related to the above debt of $48.8 million and capitalized $12.9 million, resulting in net interest expense of $35.9 million on the accompanying consolidated statement of operations. During the year ended December 31, 2008, the Company
incurred interest related to the above debt of $66.7 million and capitalized $42.3 million, resulting in net interest expense of $24.4 million on the accompanying consolidated statement of operations. During 2009 and 2008, the real estate assets
that qualify for interest capitalization decreased compared to 2007 levels. During the year ended December 31, 2007, the Company incurred and capitalized interest relating to the above debt of $76.5 million.

Maturities of the notes payable and Senior Notes are as follows as of December 31, 2009:



|                        |  |                |        
|----------------------- |  | -------------- | -------
|Year Ended December 31, |  | (in thousands)
|2010                    |  | $              | 36,498 
|2011                    |  |                | 18,899 
|2012                    |  |                | 67,204 
|2013                    |  |                | 168,158
|2014                    |  |                | 290,701
|Thereafter              |  |                | 8,830  
|                        |  |                |        
|                        |  | $              | 590,290
|                        |  |                |        

Senior Secured Term Loan

William Lyon Homes, Inc., a California corporation (California Lyon) and wholly-owned
subsidiary of William Lyon Homes is a party to a Senior Secured Term Loan Agreement (the Term Loan Agreement), dated October 20, 2009, with COLFIN WLH Funding, LLC, as Administrative Agent (Admin Agent), COLFIN WLH
Funding, LLC, as Initial Lender and Lead Arranger (COLFIN) and the other Lenders who may become assignees of COLFIN (collectively, with COLFIN, the Lenders).

The Term Loan Agreement provides for a first lien secured loan of $206.0 million (the Term Loan), secured by
substantially all of the assets of California Lyon, the Company (excluding stock in the California Lyon) and certain wholly-owned subsidiaries. The Term Loan is guaranteed by the Company.

California Lyon received the first installment of $131.0 million, which funded in October 2009, and its second
installment of $75.0 million, which funded on December 24, 2009. Under the Term Loan Agreement, California Lyon will be restricted from future borrowings, and, if necessary, will be required to repay existing borrowings, in order to maintain
required loan to value ratios such that: (i) the aggregate amount of outstanding loans under the Term Loan Agreement may not exceed 60% of the aggregate value of the properties securing the facility, with valuation based on the lower of
appraised value (if any) and discounted net present value of the cash flows, and (ii) the aggregate amount of secured debt may not exceed 60% of the aggregate value of the properties owned by California Lyon and its subsidiaries, with valuation
based on the lower of appraised value (if any) and discounted net present value of the cash flows. California Lyon is currently in compliance with the above requirements following each drawdown. The net proceeds to the Company from the first
installment of the Term Loan, after giving effect to attorney fees, loan fees and other miscellaneous costs associated with the loan transaction, and repayment of the revolving credit facilities and purchase of the Senior Notes as described below,
was $34.6 million. A portion of the $75.0 million proceeds from the second installment will be used to fund the Companys opportunistic land acquisitions in 2010.

The Term Loan bears interest at a rate of 14.0%. However, California Lyon has also agreed that, upon any repayment of any portion of the principal amount under the Term Loan (whether
or not at maturity), California Lyon will also pay an exit fee equal to the difference (if positive) between (x) the interest that would have been accrued and been then payable on the repaid portion if the interest rate under the Term Loan
Agreement were 15.625% and (y) the internal rate of return realized by the Lenders on such repaid portion, taking into account all cash amounts actually received by the Lenders with respect thereto other than any make whole payments described
below.

Based on the current outstanding balance of the Term Loan, interest payments are $28.8 million
annually.

On any voluntary prepayment of any portion of the Term Loan, California Lyon will be required to
make a make whole payment equal to an amount, if positive, of the present value of all future payments of interest which would become due with respect to such prepaid amount from the date of prepayment thereof through and including the
maturity date, discounted at an annual rate of 14%.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The Term Loan will mature on October 20, 2014; however, in the
event that any portion of the outstanding principal amounts (the Repaid Senior Note Principal) of the Senior Notes is repaid (whether or not at maturity), the Lenders may elect to require California Lyon to repay that portion of the
outstanding Term Loan as bears the same ratio to the entire Term Loan outstanding as the Repaid Senior Note Principal bears to the entire amounts then outstanding under all of the indentures. All or a portion of the Term Loan may also be accelerated
upon certain other events described in the Term Loan Agreement. The lenders waived the requirement for such repayment in connection with the Senior Note repurchases described below.

The Term Loan Agreement requires the Company to maintain a Minimum Tangible Net Worth (as defined therein) of at least
$75.0 million. The Term Loan Agreement also contains covenants that limit the ability of California Lyon and the Company to, with prior approval from Lender, among other things: (i) incur liens; (ii) incur additional indebtedness;
(iii) transfer or dispose of assets; (iv) merge, consolidate or alter their line of business; (v) guarantee obligations; (vi) engage in affiliated party transactions; (vii) declare or pay dividends or make other
distributions or repurchase stock; (viii) make advances, loans or investments; (ix) repurchase debt (including under the Senior Note indentures) and (x) engage in change of control transactions.

The Term Loan Agreement contains customary events of default, including, without limitation, failure to pay when due amounts
in respect of the Term Loan or otherwise under the Term Loan Agreement; failure to comply with certain agreements or covenants contained in the Term Loan Agreement for a period of 10 days (or, in some cases, 30 days) after the administrative
agents notice of such non-compliance; acceleration of more than $10.0 million of certain other indebtedness; and certain insolvency and bankruptcy events.

Under the Senior Secured Term Loan, the Company is required to comply with a number of covenants, the most restrictive of which require the Company to maintain:



| |  |  | A tangible net worth, as defined, of at least $75.0 million;
| | - |  | ------------------------------------------------------------



| |  |  | A minimum borrowing base such that the indebtedness under the Term Loan does not exceed 60% of the Borrowing Base, with the Borrowing
Base being calculated as (1) the discounted cash flows of each project securing the loan (collateral value), plus (2) restricted cash and (3) escrow proceeds receivable, as defined;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Total secured indebtedness (including the indebtedness under the Term Loan and under all other Construction Notes payable) less than or equal to the
Maximum Permitted Secured Indebtedness under the Term Loan Agreement (which is generally 60% of the total secured debt collateral value as calculated under the Term Loan Agreement, which value generally does not include cash assets); and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Excluded Assets of no more than $25.0 Million, with Excluded Assets being defined generally as the sum total of certain deposit
accounts, payroll accounts, unrestricted cash accounts, and the Companys total investment in joint ventures.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The Companys covenant compliance for the Term Loan at
December 31, 2009 is detailed in the table set forth below:



|                                                              |  |                           |       |   |                                         |       
|------------------------------------------------------------- |  | ------------------------- | ----- | - | --------------------------------------- | ------
|Covenant and Other Requirements                               |  | Actual atDecember 31,2009 |       |   | CovenantRequirements atDecember 31,2009
|Tangible Net Worth(1)                                         |  | $                         | 143.3 |   |                                         | >$75.0
|Ratio of Term Loan to Borrowing Base                          |  |                           | 47.5  | % |                                         | <60%  
|Secured Indebtedness (as a percentage of collateral value)(2) |  |                           | 71.8  | % |                                         | <60%  
|Excluded Assets(3)                                            |  | $                         | 25.3  |   |                                         | <$25.0



|(1) | Tangible Net Worth was calculated based on the stated amount of equity less intangible assets of $14.9 million as of December 31, 2009.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



|(2) | The Company did not meet this covenant requirement at December 31, 2009, due to the land sales that occurred in December 2009, since the proceeds
had not been reapplied to eligible collateral by that date. The Company received prior approval from the lender to enter into the land sale transactions, whereby both the lender and the Company were aware of the collateral value that would be lost
by selling the underlying assets. The terms of the Secured Term Loan Agreement include a Notice of Default provision whereby the Company is not in Default until the lender notifies the Company of an event of default. The lender has
confirmed that it will not serve the Company a Notice of Default. The Company expects this calculation to be less than 60% by March 31, 2010.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The terms of the Secured Term Loan Agreement include a 30-day period to allow the Company to cure items of possible default. These calculations have
been cured as of January 30, 2010, by reducing the balance in one of the unrestricted cash accounts.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of and for the year ending December 31, 2009, the Company is not in default with the covenants under this loan.

If market conditions deteriorate, the financial covenants contained in the Companys Term Loan will continue to be negatively impacted. Under these circumstances, the lenders
under the Term Loan would need to provide the Company with additional covenant relief if the Company is to avoid future noncompliance with these financial covenants. If the Company is unable to obtain requested covenant relief or is unable to obtain
a waiver for any covenant non-compliance, the Companys obligation to repay indebtedness under the Term Loan and the Senior Notes could be accelerated. The Company can give no assurance that in such an event, the Company would have, or be able
to obtain, sufficient funds to pay the amount the Company would be required to repay.

Senior Notes

October 2009 Senior Note Repurchases

On October 23, 2009, California Lyon repurchased, in a privately negotiated transaction using the
proceeds of the initial installment under the Loan Agreement, (i) $23.3 million principal amount of its outstanding 103/4% Senior Notes at a cost of $16.3 million plus accrued interest, (ii) $31.6 million principal amount of its outstanding 75/8% Senior Notes at a cost of $22.1 million plus accrued interest, and
(iii) $17.6 million principal amount of its outstanding 71/2% Senior Notes at a cost of $12,348,000 plus accrued interest. The Lenders have permitted this repurchase and have waived their right to require any prepayment of the Term Loan in connection therewith.
The net gain resulting from these purchases, after giving effect to amortization of related deferred loan costs and other fees, was approximately $20.5 million.

After giving effect to these Senior Note repurchases, in addition to the other Senior Note repurchases, California Lyon now
has the following principal amounts of Senior Notes outstanding (in thousands):



|                                         |  |                  |        
|---------------------------------------- |  | ---------------- | -------
|                                         |  | December 31,2009
|75/8% Senior Notes due December 15, 2012 |  | $                | 67,204 
|103/4% Senior Notes due April 1, 2013    |  |                  | 168,158
|71/2% Senior Notes due February 15, 2014 |  |                  | 84,701 
|                                         |  |                  |        
|                                         |  | $                | 320,063
|                                         |  |                  |        

75/8% Senior Notes

On November 22, 2004, California Lyon issued $150.0 million
principal amount of 75/8% Senior Notes due 2012
(the 75/8% Senior Notes), resulting in
net proceeds to the Company of approximately $148.5 million. Of the initial $150.0 million, $67.2 million in aggregate principal amount remained as of December 31, 2009 and the date hereof.

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 $2.6 million.



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The 75/8% Senior Notes are 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.

103/4% Senior Notes

On March 17, 2003 California Lyon issued $250.0 million of 103/4% Senior Notes due 2013 (the 103/4% Senior Notes) 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. Of the initial $250.0 million, $168.2 million aggregate principal amount remained outstanding as of December 31,
2009 and the date hereof.

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 $9.0 million.

The 103/4% Senior Notes are 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.

71/2% Senior Notes

On February 6, 2004, California Lyon issued $150.0 million principal amount of 71/2% Senior Notes due 2014 (the 71/2% Senior Notes), resulting in net proceeds to the Company of
approximately $147.6 million. Of the initial $150.0 million, $84.7 million aggregate principal amount remained outstanding as of December 31, 2009 and the date hereof.

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 $3.2 million.

The 71/2% Senior Notes are 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.

General Terms of the Senior Notes

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 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.



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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.

