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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K



(Mark One)

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

For the fiscal year ended December 31, 2007

OR



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

For the transition period from
 to

Commission File Number 001-31625

WILLIAM LYON HOMES

(Exact name of registrant as specified in its charter)



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



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

Registrants telephone number, including area code: (949) 833-3600

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

None

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

None

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

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

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

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 1, 2008 was 1,000.

DOCUMENTS INCORPORATED BY REFERENCE

None









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##### Table of Contents

WILLIAM LYON HOMES

INDEX



|         |  |                                                                                                              |  |         
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | --------
|         |  |                                                                                                              |  | Page No.
|         |  | PART I                                                                                                       |  |         
|         |  |                                                                                                             
|Item 1.  |  | Business                                                                                                     |  | 2       
|         |  |                                                                                                             
|Item 1A. |  | Risk Factors                                                                                                 |  | 16      
|         |  |                                                                                                             
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 24      
|         |  |                                                                                                             
|Item 2.  |  | Properties                                                                                                   |  | 24      
|         |  |                                                                                                             
|Item 3.  |  | Legal Proceedings                                                                                            |  | 24      
|         |  |                                                                                                             
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 25      
|         |  |                                                                                                             
|         |  | PART II                                                                                                      |  |         
|         |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 26      
|         |  |                                                                                                             
|Item 6.  |  | Selected Financial Data                                                                                      |  | 27      
|         |  |                                                                                                             
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 30      
|         |  |                                                                                                             
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 56      
|         |  |                                                                                                             
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 56      
|         |  |                                                                                                             
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 56      
|         |  |                                                                                                             
|Item 9A. |  | Controls and Procedures                                                                                      |  | 56      
|         |  |                                                                                                             
|         |  | PART III                                                                                                     |  |         
|         |  |                                                                                                             
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 57      
|         |  |                                                                                                             
|Item 11. |  | Executive Compensation                                                                                       |  | 61      
|         |  |                                                                                                             
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 68      
|         |  |                                                                                                             
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 68      
|         |  |                                                                                                             
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 71      
|         |  |                                                                                                             
|         |  | PART IV                                                                                                      |  |         
|         |  |                                                                                                             
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 73      
|         |  |                                                                                                             
|         |  | Index to Financial Statements                                                                                |  | 81      



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



Actual events and results may differ
materially from those expressed or forecasted in the forward-looking statements due to a number of factors. The principal factors that could cause the Companys actual performance and future events and actions to differ materially from such
forward-looking statements include, but are not limited to, changes in general economic conditions either nationally or in regions in which the Company operates, changes in the markets for residential housing, terrorism or other hostilities
involving the United States, 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, 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.



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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 70,000 homes. The Company conducts its homebuilding operations through four geographic regions (Southern California, Northern California, Arizona and Nevada). For
2007, approximately 69% of the home closings of the Company and its joint ventures were derived from its California operations. For the year ended December 31, 2007, on a consolidated basis the Company had revenues from home sales of $1.002
billion and delivered 2,182 homes, which includes $91.8 million of revenue and 219 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, 2007, the Company marketed its homes through 60 sales locations in both its wholly-owned
projects and projects being developed in consolidated joint ventures. In 2007, the average sales price for consolidated homes delivered was $459,500. Base sales prices for actively selling projects in 2007, including affordable projects, ranged from
$76,000 to $1,725,000.



As of December 31, 2007, the Company
and its consolidated joint ventures owned approximately 13,624 lots and had options to purchase an additional 837 lots, substantially all of which are entitled. As used in this Annual Report on Form 10-K, entitled land has a development
agreement and/or vesting tentative map, or a final recorded plat or map from the appropriate county or city government. Development agreements and vesting tentative maps generally provide for the right to develop the land in accordance with the
provisions of the development agreement or vesting tentative map unless an issue arises concerning health, safety or general welfare. The Companys sources of developed lots for its homebuilding operations are (1) development of
master-planned communities, primarily through both consolidated and unconsolidated joint ventures at the current time, and (2) purchase of smaller projects with shorter life cycles (merchant homebuilding). The Company estimates that its current
inventory of lots owned and controlled is adequate to supply its homebuilding operations at current operating levels for approximately four to five years.