As of and for the year ending December 31, 2009, the Company was in compliance with these
covenants.

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.



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING BALANCE SHEET

December 31, 2009

(in thousands)



|                                                            |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |        
|----------------------------------------------------------- |  | -------------- | ------- | -------------- | - | ------- | --------------------- |  | ------------------------- | ------- | ------------------ | - | ------ | ------------------- | - | -------- | - |  | - | -------
|                                                            |  | Unconsolidated |         |                |   |         |                      
|                                                            |  | DelawareLyon   |         | CaliforniaLyon |   |         | GuarantorSubsidiaries |  | Non-GuarantorSubsidiaries |         | EliminatingEntries |   |        | ConsolidatedCompany
|ASSETS                                                      |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |        
|Cash and cash equivalents                                   |  | $              |        |                | $ | 115,247 |                       |  | $                         | 111     |                    | $ | 2,229  |                     | $ |         |   |  | $ | 117,587
|Restricted cash                                             |  |                |        |                |   | 4,352   |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 4,352  
|Receivables                                                 |  |                |        |                |   | 12,599  |                       |  |                           | 320     |                    |   | 3,375  |                     |   |         |   |  |   | 16,294 
|Income tax refunds receivable                               |  |                |        |                |   | 106,989 |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 106,989
|Real estate inventories                                     |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |        
|Owned                                                       |  |                |        |                |   | 515,102 |                       |  |                           |        |                    |   | 8,234  |                     |   |         |   |  |   | 523,336
|Not owned                                                   |  |                |        |                |   | 55,270  |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 55,270 
|Investments in and advances to unconsolidated jointventures |  |                |        |                |   | 1,703   |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 1,703  
|Property and equipment, net                                 |  |                |        |                |   | 1,624   |                       |  |                           | 49      |                    |   |       |                     |   |         |   |  |   | 1,673  
|Deferred loan costs                                         |  |                |        |                |   | 14,859  |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 14,859 
|Other assets                                                |  |                |        |                |   | 17,819  |                       |  |                           | 217     |                    |   |       |                     |   |         |   |  |   | 18,036 
|Investments in subsidiaries                                 |  |                | 150,600 |                |   | 3,978   |                       |  |                           |        |                    |   |       |                     |   | (154,578 | ) |  |   |       
|Intercompany receivables                                    |  |                |        |                |   |        |                       |  |                           | 204,917 |                    |   |       |                     |   | (204,917 | ) |  |   |       
|                                                            |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |        
|                                                            |  | $              | 150,600 |                | $ | 849,542 |                       |  | $                         | 205,614 |                    | $ | 13,838 |                     | $ | (359,495 | ) |  | $ | 860,099
|                                                            |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |        
|Accounts payable                                            |  | $              |        |                | $ | 8,914   |                       |  | $                         | 42      |                    | $ | 2,090  |                     | $ |         |   |  | $ | 11,046 
|Accrued expenses                                            |  |                |        |                |   | 44,814  |                       |  |                           | 397     |                    |   | 83     |                     |   |         |   |  |   | 45,294 
|Liabilities from inventories not owned                      |  |                |        |                |   | 55,270  |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 55,270 
|Notes payable                                               |  |                |        |                |   | 64,227  |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 64,227 
|Senior Secured Term Loan                                    |  |                |        |                |   | 206,000 |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 206,000
|75/8% Senior Notes                                          |  |                |        |                |   | 67,204  |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 67,204 
|103/4% Senior Notes                                         |  |                |        |                |   | 168,158 |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 168,158
|71/2% Senior Notes                                          |  |                |        |                |   | 84,701  |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 84,701 
|Intercompany payables                                       |  |                |        |                |   | 204,829 |                       |  |                           |        |                    |   | 88     |                     |   | (204,917 | ) |  |   |       
|                                                            |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |        
|Total liabilities                                           |  |                |        |                |   | 904,117 |                       |  |                           | 439     |                    |   | 2,261  |                     |   | (204,917 | ) |  |   | 701,900
|Equity                                                      |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |        
|Stockholders equity (deficit)                              |  |                | 150,600 |                |   | (54,575 | )                     |  |                           | 205,175 |                    |   | 11,577 |                     |   | (162,177 | ) |  |   | 150,600
|Noncontrolling interest                                     |  |                |        |                |   |        |                       |  |                           |        |                    |   |       |                     |   | 7,599    |   |  |   | 7,599  
|                                                            |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |        
|                                                            |  | $              | 150,600 |                | $ | 849,542 |                       |  | $                         | 205,614 |                    | $ | 13,838 |                     | $ | (359,495 | ) |  | $ | 860,099
|                                                            |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |        



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING BALANCE SHEET

December 31, 2008

(in thousands)



|                                                            |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |          
|----------------------------------------------------------- |  | -------------- | ------- | -------------- | - | ------- | --------------------- |  | ------------------------- | ------- | ------------------ | - | ------ | ------------------- | - | -------- | - |  | - | ---------
|                                                            |  | Unconsolidated |         |                |   |         |                      
|                                                            |  | DelawareLyon   |         | CaliforniaLyon |   |         | GuarantorSubsidiaries |  | Non-GuarantorSubsidiaries |         | EliminatingEntries |   |        | ConsolidatedCompany
|ASSETS                                                      |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |          
|Cash and cash equivalents                                   |  | $              |        |                | $ | 59,285  |                       |  | $                         | 2,898   |                    | $ | 4,834  |                     | $ |         |   |  | $ | 67,017   
|Restricted cash                                             |  |                |        |                |   | 5,079   |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 5,079    
|Receivables                                                 |  |                |        |                |   | 13,081  |                       |  |                           | 7,615   |                    |   | 9,289  |                     |   |         |   |  |   | 29,985   
|Income tax refunds receivable                               |  |                |        |                |   | 46,696  |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 46,696   
|Real estate inventories                                     |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |          
|Owned                                                       |  |                |        |                |   | 681,609 |                       |  |                           |        |                    |   | 72,880 |                     |   |         |   |  |   | 754,489  
|Not owned                                                   |  |                |        |                |   | 107,763 |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 107,763  
|Investments in and advances to unconsolidated jointventures |  |                |        |                |   | 2,769   |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 2,769    
|Property and equipment, net                                 |  |                |        |                |   | 2,264   |                       |  |                           | 12,139  |                    |   |       |                     |   |         |   |  |   | 14,403   
|Deferred loan costs                                         |  |                |        |                |   | 6,264   |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 6,264    
|Other assets                                                |  |                |        |                |   | 9,139   |                       |  |                           | 1,239   |                    |   |       |                     |   |         |   |  |   | 10,378   
|Investments in subsidiaries                                 |  |                | 171,125 |                |   | 7,677   |                       |  |                           |        |                    |   |       |                     |   | (178,802 | ) |  |   |         
|Intercompany receivables                                    |  |                |        |                |   |        |                       |  |                           | 195,801 |                    |   | 375    |                     |   | (196,176 | ) |  |   |         
|                                                            |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |          
|                                                            |  | $              | 171,125 |                | $ | 941,626 |                       |  | $                         | 219,692 |                    | $ | 87,378 |                     | $ | (374,978 | ) |  | $ | 1,044,843
|                                                            |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |          
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |          
|Accounts payable                                            |  | $              |        |                | $ | 9,078   |                       |  | $                         | 294     |                    | $ | 6,959  |                     | $ |         |   |  | $ | 16,331   
|Accrued expenses                                            |  |                |        |                |   | 61,625  |                       |  |                           | 1,260   |                    |   | 102    |                     |   |         |   |  |   | 62,987   
|Liabilities from inventories not owned                      |  |                |        |                |   | 80,079  |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 80,079   
|Notes payable                                               |  |                |        |                |   | 132,209 |                       |  |                           | 6,269   |                    |   | 56,151 |                     |   |         |   |  |   | 194,629  
|75/8% Senior Notes                                          |  |                |        |                |   | 133,800 |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 133,800  
|103/4% Senior Notes                                         |  |                |        |                |   | 218,176 |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 218,176  
|71/2% Senior Notes                                          |  |                |        |                |   | 124,300 |                       |  |                           |        |                    |   |       |                     |   |         |   |  |   | 124,300  
|Intercompany payables                                       |  |                |        |                |   | 195,419 |                       |  |                           |        |                    |   | 757    |                     |   | (196,176 | ) |  |   |         
|                                                            |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |          
|Total liabilities                                           |  |                |        |                |   | 954,686 |                       |  |                           | 7,823   |                    |   | 63,969 |                     |   | (196,176 | ) |  |   | 830,302  
|Equity                                                      |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |          
|Stockholders equity (deficit)                              |  |                | 171,125 |                |   | (13,060 | )                     |  |                           | 211,869 |                    |   | 23,409 |                     |   | (222,218 | ) |  |   | 171,125  
|Noncontrolling interest                                     |  |                |        |                |   |        |                       |  |                           |        |                    |   |       |                     |   | 43,416   |   |  |   | 43,416   
|                                                            |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |          
|                                                            |  | $              | 171,125 |                | $ | 941,626 |                       |  | $                         | 219,692 |                    | $ | 87,378 |                     | $ | (374,978 | ) |  | $ | 1,044,843
|                                                            |  |                |         |                |   |         |                       |  |                           |         |                    |   |        |                     |   |          |   |  |   |          



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2009

(in thousands)



|                                                |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |        |   |  |   |          |  
|----------------------------------------------- |  | -------------- | ------- | - | -------------- | - | -------- | --------------------- |  | - | ------------------------- | - |  | ------------------ | ------ | - | ------------------- | - | ------ | - |  | - | -------- | -
|                                                |  | Unconsolidated |         |   |                |   |          |                       | 
|                                                |  | DelawareLyon   |         |   | CaliforniaLyon |   |          | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |        |   | ConsolidatedCompany |  
|Operating revenue                               |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |        |   |  |   |          |  
|Sales                                           |  | $              |        |   |                | $ | 229,854  |                       |  | $ | 39,619                    |   |  | $                  | 5,621  |   |                     | $ |       |   |  | $ | 275,094  |  
|Construction services                           |  |                |        |   |                |   | 34,149   |                       |  |   |                          |   |  |                    |       |   |                     |   |       |   |  |   | 34,149   |  
|Management fees                                 |  |                |        |   |                |   | 1,127    |                       |  |   |                          |   |  |                    |       |   |                     |   | (1,127 | ) |  |   |         |  
|                                                |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |        |   |  |   |          |  
|                                                |  |                |        |   |                |   | 265,130  |                       |  |   | 39,619                    |   |  |                    | 5,621  |   |                     |   | (1,127 | ) |  |   | 309,243  |  
|                                                |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |        |   |  |   |          |  
|Operating costs                                 |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |        |   |  |   |          |  
|Cost of sales                                   |  |                |        |   |                |   | (308,639 | )                     |  |   | (38,142                   | ) |  |                    | (5,472 | ) |                     |   | 1,127  |   |  |   | (351,126 | )
|Impairment loss on real estate assets           |  |                |        |   |                |   | (45,269  | )                     |  |   |                          |   |  |                    |       |   |                     |   |       |   |  |   | (45,269  | )
|Construction services                           |  |                |        |   |                |   | (28,486  | )                     |  |   |                          |   |  |                    |       |   |                     |   |       |   |  |   | (28,486  | )
|Sales and marketing                             |  |                |        |   |                |   | (14,820  | )                     |  |   | (2,308                    | ) |  |                    | (508   | ) |                     |   |       |   |  |   | (17,636  | )
|General and administrative                      |  |                |        |   |                |   | (20,733  | )                     |  |   | (276                      | ) |  |                    | (18    | ) |                     |   |       |   |  |   | (21,027  | )
|Other                                           |  |                |        |   |                |   | (6,496   | )                     |  |   | (84                       | ) |  |                    |       |   |                     |   |       |   |  |   | (6,580   | )
|                                                |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |        |   |  |   |          |  
|                                                |  |                |        |   |                |   | (424,443 | )                     |  |   | (40,810                   | ) |  |                    | (5,998 | ) |                     |   | 1,127  |   |  |   | (470,124 | )
|                                                |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |        |   |  |   |          |  
|Equity in loss of unconsolidated joint ventures |  |                |        |   |                |   | (420     | )                     |  |   |                          |   |  |                    |       |   |                     |   |       |   |  |   | (420     | )
|                                                |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |        |   |  |   |          |  
|Loss from subsidiaries                          |  |                | (20,525 | ) |                |   | (4,780   | )                     |  |   | (411                      | ) |  |                    |       |   |                     |   | 25,716 |   |  |   |         |  
|                                                |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |        |   |  |   |          |  
|Operating loss                                  |  |                | (20,525 | ) |                |   | (164,513 | )                     |  |   | (1,602                    | ) |  |                    | (377   | ) |                     |   | 25,716 |   |  |   | (161,301 | )
|Gain on retirement of debt                      |  |                |        |   |                |   | 78,144   |                       |  |   |                          |   |  |                    |       |   |                     |   |       |   |  |   | 78,144   |  
|Interest expense, net of amounts capitalized    |  |                |        |   |                |   | (35,902  | )                     |  |   |                          |   |  |                    |       |   |                     |   |       |   |  |   | (35,902  | )
|Other income (expense), net                     |  |                |        |   |                |   | 1,159    |                       |  |   | (4,990                    | ) |  |                    | 29     |   |                     |   |       |   |  |   | (3,802   | )
|                                                |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |        |   |  |   |          |  
|Loss before benefit from income taxes           |  |                | (20,525 | ) |                |   | (121,112 | )                     |  |   | (6,592                    | ) |  |                    | (348   | ) |                     |   | 25,716 |   |  |   | (122,861 | )
|Benefit from income taxes                       |  |                |        |   |                |   | 101,908  |                       |  |   |                          |   |  |                    |       |   |                     |   |       |   |  |   | 101,908  |  
|                                                |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |        |   |  |   |          |  
|Consolidated net loss                           |  |                | (20,525 | ) |                |   | (19,204  | )                     |  |   | (6,592                    | ) |  |                    | (348   | ) |                     |   | 25,716 |   |  |   | (20,953  | )
|Less: net loss from noncontrolling interest     |  |                |        |   |                |   |         |                       |  |   |                          |   |  |                    |       |   |                     |   | 428    |   |  |   | 428      |  
|                                                |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |        |   |  |   |          |  
|Net loss attributable to William Lyon Homes     |  | $              | (20,525 | ) |                | $ | (19,204  | )                     |  | $ | (6,592                    | ) |  | $                  | (348   | ) |                     | $ | 26,144 |   |  | $ | (20,525  | )
|                                                |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |        |   |  |   |          |  



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2008

(in thousands)



|                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|----------------------------------------------- |  | -------------- | -------- | - | -------------- | - | -------- | --------------------- |  | - | ------------------------- | - |  | ------------------ | ------- | - | ------------------- | - | ------- | - |  | - | -------- | -
|                                                |  | Unconsolidated |          |   |                |   |          |                       | 
|                                                |  | DelawareLyon   |          |   | CaliforniaLyon |   |          | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |         |   | ConsolidatedCompany |  
|Operating revenue                               |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Sales                                           |  | $              |         |   |                | $ | 437,038  |                       |  | $ | 48,589                    |   |  | $                  | 22,337  |   |                     | $ |        |   |  | $ | 507,964  |  
|Construction services                           |  |                |         |   |                |   | 18,114   |                       |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | 18,114   |  
|Management fees                                 |  |                |         |   |                |   | 825      |                       |  |   |                          |   |  |                    |        |   |                     |   | (825    | ) |  |   |         |  
|                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|                                                |  |                |         |   |                |   | 455,977  |                       |  |   | 48,589                    |   |  |                    | 22,337  |   |                     |   | (825    | ) |  |   | 526,078  |  
|                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Operating costs                                 |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Cost of sales                                   |  |                |         |   |                |   | (421,620 | )                     |  |   | (44,231                   | ) |  |                    | (21,849 | ) |                     |   | 825     |   |  |   | (486,875 | )
|Impairment loss on real estate assets           |  |                |         |   |                |   | (111,737 | )                     |  |   |                          |   |  |                    | (23,574 | ) |                     |   |        |   |  |   | (135,311 | )
|Impairment loss on goodwill                     |  |                |         |   |                |   | (5,896   | )                     |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | (5,896   | )
|Construction services                           |  |                |         |   |                |   | (15,431  | )                     |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | (15,431  | )
|Sales and marketing                             |  |                |         |   |                |   | (34,815  | )                     |  |   | (3,233                    | ) |  |                    | (2,393  | ) |                     |   |        |   |  |   | (40,441  | )
|General and administrative                      |  |                |         |   |                |   | (27,176  | )                     |  |   | (422                      | ) |  |                    | (47     | ) |                     |   |        |   |  |   | (27,645  | )
|Other                                           |  |                |         |   |                |   | (4,404   | )                     |  |   | (57                       | ) |  |                    |        |   |                     |   |        |   |  |   | (4,461   | )
|                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|                                                |  |                |         |   |                |   | (621,079 | )                     |  |   | (47,943                   | ) |  |                    | (47,863 | ) |                     |   | 825     |   |  |   | (716,060 | )
|                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Equity in loss of unconsolidated joint ventures |  |                |         |   |                |   | (3,877   | )                     |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | (3,877   | )
|                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Loss from subsidiaries                          |  |                | (111,638 | ) |                |   | (7,552   | )                     |  |   | (8,693                    | ) |  |                    |        |   |                     |   | 127,883 |   |  |   |         |  
|                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Operating loss                                  |  |                | (111,638 | ) |                |   | (176,531 | )                     |  |   | (8,047                    | ) |  |                    | (25,526 | ) |                     |   | 127,883 |   |  |   | (193,859 | )
|Gain on retirement of debt                      |  |                |         |   |                |   | 54,044   |                       |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | 54,044   |  
|Interest expense, net of amounts capitalized    |  |                |         |   |                |   | (24,440  | )                     |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | (24,440  | )
|Other income (expense), net                     |  |                |         |   |                |   | 2,050    |                       |  |   | (1,593                    | ) |  |                    | 122     |   |                     |   |        |   |  |   | 579      |  
|                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Loss before benefit from income taxes           |  |                | (111,638 | ) |                |   | (144,877 | )                     |  |   | (9,640                    | ) |  |                    | (25,404 | ) |                     |   | 127,883 |   |  |   | (163,676 | )
|Benefit from income taxes                       |  |                |         |   |                |   | 41,592   |                       |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | 41,592   |  
|                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Consolidated net loss                           |  |                | (111,638 | ) |                |   | (103,285 | )                     |  |   | (9,640                    | ) |  |                    | (25,404 | ) |                     |   | 127,883 |   |  |   | (122,084 | )
|Less: net loss from noncontrolling interest     |  |                |         |   |                |   |         |                       |  |   |                          |   |  |                    |        |   |                     |   | 10,446  |   |  |   | 10,446   |  
|                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net loss attributable to William Lyon Homes     |  | $              | (111,638 | ) |                | $ | (103,285 | )                     |  | $ | (9,640                    | ) |  | $                  | (25,404 | ) |                     | $ | 138,329 |   |  | $ | (111,638 | )
|                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2007

(in thousands)



|                                                        |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|------------------------------------------------------- |  | -------------- | -------- | - | -------------- | - | ---------- | --------------------- |  | - | ------------------------- | - |  | ------------------ | -------- | - | ------------------- | - | ------- | - |  | - | ---------- | -
|                                                        |  | Unconsolidated |          |   |                |   |            |                       | 
|                                                        |  | DelawareLyon   |          |   | CaliforniaLyon |   |            | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |          |   | ConsolidatedCompany |  
|Operating revenue                                       |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|Sales                                                   |  | $              |         |   |                | $ | 885,284    |                       |  | $ | 115,714                   |   |  | $                  | 121,701  |   |                     | $ | (17,342 | ) |  | $ | 1,105,357  |  
|Management fees                                         |  |                |         |   |                |   | 3,123      |                       |  |   |                          |   |  |                    |         |   |                     |   | (3,123  | ) |  |   |           |  
|                                                        |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|                                                        |  |                |         |   |                |   | 888,407    |                       |  |   | 115,714                   |   |  |                    | 121,701  |   |                     |   | (20,465 | ) |  |   | 1,105,357  |  
|                                                        |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|Operating costs                                         |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|Cost of sales                                           |  |                |         |   |                |   | (908,201   | )                     |  |   | (92,518                   | ) |  |                    | (98,577  | ) |                     |   | 20,465  |   |  |   | (1,078,831 | )
|Impairment loss on real estate assets                   |  |                |         |   |                |   | (231,120   | )                     |  |   |                          |   |  |                    |         |   |                     |   |        |   |  |   | (231,120   | )
|Sales and marketing                                     |  |                |         |   |                |   | (53,192    | )                     |  |   | (6,481                    | ) |  |                    | (7,030   | ) |                     |   |        |   |  |   | (66,703    | )
|General and administrative                              |  |                |         |   |                |   | (37,083    | )                     |  |   | (375                      | ) |  |                    | (14      | ) |                     |   |        |   |  |   | (37,472    | )
|Other                                                   |  |                |         |   |                |   | (795       | )                     |  |   | (108                      | ) |  |                    |         |   |                     |   |        |   |  |   | (903       | )
|                                                        |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|                                                        |  |                |         |   |                |   | (1,230,391 | )                     |  |   | (99,482                   | ) |  |                    | (105,621 | ) |                     |   | 20,465  |   |  |   | (1,415,029 | )
|                                                        |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|Equity in income (loss) of unconsolidatedjoint ventures |  |                |         |   |                |   | 676        |                       |  |   | (372                      | ) |  |                    |         |   |                     |   |        |   |  |   | 304        |  
|                                                        |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|(Loss) income from subsidiaries                         |  |                | (349,408 | ) |                |   | 20,034     |                       |  |   | 191                       |   |  |                    |         |   |                     |   | 329,183 |   |  |   |           |  
|                                                        |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|Operating (loss) income                                 |  |                | (349,408 | ) |                |   | (321,274   | )                     |  |   | 16,051                    |   |  |                    | 16,080   |   |                     |   | 329,183 |   |  |   | (309,368   | )
|Other (expense) income, net                             |  |                |         |   |                |   | (247       | )                     |  |   | 3,551                     |   |  |                    | 440      |   |                     |   |        |   |  |   | 3,744      |  
|                                                        |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|(Loss) income before provision for incometaxes          |  |                | (349,408 | ) |                |   | (321,521   | )                     |  |   | 19,602                    |   |  |                    | 16,520   |   |                     |   | 329,183 |   |  |   | (305,624   | )
|Provision for income taxes                              |  |                |         |   |                |   | (32,645    | )                     |  |   |                          |   |  |                    | (13      | ) |                     |   |        |   |  |   | (32,658    | )
|                                                        |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|Consolidated net (loss) income                          |  |                | (349,408 | ) |                |   | (354,166   | )                     |  |   | 19,602                    |   |  |                    | 16,507   |   |                     |   | 329,183 |   |  |   | (338,282   | )
|Less: net income from noncontrollinginterest            |  |                |         |   |                |   |           |                       |  |   |                          |   |  |                    |         |   |                     |   | (11,126 | ) |  |   | (11,126    | )
|                                                        |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|Net (loss) income attributable to WilliamLyon Homes     |  | $              | (349,408 | ) |                | $ | (354,166   | )                     |  | $ | 19,602                    |   |  | $                  | 16,507   |   |                     | $ | 318,057 |   |  | $ | (349,408   | )
|                                                        |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  