The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential
projects. As described more fully in Critical Accounting Policies Variable Interest Entities certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary beneficiary.
Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Companys financial statements as of December 31, 2007 and 2006 and for each of the three years in the period ended December 31, 2007.
The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Companys financial statements. The Companys investments in unconsolidated joint ventures are
accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Income allocations and cash distributions to the Company from the
unconsolidated joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners priority
returns and returns of partners capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of Notes to Consolidated Financial Statements for condensed combined financial information for the joint
ventures whose financial statements have been consolidated with the Companys financial statements. See Note 5 of Notes to Consolidated Financial Statements for condensed combined financial information for the unconsolidated joint
ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.



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



The Company had total consolidated revenues from operations of $1.105 billion, $1.492 billion and $1.856 billion for the years ended December 31, 2007,
2006 and 2005, respectively. Homes closed by the Company, including its joint ventures, were 2,182, 2,887 and 3,196 for the years ended December 31, 2007, 2006 and 2005, respectively. Including its joint ventures, the Companys dollar
amount of backlog of homes sold but not closed as of December 31, 2007, was $107.9 million, a 63% decrease over the $295.5 million as of December 31, 2006. The cancellation rate of buyers who contracted to buy a home but did not close escrow was
approximately 33% during 2007 and 33% during 2006.



The Companys operations are dependent to a significant extent on debt financing and, to a
lesser extent, on joint venture financing. The Companys principal credit sources are its 75/8% Senior Notes, 103/4% Senior Notes, 71/2% Senior Notes, secured revolving credit facilities, seller-provided financing, and land banking transactions. At December 31, 2007, the outstanding principal amount of the 75/8% Senior Notes was $150.0 million, the outstanding principal amount of the 103/4% Senior Notes was $247.6 million and the outstanding principal amount of the 71/2% Senior
Notes was $150.0 million. The secured revolving credit facilities are revolving lines of credit which previously had a maximum loan commitment of $560.0 million. However, as described below, as a result of certain land sales transactions, the
Company has reached agreement with each of the lenders to modify the terms of the respective revolving credit facilities, including reducing the aggregate maximum loan commitment to $395.0 million. The credit facilities have limitations on the
amounts that can be borrowed at any time based on assets which are included in the credit facilities and the specified borrowings permitted under borrowing base calculations. The secured revolving credit facilities are secured by substantially all
of the Companys assets. At December 31, 2007, the outstanding principal amount under the secured revolving credit facilities was $139.6 million. The Companys mortgage subsidiary has two revolving credit facilities to fund its mortgage
operations, of which an aggregate $11.5 million was outstanding at December 31, 2007. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition and Liquidity and
Note 6 of Notes to Consolidated Financial Statements for more information relating to the revolving credit facilities of the Company and its mortgage subsidiary.



In 2007, the homebuilding industry experienced continued decreased demand for
housing, which has resulted in a decrease in new home orders, home closings, average sales prices and gross margins for the Company compared to the 2006 period. During 2007, the Company incurred impairment losses on real estate assets in the amount
of $231.1 million. The impairments were primarily attributable to slower than anticipated homes sales and lower than anticipated net revenue due to the decline in the homebuilding industry. The Company was required to write-down the book value of
certain real estate assets in accordance with Statement No. 144, as defined in Note 1 of Notes to Consolidated Financial Statements.



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 ten 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 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
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. 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
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



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Estate Assets for the year ended December 31, 2007. The Company may consider entering into future agreements with the various affiliates of the equity
partner to build and market homes in 5 of the 10 communities on behalf of the affiliates. For such services, the Company would receive fees and may, under certain circumstances, receive additional compensation if certain financial thresholds are
achieved. Certain of the equity partner affiliates have an option to acquire an additional 23 model homes in 6 of the 10 communities.



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.