106



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##### Table of Contents

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2009

(in thousands)



|                                                                                          |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|----------------------------------------------------------------------------------------- |  | -------------- | ------- | - | -------------- | - | -------- | --------------------- |  | - | ------------------------- | - |  | ------------------ | ------- | - | ------------------- | - | ------- | - |  | - | -------- | -
|                                                                                          |  | Unconsolidated |         |   |                |   |          |                       | 
|                                                                                          |  | DelawareLyon   |         |   | CaliforniaLyon |   |          | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |         |   | ConsolidatedCompany |  
|Operating activities                                                                      |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net loss                                                                                  |  | $              | (20,525 | ) |                | $ | (19,204  | )                     |  | $ | (6,592                    | ) |  | $                  | (348    | ) |                     | $ | 25,716  |   |  | $ | (20,953  | )
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Depreciation and amortization                                                             |  |                |        |   |                |   | 546      |                       |  |   | 947                       |   |  |                    |        |   |                     |   |        |   |  |   | 1,493    |  
|Impairment loss on real estate assets                                                     |  |                |        |   |                |   | 45,269   |                       |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | 45,269   |  
|Equity in loss of unconsolidated joint ventures                                           |  |                |        |   |                |   | 420      |                       |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | 420      |  
|Equity in loss of subsidiaries                                                            |  |                | 20,525  |   |                |   | 4,780    |                       |  |   | 411                       |   |  |                    |        |   |                     |   | (25,716 | ) |  |   |         |  
|Gain on retirement of debt                                                                |  |                |        |   |                |   | (78,144  | )                     |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | (78,144  | )
|Loss on sale of fixed asset                                                               |  |                |        |   |                |   |         |                       |  |   | 3,009                     |   |  |                    |         |   |                     |   |         |   |  |   | 3,009    |  
|Benefit from income taxes                                                                 |  |                |        |   |                |   | (101,908 | )                     |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | (101,908 | )
|Net changes in operating assets and liabilities:                                          |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Restricted cash                                                                           |  |                |        |   |                |   | 727      |                       |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | 727      |  
|Receivables                                                                               |  |                |        |   |                |   | 482      |                       |  |   | 13,483                    |   |  |                    | 5,914   |   |                     |   |        |   |  |   | 19,879   |  
|Income tax refund receivable                                                              |  |                |        |   |                |   | 41,615   |                       |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | 41,615   |  
|Real estate inventories-owned                                                             |  |                |        |   |                |   | 121,941  |                       |  |   |                          |   |  |                    | 8,495   |   |                     |   |        |   |  |   | 130,436  |  
|Deferred loan costs                                                                       |  |                |        |   |                |   | 1,720    |                       |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | 1,720    |  
|Other assets                                                                              |  |                |        |   |                |   | (8,680   | )                     |  |   | 1,022                     |   |  |                    |        |   |                     |   |        |   |  |   | (7,658   | )
|Accounts payable                                                                          |  |                |        |   |                |   | (164     | )                     |  |   | (252                      | ) |  |                    | (4,869  | ) |                     |   |        |   |  |   | (5,285   | )
|Accrued expenses                                                                          |  |                |        |   |                |   | (16,811  | )                     |  |   | (863                      | ) |  |                    | (19     | ) |                     |   |        |   |  |   | (17,693  | )
|                                                                                          |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net cash (used in) provided by operating activities                                       |  |                |        |   |                |   | (7,411   | )                     |  |   | 11,165                    |   |  |                    | 9,173   |   |                     |   |        |   |  |   | 12,927   |  
|                                                                                          |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Investing activities                                                                      |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net change in investments in and advances to unconsolidated joint ventures                |  |                |        |   |                |   | 646      |                       |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | 646      |  
|Net proceeds from sale of fixed asset                                                     |  |                |        |   |                |   |         |                       |  |   | 2,063                     |   |  |                    |        |   |                     |   |        |   |  |   | 2,063    |  
|Purchases of property and equipment                                                       |  |                |        |   |                |   | 94       |                       |  |   | (117                      | ) |  |                    |        |   |                     |   |        |   |  |   | (23      | )
|Investment in subsidiaries                                                                |  |                |        |   |                |   | (1,081   | )                     |  |   | (411                      | ) |  |                    |        |   |                     |   | 1,492   |   |  |   |         |  
|                                                                                          |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net cash (used in) provided by investing activities                                       |  |                |        |   |                |   | (341     | )                     |  |   | 1,535                     |   |  |                    |        |   |                     |   | 1,492   |   |  |   | 2,686    |  
|                                                                                          |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Financing activities                                                                      |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Proceeds from borrowings on notes payable                                                 |  |                |        |   |                |   | 102,115  |                       |  |   | 11,352                    |   |  |                    |        |   |                     |   |        |   |  |   | 113,467  |  
|Principal payments on notes payable                                                       |  |                |        |   |                |   | (170,097 | )                     |  |   | (17,621                   | ) |  |                    |        |   |                     |   |        |   |  |   | (187,718 | )
|Net cash paid for repurchase of senior notes                                              |  |                |        |   |                |   | (76,991  | )                     |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | (76,991  | )
|Proceeds from senior secured term loan                                                    |  |                |        |   |                |   | 193,904  |                       |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | 193,904  |  
|Minority interest contributions, net                                                      |  |                |        |   |                |   |         |                       |  |   |                          |   |  |                    |        |   |                     |   | (7,705  | ) |  |   | (7,705   | )
|Intercompany receivables/payables                                                         |  |                |        |   |                |   | 14,783   |                       |  |   | (9,116                    | ) |  |                    | (294    | ) |                     |   | (5,373  | ) |  |   |         |  
|Advances to affiliates                                                                    |  |                |        |   |                |   |         |                       |  |   | (102                      | ) |  |                    | (11,484 | ) |                     |   | 11,586  |   |  |   |         |  
|                                                                                          |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net cash provided by (used in) financing activities                                       |  |                |        |   |                |   | 63,714   |                       |  |   | (15,487                   | ) |  |                    | (11,778 | ) |                     |   | (1,492  | ) |  |   | 34,957   |  
|                                                                                          |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                |        |   |                |   | 55,962   |                       |  |   | (2,787                    | ) |  |                    | (2,605  | ) |                     |   |        |   |  |   | 50,570   |  
|Cash and cash equivalents at beginning of year                                            |  |                |        |   |                |   | 59,285   |                       |  |   | 2,898                     |   |  |                    | 4,834   |   |                     |   |        |   |  |   | 67,017   |  
|                                                                                          |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Cash and cash equivalents at end of year                                                  |  | $              |        |   |                | $ | 115,247  |                       |  | $ | 111                       |   |  | $                  | 2,229   |   |                     | $ |        |   |  | $ | 117,587  |  
|                                                                                          |  |                |         |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  



107



---

##### Table of Contents

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2008

(in thousands)



|                                                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  
|------------------------------------------------------------------------------- |  | -------------- | -------- | - | -------------- | - | -------- | --------------------- |  | - | ------------------------- | - |  | ------------------ | ------- | - | ------------------- | - | -------- | - |  | - | -------- | -
|                                                                                |  | Unconsolidated |          |   |                |   |          |                       | 
|                                                                                |  | DelawareLyon   |          |   | CaliforniaLyon |   |          | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |         |   | ConsolidatedCompany |  
|Operating activities                                                            |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  
|Net loss                                                                        |  | $              | (111,638 | ) |                | $ | (103,285 | )                     |  | $ | (9,640                    | ) |  | $                  | (25,404 | ) |                     | $ | 127,883  |   |  | $ | (122,084 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  
|Depreciation and amortization                                                   |  |                |         |   |                |   | 745      |                       |  |   | 1,473                     |   |  |                    |        |   |                     |   |         |   |  |   | 2,218    |  
|Impairment loss on real estate assets                                           |  |                |         |   |                |   | 111,737  |                       |  |   |                          |   |  |                    | 23,574  |   |                     |   |         |   |  |   | 135,311  |  
|Impairment loss on goodwill                                                     |  |                |         |   |                |   | 5,896    |                       |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | 5,896    |  
|Equity in loss of unconsolidated joint ventures                                 |  |                |         |   |                |   | 3,877    |                       |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | 3,877    |  
|Distributions of income from unconsolidated joint ventures                      |  |                |         |   |                |   | 816      |                       |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | 816      |  
|Equity in loss of subsidiaries                                                  |  |                | 111,638  |   |                |   | 7,552    |                       |  |   | 8,693                     |   |  |                    |        |   |                     |   | (127,883 | ) |  |   |         |  
|Gain on retirement of debt                                                      |  |                |         |   |                |   | (54,044  | )                     |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | (54,044  | )
|Benefit from income taxes                                                       |  |                |         |   |                |   | (41,592  | )                     |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | (41,592  | )
|Net changes in operating assets and liabilities:                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  
|Restricted cash                                                                 |  |                |         |   |                |   | (5,079   | )                     |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | (5,079   | )
|Receivables                                                                     |  |                |         |   |                |   | 13,610   |                       |  |   | 5,286                     |   |  |                    | (9,268  | ) |                     |   |         |   |  |   | 9,628    |  
|Income tax refund receivable                                                    |  |                |         |   |                |   | 550      |                       |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | 550      |  
|Real estate inventories-owned                                                   |  |                |         |   |                |   | 104,899  |                       |  |   |                          |   |  |                    | 62,617  |   |                     |   |         |   |  |   | 167,516  |  
|Deferred loan costs                                                             |  |                |         |   |                |   | 2,501    |                       |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | 2,501    |  
|Other assets                                                                    |  |                |         |   |                |   | 3,104    |                       |  |   | 1,153                     |   |  |                    |        |   |                     |   |         |   |  |   | 4,257    |  
|Accounts payable                                                                |  |                |         |   |                |   | (23,950  | )                     |  |   | (97                       | ) |  |                    | (512    | ) |                     |   |         |   |  |   | (24,559  | )
|Accrued expenses                                                                |  |                |         |   |                |   | (500     | )                     |  |   | (2,233                    | ) |  |                    | (2,066  | ) |                     |   |         |   |  |   | (4,799   | )
|                                                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  
|Net cash provided by operating activities                                       |  |                |         |   |                |   | 26,837   |                       |  |   | 4,635                     |   |  |                    | 48,941  |   |                     |   |         |   |  |   | 80,413   |  
|                                                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  
|Investing activities                                                            |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  
|Net change in investments in and advances to unconsolidated joint ventures      |  |                |         |   |                |   | (3,003   | )                     |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | (3,003   | )
|Distributions of capital from unconsolidated joint venture                      |  |                |         |   |                |   | 212      |                       |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | 212      |  
|Purchases of property and equipment                                             |  |                |         |   |                |   | (417     | )                     |  |   | (112                      | ) |  |                    |        |   |                     |   |         |   |  |   | (529     | )
|Investment in subsidiaries                                                      |  |                |         |   |                |   | 52,201   |                       |  |   |                          |   |  |                    |        |   |                     |   | (52,201  | ) |  |   |         |  
|Advances to affiliates                                                          |  |                |         |   |                |   | (10,308  | )                     |  |   |                          |   |  |                    |        |   |                     |   | 10,308   |   |  |   |         |  
|                                                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  
|Net cash provided by (used in) investing activities                             |  |                |         |   |                |   | 38,685   |                       |  |   | (112                      | ) |  |                    |        |   |                     |   | (41,893  | ) |  |   | (3,320   | )
|                                                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  
|Financing activities                                                            |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  
|Proceeds from borrowings on notes payable                                       |  |                |         |   |                |   | 312,094  |                       |  |   | 279,333                   |   |  |                    |        |   |                     |   |         |   |  |   | 591,427  |  
|Principal payments on notes payable                                             |  |                |         |   |                |   | (358,952 | )                     |  |   | (284,518                  | ) |  |                    | (15,551 | ) |                     |   |         |   |  |   | (659,021 | )
|Net cash paid for repurchase of senior notes                                    |  |                |         |   |                |   | (16,718  | )                     |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | (16,718  | )
|Minority interest contributions, net                                            |  |                |         |   |                |   |         |                       |  |   |                          |   |  |                    |        |   |                     |   | 1,039    |   |  |   | 1,039    |  
|Intercompany receivables/payables                                               |  |                |         |   |                |   | 1,927    |                       |  |   | (3,087                    | ) |  |                    | 4,346   |   |                     |   | (3,186   | ) |  |   |         |  
|Advances to affiliates                                                          |  |                |         |   |                |   |         |                       |  |   | (284                      | ) |  |                    | (43,756 | ) |                     |   | 44,040   |   |  |   |         |  
|                                                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  
|Net cash used in financing activities                                           |  |                |         |   |                |   | (61,649  | )                     |  |   | (8,556                    | ) |  |                    | (54,961 | ) |                     |   | 41,893   |   |  |   | (83,273  | )
|                                                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                            |  |                |         |   |                |   | 3,873    |                       |  |   | (4,033                    | ) |  |                    | (6,020  | ) |                     |   |         |   |  |   | (6,180   | )
|Cash and cash equivalents at beginning of year                                  |  |                |         |   |                |   | 55,412   |                       |  |   | 6,931                     |   |  |                    | 10,854  |   |                     |   |         |   |  |   | 73,197   |  
|                                                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  
|Cash and cash equivalents at end of year                                        |  | $              |         |   |                | $ | 59,285   |                       |  | $ | 2,898                     |   |  | $                  | 4,834   |   |                     | $ |         |   |  | $ | 67,017   |  
|                                                                                |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |          |  



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2007

(in thousands)



|                                                                                         |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|---------------------------------------------------------------------------------------- |  | -------------- | -------- | - | -------------- | - | -------- | --------------------- |  | - | ------------------------- | - |  | ------------------ | ------- | - | ------------------- | - | -------- | - |  | - | ---------- | -
|                                                                                         |  | Unconsolidated |          |   |                |   |          |                       | 
|                                                                                         |  | DelawareLyon   |          |   | CaliforniaLyon |   |          | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |         |   | ConsolidatedCompany |  
|Operating activities                                                                     |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Net (loss) income                                                                        |  | $              | (349,408 | ) |                | $ | (354,166 | )                     |  | $ | 19,602                    |   |  | $                  | 16,507  |   |                     | $ | 329,183  |   |  | $ | (338,282   | )
|Adjustments to reconcile net (loss) income to net cash provided by operating activities: |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Depreciation and amortization                                                            |  |                |         |   |                |   | 1,002    |                       |  |   | 1,458                     |   |  |                    |        |   |                     |   |         |   |  |   | 2,460      |  
|Impairment loss on real estate assets                                                    |  |                |         |   |                |   | 231,120  |                       |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | 231,120    |  
|Equity in (income) loss of unconsolidated joint ventures                                 |  |                |         |   |                |   | (676     | )                     |  |   | 372                       |   |  |                    |        |   |                     |   |         |   |  |   | (304       | )
|Equity in earnings (loss) of subsidiaries                                                |  |                | 349,408  |   |                |   | (20,034  | )                     |  |   | (191                      | ) |  |                    |        |   |                     |   | (329,183 | ) |  |   |           |  
|Provision for income taxes                                                               |  |                |         |   |                |   | 32,645   |                       |  |   |                          |   |  |                    | 13      |   |                     |   |         |   |  |   | 32,658     |  
|Net changes in operating assets and liabilities:                                         |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Receivables                                                                              |  |                |         |   |                |   | 30,880   |                       |  |   | 49,273                    |   |  |                    | 1,212   |   |                     |   |         |   |  |   | 81,365     |  
|Real estate inventories-owned                                                            |  |                |         |   |                |   | 153,234  |                       |  |   | 1,846                     |   |  |                    | 19,238  |   |                     |   |         |   |  |   | 174,318    |  
|Deferred loan costs                                                                      |  |                |         |   |                |   | 1,613    |                       |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | 1,613      |  
|Other assets                                                                             |  |                |         |   |                |   | 2,819    |                       |  |   | 294                       |   |  |                    |        |   |                     |   |         |   |  |   | 3,113      |  
|Accounts payable                                                                         |  |                |         |   |                |   | (2,040   | )                     |  |   | (693                      | ) |  |                    | (6,736  | ) |                     |   |         |   |  |   | (9,469     | )
|Accrued expenses                                                                         |  |                |         |   |                |   | (42,357  | )                     |  |   | (3,705                    | ) |  |                    | 1,983   |   |                     |   |         |   |  |   | (44,079    | )
|                                                                                         |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Net cash provided by operating activities                                                |  |                |         |   |                |   | 34,040   |                       |  |   | 68,256                    |   |  |                    | 32,217  |   |                     |   |         |   |  |   | 134,513    |  
|                                                                                         |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Investing activities                                                                     |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Net change in investments in and advances to unconsolidated
joint ventures               |  |                |         |   |                |   | (5,639   | )                     |  |   | (372                      | ) |  |                    |        |   |                     |   |         |   |  |   | (6,011     | )
|Net cash paid for purchase of partners interest in unconsolidated joint venture         |  |                |         |   |                |   | (1,484   | )                     |  |   |                          |   |  |                    |        |   |                     |   |         |   |  |   | (1,484     | )
|Purchases of property and equipment                                                      |  |                |         |   |                |   | (143     | )                     |  |   | (623                      | ) |  |                    |        |   |                     |   |         |   |  |   | (766       | )
|Investment in subsidiaries                                                               |  |                |         |   |                |   | 29,885   |                       |  |   |                          |   |  |                    |        |   |                     |   | (29,885  | ) |  |   |           |  
|Advances (to) from affiliates                                                            |  |                |         |   |                |   | (27,967  | )                     |  |   |                          |   |  |                    |        |   |                     |   | 27,967   |   |  |   |           |  
|                                                                                         |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Net cash used in investing activities                                                    |  |                |         |   |                |   | (5,348   | )                     |  |   | (995                      | ) |  |                    |        |   |                     |   | (1,918   | ) |  |   | (8,261     | )
|                                                                                         |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Financing activities                                                                     |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Proceeds from borrowings on notes payable                                                |  |                |         |   |                |   | 894,199  |                       |  |   | 799,498                   |   |  |                    | 6,003   |   |                     |   |         |   |  |   | 1,699,700  |  
|Principal payments on notes payable                                                      |  |                |         |   |                |   | (917,965 | )                     |  |   | (847,403                  | ) |  |                    |        |   |                     |   |         |   |  |   | (1,765,368 | )
|Minority interest (distributions) contributions, net                                     |  |                |         |   |                |   |         |                       |  |   |                          |   |  |                    |        |   |                     |   | (26,119  | ) |  |   | (26,119    | )
|Intercompany receivables/payables                                                        |  |                |         |   |                |   | 38,233   |                       |  |   | (22,731                   | ) |  |                    | (648    | ) |                     |   | (14,854  | ) |  |   |           |  
|Advances (to) from affiliates                                                            |  |                |         |   |                |   |         |                       |  |   | (916                      | ) |  |                    | (41,975 | ) |                     |   | 42,891   |   |  |   |           |  
|                                                                                         |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Net cash provided by (used in) financing activities                                      |  |                |         |   |                |   | 14,467   |                       |  |   | (71,552                   | ) |  |                    | (36,620 | ) |                     |   | 1,918    |   |  |   | (91,787    | )
|                                                                                         |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Net increase (decrease) in cash and cash equivalents                                     |  |                |         |   |                |   | 43,159   |                       |  |   | (4,291                    | ) |  |                    | (4,403  | ) |                     |   |         |   |  |   | 34,465     |  
|Cash and cash equivalents at beginning of year                                           |  |                |         |   |                |   | 12,253   |                       |  |   | 11,222                    |   |  |                    | 15,257  |   |                     |   |         |   |  |   | 38,732     |  
|                                                                                         |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Cash and cash equivalents at end of year                                                 |  | $              |         |   |                | $ | 55,412   |                       |  | $ | 6,931                     |   |  | $                  | 10,854  |   |                     | $ |         |   |  | $ | 73,197     |  
|                                                                                         |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |          |   |  |   |            |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Revolving Credit Facilities

As discussed previously, on October 20, 2009, the Company entered into a Senior Secured Term Loan Agreement with COLFIN
WLH Funding, LLC, and used a portion of the net proceeds to fully repay the Revolving Credit Facilities. As of December 31, 2009, the Revolving Credit Facilities have been retired and there are no available borrowings.

Construction Notes Payable

At December 31, 2009, the Company had construction notes payable amounting to $64.2 million. The construction notes have various maturity dates through 2017 and bear interest at
rates ranging from prime plus 0.25% to prime plus 1.0% at December 31, 2009. Interest is calculated on the average daily balance and is paid following the end of each month.

The Company is the sole member of Lyon East Garrison Company I, LLC which is a member with Woodman Development Company, LLC
(the Members) in East Garrison Partners I, LLC (the LLC). The LLC had a non-recourse construction note payable secured by the underlying land parcel, with an outstanding balance of $56.2 million as of June 30, 2009
related to the acquisition and development of real estate in Monterey County, California. In addition to the non-recourse construction note payable, the Company and affiliates of the other Member entered into a completion guaranty.

Based on general economic conditions at the time, the Members of the LLC and the construction note lender determined to
temporarily suspend further entitlement and development of the project, at which time it was agreed that certain site improvements would be completed in order to prepare and protect the site for a delay of approximately two years. The Company and
affiliates of the other Member of the LLC concluded that the completion of these site improvements satisfied the obligation under the completion guaranty.

The lender agreed to fund the site improvements under the guaranty; however the lender stopped funding for the improvements, which left the LLC with unpaid invoices. During this same
period, the LLC received several letters from the lender alleging default under the construction loan agreement which the Members contended were invalid based on previous discussions. In addition, under the terms of the construction loan agreement,
the LLC was required to reduce the loan commitment from $75.0 million to $35.0 million by January 31, 2009, which required a $21.2 million pay down.

The LLC did not make the required pay down on January 31, 2009 and was in default under the construction loan agreement. In September 2009, the Lender under the construction
note payable sold the note to a third party, at which time the new holder of the note foreclosed on the property owned by the LLC. Since the inventory was written down to fair value during 2008, there was no significant loss recorded at foreclosure
during 2009 related to the $56.2 million and related note payable written off at foreclosure. The lender and the LLC waived all construction guaranties and obligations under the construction note payable.

Prime Interest Rates

The prime interest rates at December 31, 2009, 2008 and 2007 were 3.25%, 3.25% and 7.25%, respectively. The weighted-average prime interest rates for each of the three years ended December 31,
2009, 2008 and 2007 were 3.25%, 5.09% and 8.05%, respectively.