In 2008, the Company expects to temporarily suspend all development, sales and marketing activities at ten of its actively-selling projects which are in
the early stages of development. Management of the Company has concluded that this strategy is 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.



Upon consummation of the land sales transactions
described above, the Company would not have been in compliance with the tangible net worth covenants in certain of the revolving credit facilities. The Company has reached agreement with each of the lenders to modify the terms of the respective
revolving credit facilities so that upon consummation of the land sales transactions described above, the Company would be in compliance with the modified terms.



Under the modified revolving credit facilities, the aggregate loan commitment is reduced to $395.0 million (including
one facility of $100.0 million, one of $70.0 million, one of $60.0 million, two of $50.0 million each, one of $35.0 million and one of $30.0 million) and 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 $175.0 million;
| | - |  | ----------------------------------------------------



| |  |  | A ratio of total liabilities to tangible net worth, each as defined, of less than 5.00 to 1; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Minimum liquidity, as defined, of at least $20.0 million.
| | - |  | ---------------------------------------------------------



The modifications for the facilities of $100.0 million and $35.0 million were effective January 1, 2008; however, the Company has received a waiver
from each of the respective lenders for non-compliance with the tangible net worth covenant for the quarter ended December 31, 2007.



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



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



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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 William Lyon and
two trusts of which William H. Lyon is the sole beneficiary.



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



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



|                              |  |                         |           |      |   |           |  |   |          
|----------------------------- |  | ----------------------- | --------- | ---- | - | --------- |  | - | ---------
|                              |  | Total Revenue          
|                              |  | Year Ended December 31,
|                              |  | 2007                    |           | 2006 |   | 2005     
|                              |  | (in thousands)         
|                              |  | (note 1)               
|Consolidated                  |  |                         |           |      |   |           |  |   |          
|Southern California Region(2) |  | $                       | 780,213   |      | $ | 852,528   |  | $ | 851,044  
|Northern California Region(3) |  |                         | 102,432   |      |   | 232,101   |  |   | 531,390  
|Arizona Region(4)             |  |                         | 134,153   |      |   | 208,083   |  |   | 267,949  
|Nevada Region(5)              |  |                         | 88,559    |      |   | 199,509   |  |   | 206,000  
|                              |  |                         |           |      |   |           |  |   |          
|                              |  | $                       | 1,105,357 |      | $ | 1,492,221 |  | $ | 1,856,383
|                              |  |                         |           |      |   |           |  |   |          
|Unconsolidated joint ventures |  |                         |           |      |   |           |  |   |          
|Nevada(5)                     |  | $                       |          |      | $ | 17,046    |  | $ | 26,091   
|                              |  |                         |           |      |   |           |  |   |          
|                              |  | $                       |          |      | $ | 17,046    |  | $ | 26,091   
|                              |  |                         |           |      |   |           |  |   |          

---

|(1) |  | The Company has organized its operations into geographic regions. Each region has a management team led by a regional president. The Southern California Region is divided into 2
operating divisions, each with a division manager and separate management team.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|(4) |  | The Arizona Region consists of operations in the Phoenix area.
|--- |  | --------------------------------------------------------------



|(5) |  | The Nevada Region consists of operations in Clark and Nye counties.
|--- |  | -------------------------------------------------------------------



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



LAND ACQUISITION AND DEVELOPMENT



As of December 31, 2007, the Company and its consolidated joint ventures
owned approximately 13,624 lots and had options to purchase an additional 837 lots, substantially all of which are entitled.



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



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



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



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



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



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



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



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



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



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



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The Company and an unaffiliated party formed a limited liability company for the purpose of acquiring and
developing 885 acres of land in Pahrump, Nevada into approximately 3,174 lots for residential homesites. The company had a 50% direct interest in the limited liability company which began developing the lots in 2004 and sold approximately 472 and
678 lots during the years ended December 31, 2006 and 2005, respectively, of which 209 and 488 lots were sold to the Company. In July 2007, the Company purchased the interest of the other member in the limited liability company for $2.1 million in
cash and assumed all of the members debt ($18.4 million) in the entity. Upon completion of the transaction, the assets and liabilities of the entity are consolidated with the Companys financial statements.