Note 7  Fair Value of Financial Instruments

In accordance with FASB ASC Topic 820 Fair Value Measurements and Disclosure, the Company is
required to disclose the estimated fair value of financial instruments. As of December 31, 2009, the Company used the following assumptions to estimate the fair value of each type of financial instrument for which it is practicable to estimate:



| |  |  | Cash and Equivalents  The carrying amount is a reasonable estimate of fair value. The Companys cash balances primarily consist of
short-term liquid investments and demand deposits.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Secured Term Loan  The carrying amount is a reasonable estimate of fair value because the loan funded in October and December 2009.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Construction Notes Payable  On certain notes, the carrying amount is a reasonable estimate of fair value because the maturities occur
within one year. On certain other notes, the Company used Level 3 unobservable inputs, as defined below, to estimate fair value.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Senior Notes Payable  The Senior Notes are publicly traded over the counter and their fair values were based on quotes from industry
sources.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The estimated fair values of financial instruments are as follows (in
thousands):



|                                             |  |                   |         |                   |   |                |  |           |         |  |   |       
|-------------------------------------------- |  | ----------------- | ------- | ----------------- | - | -------------- |  | --------- | ------- |  | - | ------
|                                             |  | December 31, 2009 |         | December 31, 2008
|                                             |  | CarryingAmount    |         | FairValue         |   | CarryingAmount |  | FairValue
|Financial assets:                            |  |                   |         |                   |   |                |  |           |         |  |   |       
|Cash and equivalents                         |  | $                 | 117,587 |                   | $ | 117,587        |  | $         | 67,017  |  | $ | 67,017
|First Trust Deed Mortgage Notes Receivable   |  |                   |        |                   |   |               |  | $         | 7,030   |  | $ | 7,030 
|Financial liabilities:                       |  |                   |         |                   |   |                |  |           |         |  |   |       
|Revolving credit facilities                  |  |                   |        |                   |   |               |  | $         | 72,044  |  | $ | 72,044
|Construction notes payable                   |  | $                 | 64,227  |                   | $ | 42,149         |  | $         | 116,316 |  | $ | 97,672
|Revolving Mortgage Warehouse Credit Facility |  |                   |        |                   |   |               |  | $         | 6,269   |  | $ | 6,269 
|Senior Secured Term Loan due 2014            |  | $                 | 206,000 |                   | $ | 206,000        |  |           |        |  |   |      
|75/8% Senior Notes due 2012                  |  | $                 | 67,204  |                   | $ | 42,943         |  | $         | 133,800 |  | $ | 28,100
|103/4% Senior Notes due 2013                 |  | $                 | 168,158 |                   | $ | 120,233        |  | $         | 218,176 |  | $ | 47,300
|71/2% Senior Notes due 2014                  |  | $                 | 84,701  |                   | $ | 59,291         |  | $         | 124,300 |  | $ | 24,900

Effective January 1, 2008, the Company implemented the requirements of FASB ASC Topic 820 for the Companys financial assets and liabilities. FASB ASC Topic 820 establishes a framework for measuring fair value expands disclosures
regarding fair value measurements and defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 requires
the Company to maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements. FASB ASC Topic 820 specifies a hierarchy of
valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. The three levels of the hierarchy are as follows:



| |  |  | Level 1  quoted prices for identical assets or liabilities in active markets;
| | - |  | ------------------------------------------------------------------------------



| |  |  | Level 2  quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------

Non-financial Instruments

The Company adopted FASB ASC Topic 820 in 2008, however, disclosure of certain non-financial portions of the statement were
deferred until the 2009 reporting period. These non-financial homebuilding assets are those assets for which the Company recorded valuation adjustments during 2009 on a nonrecurring basis. See Note 5, Real Estate Inventories for further
discussion of the valuation of real estate inventories and within Managements Discussion and Analysis of Financial Condition and Results of Operations.

The following table summarizes the fair-value measurements of its non-financial assets for the year ended December 31, 2009:



|                                                                     |  |                     |  |                                |         |                                                        |   |       
|-------------------------------------------------------------------- |  | ------------------- |  | ------------------------------ | ------- | ------------------------------------------------------ | - | ------
|                                                                     |  | Fair ValueHierarchy |  | Fair ValueatMeasurementDate(1) |         | ImpairmentChargesfor the Year EndedDecember 31,2009(1)
|                                                                     |  | (in thousands)     
|Land under development and homes completed and under construction(2) |  | Level 3             |  | $                              | 162,588 |                                                        | $ | 31,916
|Inventory held-for-sale(3)                                           |  | Level 3             |  | $                              | 7,822   |                                                        | $ | 13,353



|(1) | Amounts represent the aggregate fair values for communities where the Company recognized noncash inventory impairment charges during the period, at
March 31, 2009 and December 31, 2009.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



|(2) | In accordance with FASB ASC 360-10-35, inventory under this caption with a carrying value of $194.5 million was written down to its fair value of
$162.6 million, resulting in total impairments of $31.9 million for the year ended December 31, 2009.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | In accordance with FASB ASC 360-10-35, inventory under this caption with a carrying value of $21.2 million was written down to its fair value of
$7.8 million, resulting in total impairments of $13.4 million for the year ended December 31, 2009.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fair values determined to be Level 3 include the use of internal assumptions, estimates and financial forecasts. Valuations of these items are therefore sensitive to the assumptions used. Fair values
represent the Companys best estimates as of the measurement date, based on conditions existing and information available at the date of issuance of the consolidated financial statements. Subsequent changes in conditions or information
available may change assumptions and estimates, as outlined in more detail within Managements Discussion and Analysis of Financial Condition and Results of Operations. Fair values determined using Level 3 inputs, were
primarily based on the estimated future cash flows discounted for inherent risk associated with each asset. These discounted cash flows are impacted by: the risk-free rate of return; expected risk premium based on estimated land development;
construction and delivery timelines; market risk from potential future price erosion; cost uncertainty due to development or construction cost increases; and other risks specific to the asset or conditions in the market in which the asset is located
at the time the assessment is made. These factors are specific to each community and may vary among communities.

Note
8  Stockholders Equity

Tender Offer and Merger

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.

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.

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

Incentive Compensation Plans

The Companys 2008 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 3/4of 1% of the Companys consolidated pre-tax, pre-bonus income; and (iii) the Chief Financial Officer (CFO) is eligible to receive a bonus of 1/2of 1% of the Companys consolidated pre-tax, pre-bonus income.
In addition, under the Plan, each Division 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 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,



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



pre-bonus income. In addition, because the Companys results of operations were expected to be in a loss position for the year ending December 31, 2008, and thus participants would
receive no bonus income in 2008, the Plan provided for a 2008 Bonus Plan for all participants in various management bonus plans. Under this 2008 Bonus Plan, bonus ranges (defined as a percent of salary) are varied based on the level of position but
range from a maximum of 25% to 100% of salary for managers. In addition, the Companys board of directors has approved a cash bonus plan applicable in 2008 for all of its full-time, salaried employees who are not included in the Companys
2008 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.

For the CEO, COO, EVP CFO, division presidents, executives and managers, awards under bonus plans are generally 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. However, under the 2008
Bonus Plan, 100% of the bonuses awarded for 2008 were paid in January 2009.

Note 9  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,which are now codified as FASB ASC Topic 740, 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 carry forwards 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.

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



|                                    |  |                         |         |   |      |   |        |      |  |   |         |  
|----------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                    |  | Year Ended December 31, |        
|                                    |  | 2009                    |         |   | 2008 |   |        | 2007 | 
|Current                             |  |                         |         |   |      |   |        |      |  |   |         |  
|Interest on uncertain tax positions |  | $                       | 108     |   |      | $ |       |      |  | $ |        |  
|Federal                             |  |                         | 101,810 |   |      |   | 41,602 |      |  |   | (234    | )
|State                               |  |                         | (10     | ) |      |   | (10    | )    |  |   | 240     |  
|                                    |  |                         |         |   |      |   |        |      |  |   |         |  
|                                    |  |                         | 101,908 |   |      |   | 41,592 |      |  |   | 6       |  
|                                    |  |                         |         |   |      |   |        |      |  |   |         |  
|Deferred                            |  |                         |         |   |      |   |        |      |  |   |         |  
|Federal                             |  |                         |        |   |      |   |       |      |  |   | (27,148 | )
|State                               |  |                         |        |   |      |   |       |      |  |   | (5,516  | )
|                                    |  |                         |         |   |      |   |        |      |  |   |         |  
|                                    |  |                         |        |   |      |   |       |      |  |   | (32,664 | )
|                                    |  |                         |         |   |      |   |        |      |  |   |         |  
|                                    |  | $                       | 101,908 |   |      | $ | 41,592 |      |  | $ | (32,658 | )
|                                    |  |                         |         |   |      |   |        |      |  |   |         |  



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



|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                           |  | Year Ended December 31, |        
|                                                                                           |  | 2009                    |         |   | 2008 |   |         | 2007 | 
|Provision for federal income taxes at the statutory rate                                   |  | $                       | 42,852  |   |      | $ | 53,630  |      |  | $ |        |  
|Provision for state income taxes, net of federal income tax benefits                       |  |                         | (6      | ) |      |   | (6      | )    |  |   |        |  
|Valuation allowance                                                                        |  |                         | 60,015  |   |      |   | (94,607 | )    |  |   | (771    | )
|Reduction of deferred tax assets as a result of election to be taxed as an S
corporation |  |                         |        |   |      |   |        |      |  |   | (31,887 | )
|Increase of deferred tax assets as a result of revocation of S corporation election      |  |                         |        |   |      |   | 86,113  |      |  |   |        |  
|Goodwill impairment                                                                        |  |                         |        |   |      |   | (2,064  | )    |  |   |        |  
|Other                                                                                      |  |                         | (953    | ) |      |   | (1,474  | )    |  |   |        |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                                           |  | $                       | 101,908 |   |      | $ | 41,592  |      |  | $ | (32,658 | )
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  

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



|                                                                                  |  |              |         |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | -------- | -
|                                                                                  |  | December 31, |        
|                                                                                  |  | 2009         |         |   | 2008 |  
|Deferred tax assets                                                               |  |              |         |   |      |   |          |  
|Reserves deducted for financial reporting purposes not allowable for tax purposes |  | $            | 21,810  |   |      | $ | 84,348   |  
|Compensation deductible for tax purposes when paid                                |  |              | 468     |   |      |   | 481      |  
|State income tax provisions deductible when paid for federal tax purposes         |  |              | 3       |   |      |   | 3        |  
|Effect of book/tax differences for joint ventures                                 |  |              | 4,567   |   |      |   | 7,403    |  
|Other                                                                             |  |              | 311     |   |      |   | 311      |  
|AMT credit carryover                                                              |  |              | 2,698   |   |      |   | 2,698    |  
|Net operating loss                                                                |  |              | 48,482  |   |      |   | 32,458   |  
|Valuation allowance                                                               |  |              | (71,160 | ) |      |   | (123,321 | )
|                                                                                  |  |              |         |   |      |   |          |  
|                                                                                  |  |              | 7,179   |   |      |   | 4,381    |  
|Deferred tax liabilities                                                          |  |              |         |   |      |   |          |  
|Effect of book/tax differences for joint ventures                                 |  |              | (5,962  | ) |      |   | (4,381   | )
|Effect of book/tax differences for capped interest/G&A                            |  |              | (1,217  | ) |      |   |         |  
|                                                                                  |  |              |         |   |      |   |          |  
|                                                                                  |  |              | (7,179  | ) |      |   | (4,381   | )
|                                                                                  |  |              |         |   |      |   |          |  
|                                                                                  |  | $            |        |   |      | $ |         |  
|                                                                                  |  |              |         |   |      |   |          |  

On November 6, 2009, an expanded carry back election was signed into law as part of the
Worker, Homeownership, and Business Assistance Act of 2009. As of result of this legislation, the Company elected to carry back for five years the taxable losses generated in 2009. The Company recorded a deferred tax asset and related income tax
benefit of $101.8 million. The recorded deferred tax asset reflects the anticipated tax refund for the carry back of the estimated 2009 tax loss to 2004 and 2005. As of December 31, 2009, the deferred tax asset was reclassified to income tax
refunds receivable and the tax benefit was recorded as benefit from provision for income taxes in the accompanying consolidated balance sheet and statement of operations.



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In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers taxable income in carry back years, the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this
assessment. The expanded carry back election provided in legislation, effective November 6, 2009, allowed the recording of the deferred tax assets on the books; however, as of December 31, 2009, due to uncertainties surrounding the
realization of the cumulative federal and state deferred tax assets, the Company has a full valuation allowance against the deferred tax assets. The valuation allowances for the years ending December 31, 2009, 2008 and 2007 are $71.2 million,
$123.3 million and $4.5 million, respectively.

At December 31, 2009, the Company has gross federal and
state net operating loss carry forwards totaling approximately $39.2 million and $329.8 million, respectively. Federal net operating loss carry forwards will expire in 2028; state net operating loss carry forwards begin to expire in 2013.

Due to the change of ownership provision of the Tax Reform Act of 1986, utilization of the
Companys net operating loss carry forwards may be subject to an annual limitation against taxable income in future periods. As a result of the annual limitation, a portion of these carry forwards may expire before ultimately becoming available
to reduce future income tax liabilities.

The Company has federal alternative minimum tax credit carry
forwards of $2.7 million which do not expire.

In addition, as of December 31, 2009, the Company has
unused built-in losses of $19.4 million which are available to offset future income and expire in 2010 and 2011. Pursuant to Internal Revenue Code Section 382, the utilization of these losses is limited to $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 2010 and 2011. The maximum cumulative unused built-in loss that may be carried forward through 2010 and 2011 is $11.5 million and $7.9
million, respectively. The Companys ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be limited under certain circumstances.

Effective January 1, 2008, the Company and its shareholders made a revocation of the S corporation
election. As a result of this revocation, the Company will be taxed as a C corporation. The shareholders will not be able to elect S corporation status for at least five years. The revocation of the S corporation
election will allow taxable losses generated in 2008 to be carried back to the 2006 C corporation year. As a result of the change in tax status, the Company recorded a deferred tax asset and related income tax benefit of $41.6 million as
of January 1, 2008. The recorded deferred tax asset reflects the anticipated tax refund for the carry back of the estimated 2008 tax loss to 2006. In January 2009, the Company received a tax refund for the amount of the deferred tax asset and
related tax benefit. As of and during the year ended December 31, 2009, the deferred tax asset was reclassified to income tax refunds receivable and the tax benefit was recorded as benefit from provision for income taxes in the accompanying
consolidated balance sheet and statement of operations.

Effective January 1, 2007, the Company made an
election in accordance with federal and state regulations to be taxed as an S corporation rather than a C corporation. Under this election, the Companys taxable income flows through to and is reported on the personal
tax returns of its shareholders. The shareholders are responsible for paying the appropriate taxes based on this election. The Company does not pay any federal taxes under this election and is only required to pay certain state taxes based on a rate
of approximately 1.5% of taxable income. As a result of this election, the Companys provision for income taxes for the year ended December 31, 2007 includes a reduction of deferred tax assets of $31.9 million due to the elimination of any
future tax benefit by the Company from such assets. In addition, the provision reflects a valuation allowance of $.8 million.

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48) which
is now codified as FASB ASC Topic 740, Income Taxes. FASB ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be considered more-likely-than-not to be sustained upon examination by taxing authorities. The Company has taken positions in certain taxing jurisdictions for which it
is more likely than not that previously unrecognized tax benefits will be recognized. In addition, the Company has elected to recognize interest and penalties related to uncertain tax positions in the income tax provision. In accordance with the
provisions of FASB ASC Topic 740, effective January 1, 2007, the Company recorded an income tax refund receivable of $5.7 million and recognized



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the associated tax benefit as an increase in additional paid-in capital. In connection therewith, the Company recorded interest receivable of $1.1 million and recognized the associated tax
benefit as an increase in retained earnings. Since recording the income tax refund, the Company has received refunds and accrued additional interest, leaving approximately $5.2 million of income tax refunds and interest receivable on the
consolidated balance sheet at December 31, 2009. At January 1, 2007, December 31, 2007, December 31, 2008, and December 31, 2009, the Company has no unrecognized tax benefits.

In compliance with the Companys election to recognize interest income (expense) and penalties related to uncertain tax
positions in the income tax provision, $0.1 million of interest income related to the income tax refund receivable, recorded under the provisions of FASB ASC 740, is included in the benefit from income taxes of $101.9 million for the twelve months
ended December 31, 2009.

The estimated overall effective tax rate for the years ending December 31,
2009, 2008 and 2007 are 83.2%, 27.1%, and (10.3%), respectively.

The Company and its subsidiaries file income
tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal income tax examination for calendar tax years ending 2004 through 2009. The Company is subject to various state income tax
examinations for calendar tax years ending 2005 through 2009.

The Company received a letter dated
February 4, 2010 from the Internal Revenue Service giving notice that the income tax examination by the Internal Revenue Service for amended tax returns for the years ended December 31, 2002 and 2003 was completed without adjustments.
During 2007, the Company completed state income tax examinations in the states of California and Arizona for years ended December 31, 2002 through 2003 with no significant adjustments.

Note 10  Related Party Transactions

On December 27, 2007, the Company sold certain land in San Diego County, California for $12.0 million in cash to a limited liability company owned indirectly by Frank T. Suryan, Jr. as Trustee for the Suryan Family Trust.
Mr. Suryan is Chairman and Chief Executive Officer of Lyon Capital Ventures, a company wholly owned by Frank T. Suryan, Jr., General William Lyon, Chairman and Chief Executive Officer of the Company, and a trust whose sole beneficiary is
William H. Lyon, President and Chief Operating Officer of the Company. The Company has received a report from a third-party valuation and financial advisory services firm as to the reasonableness of the sales price in the transaction. Further, the
transaction was unanimously approved by all independent members of the Board of Directors. Prior to the sale, the net book value of this land (as reflected on the Companys financial statements) was approximately $18.7 million resulting in a
loss on the transaction of $6.7 million. In October 2008, in a separately negotiated transaction from the sale of the land to the Company owned indirectly by the Suryan Family Trust (the Owner), the Company was contracted by and for the
Owner to build apartment units for a contract price of $13.5 million, which includes the Companys contractor fee of $0.5 million. As described in Note 1  Construction Services, the company accounts for this transaction based on the
percentage of completion method, and recorded construction services revenue of $12.6 million and $0.2 million and construction services costs of $11.6 million and $0.2 million during the years ended December 31, 2009 and 2008, respectively.

For the years ended December 31, 2009, 2008 and 2007, the Company incurred reimbursable on-site labor
costs of $197,000, $176,000, and $224,000, respectively, for providing customer service to real estate projects developed by entities controlled by General William Lyon and William H. Lyon, of which $58,000 and $18,000 was due to the Company at
December 31, 2009 and 2008, respectively. The Company earned fees of $36,000, $64,000 and $90,000, respectively, for tax and accounting services performed for entities controlled by General William Lyon and William H. Lyon during the years
ended December 31, 2009, 2008 and 2007.

The Company earned fees of $123,000 during the year ended
December 31, 2009 related to a Human Resources and Payroll Services contract between the Company and an entity controlled by General William Lyon and William H. Lyon.

In each of the three years ended December 31, 2009, 2008 and 2007, the Company incurred charges of $0.8 million related to rent on the Companys corporate office, from a
trust of which William H. Lyon is the sole beneficiary.

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. 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



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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 expenses incurred by the Company and paid to the Affiliate under the agreement amounted to $0.8 million, $1.6 million, and $1.4 million during the years ended December 31, 2009, 2008 and 2007, 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, the Company had earned revenue of $53,000, $0.4 million and $0.6 million for charter services provided to General William Lyon personally, for the years ended December 31, 2009, 2008 and 2007,
respectively

On September 3, 2009, Presley CMR, Inc., a California corporation (Presley CMR)
and wholly owned subsidiary of California Lyon, entered into an Aircraft Purchase and Sale Agreement (PSA) with an affiliate of General William Lyon to sell the aircraft described above. The PSA provides for an aggregate sales price for
the Aircraft of $8.3 million (which value was the appraised fair market value of the Aircraft), which consists of: (i) cash in the amount of $2.1 million which was paid at closing and (ii) a promissory note from the affiliate in the amount
of $6.2 million, which is included in receivables in the accompanying consolidated balance sheet. The closing of this sale occurred on September 9, 2009. The Company recorded a loss on the sale of the Aircraft totaling $3.0 million, which is
included in other loss in the accompanying statement of operations.



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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.

Litigation Arising from General Lyons Tender Offer

As described above in Note 8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, and was subsequently 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 then 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 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. A Special Committee of the Companys Board of Directors 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.

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 then 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 pending final resolution
of all matters in the Delaware Action.

On April 23, 2006, the 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, plaintiff in the California Action appealed the fee award in the Consolidated Delaware
Action to the Supreme Court of the State of Delaware. Thereafter, the Delaware Supreme Court remanded the matter to the Chancery Court for further proceedings and, on April 2, 2009, the Chancery Court issued its decision on remand denying the
fee award sought by the California plaintiff. On April 30, 2009, the California plaintiff again appealed the fee award to the Delaware Supreme Court. On January 14, 2010, the Delaware Supreme court affirmed the order of the Chancery Court.



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

In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by municipalities to finance major infrastructure improvements. As a
land owner benefited by these improvements, the Company is responsible for the assessments on its land. When properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. Assessment
district bonds issued after May 21, 1992 are accounted for under the provisions of 91-10, Accounting for Special Assessment and Tax Increment Financing Entities issued by the Emerging Issues Task Force of the Financial Accounting
Standards Board on May 21, 1992, now codified as FASB ASC Topic 970-470, Real Estate  Debt, and recorded as liabilities in the Companys consolidated balance sheet, if the amounts are fixed and determinable.

As of December 31, 2009, the Company had $4.4 million of outstanding irrevocable standby letters of credit to guarantee
the Companys financial obligations under certain contractual arrangements in the normal course of business. The standby letters of credit were secured by cash as reflected as restricted cash on the accompanying consolidated balance sheet. 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 generally have a stated term of 12 months and have varying maturities throughout
2010, 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 $109.4 million at December 31, 2009 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 Note 6- Notes Payable and Senior Secured Term Loan for additional information relating to the Companys guarantee arrangements.