HOMEBUILDING AND MARKET STRATEGY



The Company currently has a wide variety of product lines which enables it
to meet the specific needs of each of its markets. Although the Company primarily emphasizes sales to the entry-level and move-up home markets, it believes that this diversified product strategy enables it to best serve a wide range of buyers and
adapt quickly to a variety of market conditions. In order to reduce exposure to local market conditions, the Companys sales locations are geographically dispersed. At December 31, 2007, the Company and its joint ventures had 60 sales
locations.



Because the decision as to which product to develop
is based on the Companys assessment of market conditions and the restrictions imposed by government regulations, homestyles and sizes vary from project to project. The Companys attached housing ranges in size from 1,040 to 3,050 square
feet, and the detached housing ranges from 1,123 to 5,491 square feet.



Due to the Companys product and geographic diversification strategy, the prices of the Companys homes also vary substantially. Base sales prices for the Companys attached housing range from approximately $76,000 to
$980,000 and base sales prices for detached housing range from approximately $105,000 to $1,725,000. On a consolidated basis, the average sales price of homes closed for the year ended December 31, 2007 was $459,500.



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.



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



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



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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 regions as of December 31, 2007 and only includes projects with lots owned as of December 31, 2007, lots consolidated in accordance with
Interpretation No. 46 as of December 31, 2007 or homes closed for the year ended December 31, 2007.