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Note 12  Unaudited Summarized Quarterly Financial Information

Summarized unaudited quarterly financial information for the years ended December 31, 2009, 2008, and 2007 is as
follows (in thousands except per common share amounts):



|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|------------------------------------------------- |  | ------------------ | -------- | - | ------------ | - | -------- | ----------------- |  | - | ---------------- | - |  | - | -------- | -
|                                                  |  | Three Months Ended |         
|                                                  |  | March 31,2009      |          |   | June 30,2009 |   |          | September 30,2009 |  |   | December 31,2009 |  
|Sales                                             |  | $                  | 69,339   |   |              | $ | 77,407   |                   |  | $ | 67,213           |   |  | $ | 95,284   |  
|Cost of sales                                     |  |                    | (95,124  | ) |              |   | (60,501  | )                 |  |   | (49,025          | ) |  |   | (146,476 | )
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Gross (loss) profit                               |  |                    | (25,785  | ) |              |   | 16,906   |                   |  |   | 18,188           |   |  |   | (51,192  | )
|Other income, costs and expenses, net             |  |                    | (43,408  | ) |              |   | 22,770   |                   |  |   | (29,908          | ) |  |   | (30,432  | )
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|(Loss) income before benefit from income taxes    |  |                    | (69,193  | ) |              |   | 39,676   |                   |  |   | (11,720          | ) |  |   | (81,624  | )
|Benefit from income taxes                         |  |                    | 22       |   |              |   |         |                   |  |   | 56               |   |  |   | 101,830  |  
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Consolidated net (loss) income                    |  |                    | (69,171  | ) |              |   | 39,676   |                   |  |   | (11,664          | ) |  |   | 20,206   |  
|Less: net loss (income)  noncontrolling interest |  |                    | 170      |   |              |   | (289     | )                 |  |   | 27               |   |  |   | 520      |  
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net (loss) income                                 |  | $                  | (69,001  | ) |              | $ | 39,387   |                   |  | $ | (11,637          | ) |  | $ | 20,726   |  
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|                                                  | 
|                                                  |  | Three Months Ended |         
|                                                  |  | March 31,2008      |          |   | June 30,2008 |   |          | September 30,2008 |  |   | December 31,2008 |  
|Sales                                             |  | $                  | 137,437  |   |              | $ | 140,089  |                   |  | $ | 102,168          |   |  | $ | 146,384  |  
|Cost of sales                                     |  |                    | (132,669 | ) |              |   | (134,693 | )                 |  |   | (88,812          | ) |  |   | (130,701 | )
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Gross profit                                      |  |                    | 4,768    |   |              |   | 5,396    |                   |  |   | 13,356           |   |  |   | 15,683   |  
|Other income, costs and expenses, net             |  |                    | (48,091  | ) |              |   | (45,116  | )                 |  |   | (53,824          | ) |  |   | (55,848  | )
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Loss before benefit from income taxes             |  |                    | (43,323  | ) |              |   | (39,720  | )                 |  |   | (40,468          | ) |  |   | (40,165  | )
|Benefit from income taxes                         |  |                    | 41,592   |   |              |   |         |                   |  |   |                 |   |  |   |         |  
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Consolidated net loss                             |  |                    | (1,731   | ) |              |   | (39,720  | )                 |  |   | (40,468          | ) |  |   | (40,165  | )
|Less: net loss (income)  noncontrolling interest |  |                    | 925      |   |              |   | 790      |                   |  |   | (628             | ) |  |   | 9,359    |  
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net loss                                          |  | $                  | (806     | ) |              | $ | (38,930  | )                 |  | $ | (41,096          | ) |  | $ | (30,806  | )
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|                                                  | 
|                                                  |  | Three Months Ended |         
|                                                  |  | March 31,2007      |          |   | June 30,2007 |   |          | September 30,2007 |  |   | December 31,2007 |  
|Sales                                             |  | $                  | 206,041  |   |              | $ | 271,088  |                   |  | $ | 182,244          |   |  | $ | 445,984  |  
|Cost of sales                                     |  |                    | (169,801 | ) |              |   | (232,843 | )                 |  |   | (160,621         | ) |  |   | (515,566 | )
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Gross profit (loss)                               |  |                    | 36,240   |   |              |   | 38,245   |                   |  |   | 21,623           |   |  |   | (69,582  | )
|Other income, costs and expenses, net             |  |                    | (28,153  | ) |              |   | (109,096 | )                 |  |   | (82,171          | ) |  |   | (112,730 | )
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Income (loss) before provision for income taxes   |  |                    | 8,087    |   |              |   | (70,851  | )                 |  |   | (60,548          | ) |  |   | (182,312 | )
|Benefit (provision) for income taxes              |  |                    | (32,388  | ) |              |   | 914      |                   |  |   | 1,300            |   |  |   | (2,484   | )
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Consolidated net loss                             |  |                    | (24,301  | ) |              |   | (69,937  | )                 |  |   | (59,248          | ) |  |   | (184,796 | )
|Less: net loss  noncontrolling interest          |  |                    | (2,283   | ) |              |   | (6,935   | )                 |  |   | (764             | ) |  |   | (1,144   | )
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net loss                                          |  | $                  | (26,584  | ) |              | $ | (76,872  | )                 |  | $ | (60,012          | ) |  | $ | (185,940 | )
|                                                  |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  



120



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##### 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(19)       |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                           
|3.4(19)       |  | Certificate of Amendment of Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                      
|3.5(2)        |  | Bylaws of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                                                          
|4.1(14)       |  | 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(10)       |  | 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(15)       |  | 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(10)       |  | 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(15)       |  | 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(9)        |  | 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(10)       |  | 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).



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                         
|4.9(15)       |  | 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(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.                                                                                                                                                                     
|10.2(11)      |  | 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.                                                                                                                                    
|10.3(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.                                                                                                                              
|10.4(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.                                                                                                                                
|10.5(8)       |  | 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.                                                                                                                                                                             
|10.6(16)      |  | 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.                                                                                                                                                                                                                    
|10.7(17)      |  | 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.                                                                                                                                                         
|10.8(21)      |  | Third Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of December 28, 2007, by and between William Lyon Homes, Inc., a
California corporation and California Bank & Trust, a California banking corporation.                                                                                                                                                     
|10.9(21)      |  | Fourth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of January 17, 2008 by and between William Lyon Homes, Inc., a
California corporation and California Bank & Trust, a California banking corporation.                                                                                                                                                      
|10.10(23)     |  | Fifth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of May 20, 2008 by and between William Lyon Homes, Inc., a California
corporation (Borrower), and California Bank & Trust, a California banking corporation (Lender).                                                                                                                                  
|10.11(24)     |  | Sixth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of September 17, 2008, by and between William Lyon Homes, Inc., a
California corporation and California Bank & Trust, a California Banking Corporation.                                                                                                                                                    
|10.12(26)     |  | Side Letter Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of December 17, 2008, by and between William Lyon Homes, Inc.,
a California corporation and California Bank & Trust, a California Banking Corporation.                                                                                                                                               
|10.13(26)     |  | Seventh Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of April 6, 2009, by and between William Lyon Homes, Inc., a
California corporation and California Bank & Trust, a California Banking Corporation.                                                                                                                                                       
|10.14(6)      |  | 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.                                                                                                  
|10.15(6)      |  | Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware
corporation.                                                                                                                                                                                                                                                       
|10.16(7)      |  | 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.                                                                                                                                                                                                  



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                            
|10.17(10)     |  | 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).                                          
|10.18(16)     |  | 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).                                                   
|10.19(18)     |  | 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.                              
|10.20(20)     |  | Fifth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated November 6, 2007 by and between William Lyon Homes, Inc., a California
corporation and JPMorgan Chase Bank, N.A., a national banking association.                              
|10.21(21)     |  | Sixth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated February 20, 2008 by and between William Lyon Homes, Inc., a
California corporation and JPMorgan Chase Bank, N.A., a national banking association.                             
|10.22(23)     |  | Seventh Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of March 12, 2008 by and between William Lyon Homes, Inc., a
California corporation (Borrower) and JPMorgan Chase Bank, N.A., a national banking association (Bank).  
|10.23(23)     |  | Eighth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of June 5, 2008 by and between William Lyon Homes, Inc., a
California corporation (Borrower) and JPMorgan Chase Bank, N.A., a national banking association (Bank).     
|10.24(25)     |  | Ninth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated as of September 25, 2008 by and between William Lyon Homes, Inc., a
California Corporation (Borrower) and JPMorgan Chase Bank, N.A., a national banking association (Bank).
|10.25(26)     |  | Tenth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated December 19, 2008, by and between JPMorgan Chase Bank, N.A., a
national banking association, and William Lyon Homes, Inc., a California Corporation.                           
|10.26(26)     |  | Eleventh Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated June 3, 2009, by and between JPMorgan Chase Bank, N.A., a national
banking association, and William Lyon Homes, Inc., a California Corporation.                             
|10.27(26)     |  | Twelfth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated November 18, 2009, by and between JPMorgan Chase Bank, N.A., a
national banking association, and William Lyon Homes, Inc., a California Corporation.                         
|10.28(27)     |  | Senior Secured Term Loan Agreement dated as of October 20, 2009 by and between William Lyon Homes, Inc., (Borrower) and COLFIN WLH Funding, LLC,
as Administrative Agent (Admin Agent), COLFIN WLH Funding, LLC, as Initial Lender and Lead Arranger (COLFIN).   
|10.29(12)     |  | Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.                                                                                                                                 
|10.30(12)     |  | 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.                                                             
|10.31(12)     |  | Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and
effective November 5, 1999.                                                                                  
|10.32(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.                                                                      
|10.33(19)     |  | Description of 2007 Cash Bonus Plan.                                                                                                                                                                                                                                   
|10.34(19)     |  | 2007 Senior Executive Bonus Plan.                                                                                                                                                                                                                                      
|10.35(13)     |  | Standard Industrial/Commercial Single-Tenant Lease  Net between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.                                                                                                                
|10.36(5)      |  | The Presley Companies Non-Qualified Retirement Plan for Outside Directors.                                                                                                                                                                                             
|10.37(22)     |  | Third Extension and Modification agreement dated May 19, 2008, by and between Circle G at the Church Farm North Joint Venture, LLC, an Arizona limited
liability company, and California National Bank, a national banking association.                                
|10.38(28)     |  | Aircraft Purchase and Sale Agreement dated as of September 3, 2009 (Effective Date), by and between Presley CMR, Inc., and Martin Aviation, Inc.,
or its designee.                                                                                                   
|10.39(28)     |  | Secured Promissory Note dated September 9, 2009 from Martin Aviation, Inc., a California corporation (Maker) payable to William Lyon Homes, Inc.,
a California corporation (Holder).                                                                               



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##### Table of Contents

|              |  |                                                                                                                                                              
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                  
|10.40(28)     |  | Aircraft Mortgage and Security Agreement between Martin Aviation, Inc., a California corporation and William Lyon Homes, Inc., dated as of September 9, 2009.
|12.1(29)      |  | Statement of computation of ratio of earnings to fixed charges.                                                                                              
|21.1(29)      |  | List of Subsidiaries of William Lyon Homes, a Delaware corporation.                                                                                          
|31.1(29)      |  | Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                          
|31.2(29)      |  | Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                          
|32.1(29)      |  | 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(29)      |  | 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 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(9) | 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(10) | 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.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | 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.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | 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.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | 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.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | 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.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | 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.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(16) | 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.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------

|(17) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed September 27, 2006 and incorporated herein by reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------

|(18) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed October 27, 2006 and incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

|(19) | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by
reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(20) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on November 15, 2007 and incorporated herein by
reference.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------

|(21) | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by
reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(22) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on May 28, 2008 and incorporated herein by reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------------

|(23) | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008 and
incorporated herein by reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(24) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on September 24, 2008 and incorporated herein by
reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------

|(25) | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008 and
incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(26) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on January 5, 2009 and incorporated herein by reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------

|(27) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on October 22, 2009 and incorporated herein by reference.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------

|(28) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on September 10, 2009 and incorporated herein by
reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------

|(29) | Filed herewith.
|---- | ---------------