|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|-------------------------------------- |  | -------------------- |  | --------------------------------------- |  | ------------------------------------------- |  | -------------------------------- |  | ---------------------------------- |  | --------------------------------------------- |  | ------------------- | -----------------
|Project (County) Product               |  | Year ofFirstDelivery |  | EstimatedNumber ofHomes atCompletion(1) |  | CumulativeUnits Closedas ofDecember 31,2007 |  | Backlog atDecember 31,2007(2)(3) |  | Lots Ownedas ofDecember 31,2007(4) |  | Homes Closedfor theYear EndedDecember 31,2007 |  | Sales PriceRange(5)
|                                      
|SOUTHERN CALIFORNIA REGION            
|SAN DIEGO/INLAND EMPIRE DIVISION       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Wholly-Owned:                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|San Diego:                             |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Promenade                              |  | 2006                 |  | 168                                     |  | 66                                          |  | 1                                |  | 102                                |  | 60                                            |  | $                   | 370,000 - 500,000
|Alcala Del Sur                         |  | 2005                 |  | 83                                      |  | 81                                          |  | 2                                |  | 2                                  |  | 50                                            |  | $                   | 660,000 - 710,000
|Pasado Del Sur                         |  | 2009                 |  | 89                                      |  | 0                                           |  | 0                                |  | 25                                 |  | 0                                             |  | $                   | 561,000 - 601,000
|Maybeck                                |  | 2006                 |  | 51                                      |  | 38                                          |  | 3                                |  | 13                                 |  | 33                                            |  | $                   | 620,000 - 700,000
|Sunset Cove                            |  | 2007                 |  | 35                                      |  | 29                                          |  | 0                                |  | 6                                  |  | 29                                            |  | $                   | 450,000 - 460,000
|Santee:                                |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Altair                                 |  | 2008                 |  | 85                                      |  | 0                                           |  | 19                               |  | 85                                 |  | 0                                             |  | $                   | 331,000 - 382,000
|Riverside County:                      |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Parkside, Corona                       |  | 2007                 |  | 122                                     |  | 69                                          |  | 8                                |  | 53                                 |  | 51                                            |  | $                   | 421,000 - 539,000
|Serafina, North Corona                 |  | 2007                 |  | 314                                     |  | 190                                         |  | 10                               |  | 124                                |  | 160                                           |  | $                   | 248,000 - 348,000
|Bridle Creek, Corona                   |  | 2003                 |  | 274                                     |  | 235                                         |  | 4                                |  | 39                                 |  | 35                                            |  | $                   | 573,000 - 761,000
|Sequoia at Wolf Creek, Temecula        |  | 2005                 |  | 125                                     |  | 125                                         |  | 0                                |  | 0                                  |  | 28                                            |  | $                   | 392,000 - 438,000
|Savannah at Harveston Ranch, Temecula  |  | 2005                 |  | 162                                     |  | 133                                         |  | 1                                |  | 29                                 |  | 57                                            |  | $                   | 254,000 - 306,000
|San Bernardino County:                 |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|The Peaks at Citrus Heights, Fontana   |  | 2005                 |  | 150                                     |  | 150                                         |  | 0                                |  | 0                                  |  | 16                                            |  | $                   | 597,000 - 680,000
|Adelina, Fontana                       |  | 2008                 |  | 109                                     |  | 0                                           |  | 10                               |  | 109                                |  | 0                                             |  | $                   | 256,000 - 321,000
|Rosabella, Fontana                     |  | 2008                 |  | 114                                     |  | 4                                           |  | 10                               |  | 110                                |  | 4                                             |  | $                   | 316,000 - 351,000
|Amador, Rancho Cucamonga               |  | 2007                 |  | 69                                      |  | 17                                          |  | 2                                |  | 52                                 |  | 17                                            |  | $                   | 276,000 - 397,000
|Vintner's Grove, Rancho Cucamonga      |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Sollara SFD                            |  | 2007                 |  | 45                                      |  | 9                                           |  | 0                                |  | 36                                 |  | 9                                             |  | $                   | 389,000 - 464,000
|Canela Triplex                         |  | 2007                 |  | 63                                      |  | 13                                          |  | 1                                |  | 50                                 |  | 13                                            |  | $                   | 291,000 - 361,000
|Chapman Heights, Yucaipa               |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Braeburn                               |  | 2005                 |  | 113                                     |  | 92                                          |  | 6                                |  | 21                                 |  | 27                                            |  | $                   | 519,000 - 559,000
|Crofton                                |  | 2005                 |  | 140                                     |  | 136                                         |  | 3                                |  | 4                                  |  | 46                                            |  | $                   | 403,000 - 433,000
|Westland                               |  | 2005                 |  | 79                                      |  | 79                                          |  | 0                                |  | 0                                  |  | 4                                             |  | $                   | 498,000 - 521,000
|Vista Bella                            |  | 2009                 |  | 108                                     |  | 0                                           |  | 0                                |  | 108                                |  | 0                                             |  | $                   | 264,000 - 295,000
|Redcort                                |  | 2009                 |  | 90                                      |  | 0                                           |  | 0                                |  | 90                                 |  | 0                                             |  | $                   | 298,000 - 323,000
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Total Wholly-Owned:                    |  |                      |  | 2,588                                   |  | 1,466                                       |  | 80                               |  | 1,058                              |  | 639                                           |  |                     |                  
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Joint Ventures:                        |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|San Diego:                             |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Ravenna                                |  | 2005                 |  | 199                                     |  | 198                                         |  | 0                                |  | 1                                  |  | 50                                            |  | $                   | 453,000 - 513,000
|Amante                                 |  | 2005                 |  | 127                                     |  | 127                                         |  | 0                                |  | 0                                  |  | 21                                            |  | $                   | 511,000 - 577,000
|Treviso                                |  | 2005                 |  | 186                                     |  | 154                                         |  | 5                                |  | 32                                 |  | 52                                            |  | $                   | 310,000 - 420,000
|Chula Vista:                           |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Belleza at San Miguel Village          |  | 2005                 |  | 195                                     |  | 195                                         |  | 0                                |  | 0                                  |  | 9                                             |  | $                   | 360,000 - 420,000
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Total Joint Ventures:                  |  |                      |  | 707                                     |  | 674                                         |  | 5                                |  | 33                                 |  | 132                                           |  |                     |                  
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|TOTAL SAN DIEGO/INLAND EMPIRE DIVISION |  |                      |  | 3,295                                   |  | 2,140                                       |  | 85                               |  | 1,091                              |  | 771                                           |  |                     |                  
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  



8



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##### Table of Contents

|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|----------------------------------------- |  | -------------------- |  | --------------------------------------- |  | ------------------------------------------- |  | -------------------------------- |  | ---------------------------------- |  | --------------------------------------------- |  | ------------------- | ---------------------
|Project (County) Product                  |  | Year ofFirstDelivery |  | EstimatedNumber ofHomes atCompletion(1) |  | CumulativeUnits Closedas ofDecember 31,2007 |  | Backlog atDecember 31,2007(2)(3) |  | Lots Ownedas ofDecember 31,2007(4) |  | Homes Closedfor theYear EndedDecember 31,2007 |  | Sales PriceRange(5)
|ORANGE COUNTY/LOS ANGELES DIVISION        |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Wholly-Owned:                             |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Irvine:                                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Garland Park                              |  | 2005                 |  | 166                                     |  | 166                                         |  | 0                                |  | 0                                  |  | 2                                             |  | $                   | 579,000 - 717,000    
|San Carlos                                |  | 2007                 |  | 152                                     |  | 20                                          |  | 8                                |  | 20                                 |  | 20                                            |  | $                   | 380,000 - 545,000    
|Ivy                                       |  | 2009                 |  | 135                                     |  | 0                                           |  | 0                                |  | 0                                  |  | 0                                             |  | $                   | 430,000 - 520,000    
|Columbus Grove:                           |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Lantana                                   |  | 2006                 |  | 102                                     |  | 88                                          |  | 2                                |  | 14                                 |  | 49                                            |  | $                   | 765,000 - 840,000    
|Kensington                                |  | 2006                 |  | 63                                      |  | 52                                          |  | 7                                |  | 11                                 |  | 22                                            |  | $                   | 640,000 - 775,000    
|Tustin:                                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Columbus Grove/Columbus Square:           |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Clarendon                                 |  | 2007                 |  | 102                                     |  | 100                                         |  | 1                                |  | 2                                  |  | 100                                           |  | $                   | 270,000 - 650,000    
|Astoria                                   |  | 2007                 |  | 38                                      |  | 26                                          |  | 1                                |  | 12                                 |  | 26                                            |  | $                   | 725,000 - 850,000    
|Mirabella                                 |  | 2008                 |  | 60                                      |  | 0                                           |  | 0                                |  | 0                                  |  | 0                                             |  | $                   | 660,000 - 820,000    
|Cambridge Lane                            |  | 2007                 |  | 156                                     |  | 91                                          |  | 0                                |  | 65                                 |  | 91                                            |  | $                   | 76,000 - 520,000     
|Ainsley Park                              |  | 2008                 |  | 84                                      |  | 0                                           |  | 0                                |  | 0                                  |  | 0                                             |  | $                   | 625,000 - 725,000    
|Ciara                                     |  | 2007                 |  | 67                                      |  | 39                                          |  | 2                                |  | 28                                 |  | 39                                            |  | $                   | 1,200,000 - 1,470,000
|Verandas                                  |  | 2007                 |  | 44                                      |  | 26                                          |  | 3                                |  | 18                                 |  | 26                                            |  | $                   | 650,000 - 705,000    
|Ladera Ranch:                             |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Amarante II                               |  | 2006                 |  | 18                                      |  | 18                                          |  | 0                                |  | 0                                  |  | 3                                             |  | $                   | 1,046,000 - 1,130,000
|Bellataire                                |  | 2005                 |  | 52                                      |  | 52                                          |  | 0                                |  | 0                                  |  | 4                                             |  | $                   | 1,220,000 - 1,260,000
|Bellataire II                             |  | 2006                 |  | 23                                      |  | 23                                          |  | 0                                |  | 0                                  |  | 1                                             |  | $                   | 1,180,000 - 1,220,000
|San Clemente:                             |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Alora, San Clemente                       |  | 2008                 |  | 13                                      |  | 0                                           |  | 2                                |  | 13                                 |  | 0                                             |  | $                   | 1,150,000 - 1,250,000
|San Juan Capistrano:                      |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Floralisa                                 |  | 2005                 |  | 80                                      |  | 74                                          |  | 2                                |  | 6                                  |  | 20                                            |  | $                   | 1,275,000 - 1,295,000
|Estrella Rosa                             |  | 2006                 |  | 40                                      |  | 39                                          |  | 1                                |  | 1                                  |  | 17                                            |  | $                   | 1,675,000 - 1,725,000
|Moorpark:                                 |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Meridian Hills:                           |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Ashford                                   |  | 2006                 |  | 125                                     |  | 28                                          |  | 0                                |  | 85                                 |  | 24                                            |  | $                   | 780,000 - 890,000    
|Marquis                                   |  | 2007                 |  | 123                                     |  | 27                                          |  | 2                                |  | 108                                |  | 27                                            |  | $                   | 830,000 - 975,000    
|Brighton (Affordable)                     |  | 2008                 |  | 17                                      |  | 0                                           |  | 0                                |  | 17                                 |  | 0                                             |  | $                   | 105,000 - 272,000    
|Los Angeles:                              |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Arboreta at Rainbird                      |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Vintage                                   |  | 2008                 |  | 87                                      |  | 0                                           |  | 2                                |  | 87                                 |  | 0                                             |  | $                   | 435,000 - 545,000    
|Tradition                                 |  | 2008                 |  | 53                                      |  | 0                                           |  | 9                                |  | 53                                 |  | 0                                             |  | $                   | 600,000 - 682,000    
|Hawthorne:                                |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|360 South Bay(6):                         |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|The Flats                                 |  | 2008                 |  | 188                                     |  | 0                                           |  | 1                                |  | 188                                |  | 0                                             |  | $                   | 495,000 - 700,000    
|The Lofts                                 |  | 2008                 |  | 123                                     |  | 0                                           |  | 1                                |  | 123                                |  | 0                                             |  | $                   | 525,000 - 775,000    
|The Rows                                  |  | 2008                 |  | 94                                      |  | 0                                           |  | 1                                |  | 94                                 |  | 0                                             |  | $                   | 700,000 - 810,000    
|The Courts                                |  | 2008                 |  | 118                                     |  | 0                                           |  | 1                                |  | 118                                |  | 0                                             |  | $                   | 635,000 - 790,000    
|The Gardens                               |  | 2008                 |  | 102                                     |  | 0                                           |  | 1                                |  | 102                                |  | 0                                             |  | $                   | 755,000 - 980,000    
|Azusa:                                    |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Gardenia at Rosedale(6)                   |  | 2008                 |  | 147                                     |  | 0                                           |  | 5                                |  | 147                                |  | 0                                             |  | $                   | 455,000 - 550,000    
|Sage Court at Rosedale(6) .               |  | 2008                 |  | 176                                     |  | 0                                           |  | 5                                |  | 176                                |  | 0                                             |  | $                   | 420,000 - 515,000    
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|TOTAL ORANGE COUNTY/LOS ANGELES DIVISION  |  |                      |  | 2,748                                   |  | 869                                         |  | 57                               |  | 1,488                              |  | 471                                           |  |                     |                      
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|SOUTHERN CALIFORNIA REGION COMBINED TOTAL |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|Wholly-Owned                              |  |                      |  | 5,336                                   |  | 2,335                                       |  | 137                              |  | 2,546                              |  | 1,110                                         |  |                     |                      
|Joint Ventures                            |  |                      |  | 707                                     |  | 674                                         |  | 5                                |  | 33                                 |  | 132                                           |  |                     |                      
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      
|                                          |  |                      |  | 6,043                                   |  | 3,009                                       |  | 142                              |  | 2,579                              |  | 1,242                                         |  |                     |                      
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                      



9



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##### Table of Contents

|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|----------------------------------------- |  | -------------------- |  | --------------------------------------- |  | ------------------------------------------- |  | -------------------------------- |  | ---------------------------------- |  | --------------------------------------------- |  | ------------------- | -----------------
|Project (County) Product                  |  | Year ofFirstDelivery |  | EstimatedNumber ofHomes atCompletion(1) |  | CumulativeUnits Closedas ofDecember 31,2007 |  | Backlog atDecember 31,2007(2)(3) |  | Lots Ownedas ofDecember 31,2007(4) |  | Homes Closedfor theYear EndedDecember 31,2007 |  | Sales PriceRange(5)
|                                         
|NORTHERN CALIFORNIA REGION               
|Wholly-Owned:                             |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Contra Costa County:                      |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Seagate at Bayside, Hercules              |  | 2005                 |  | 96                                      |  | 95                                          |  | 0                                |  | 1                                  |  | 15                                            |  | $                   | 615,000 - 727,000
|Rivergate I & II, Antioch                 |  | 2006                 |  | 167                                     |  | 117                                         |  | 6                                |  | 50                                 |  | 13                                            |  | $                   | 400,000 - 513,000
|Vista Del Mar, Pittsburgh                 |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Vineyard (6)                              |  | 2007                 |  | 155                                     |  | 1                                           |  | 0                                |  | 154                                |  | 1                                             |  | $                   | 650,000 - 710,000
|Victory (6)                               |  | 2008                 |  | 129                                     |  | 0                                           |  | 0                                |  | 129                                |  | 0                                             |  | $                   | 680,000 - 745,000
|San Joaquin County:                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Ironwood III, Lathrop                     |  | 2005                 |  | 109                                     |  | 109                                         |  | 0                                |  | 0                                  |  | 2                                             |  | $                   | 487,000 - 544,000
|Seasons, Stockton                         |  | 2005                 |  | 145                                     |  | 145                                         |  | 0                                |  | 0                                  |  | 7                                             |  | $                   | 473,000 - 533,000
|Stanislaus County:                        |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Falling Leaf, Modesto                     |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Trails                                    |  | 2006                 |  | 100                                     |  | 28                                          |  | 5                                |  | 72                                 |  | 23                                            |  | $                   | 260,000 - 325,000
|Groves                                    |  | 2006                 |  | 131                                     |  | 34                                          |  | 6                                |  | 97                                 |  | 25                                            |  | $                   | 273,000 - 308,000
|Meadows                                   |  | 2006                 |  | 83                                      |  | 19                                          |  | 3                                |  | 64                                 |  | 12                                            |  | $                   | 359,000 - 400,000
|Placer County:                            |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Shady Lane at Whitney Ranch, Rocklin      |  | 2006                 |  | 96                                      |  | 42                                          |  | 4                                |  | 54                                 |  | 21                                            |  | $                   | 400,000 - 426,000
|Twin Oaks at Whitney Ranch, Rocklin       |  | 2006                 |  | 92                                      |  | 25                                          |  | 1                                |  | 67                                 |  | 18                                            |  | $                   | 526,000 - 558,000
|Sacramento County:                        |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Verona at Anatolia, Rancho Cordova        |  | 2005                 |  | 79                                      |  | 67                                          |  | 5                                |  | 12                                 |  | 21                                            |  | $                   | 400,000 - 425,000
|Marquee at Fair Oaks                      |  | 2007                 |  | 190                                     |  | 8                                           |  | 1                                |  | 182                                |  | 8                                             |  | $                   | 300,000 - 360,000
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Total Wholly-Owned                        |  |                      |  | 1,572                                   |  | 690                                         |  | 31                               |  | 882                                |  | 166                                           |  |                     |                  
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Joint Ventures:                           |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Contra Costa County:                      |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Vista Del Mar, Pittsburgh                 |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Villages                                  |  | 2007                 |  | 102                                     |  | 24                                          |  | 4                                |  | 78                                 |  | 24                                            |  | $                   | 303,000 - 502,000
|Venue                                     |  | 2007                 |  | 132                                     |  | 26                                          |  | 1                                |  | 106                                |  | 26                                            |  | $                   | 363,000 - 579,000
|Monterey County:                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|East Garrison                             |  | 2010                 |  | 603                                     |  | 0                                           |  | 0                                |  | 603                                |  | 0                                             |  | $                   | 239,000 - 780,000
|Sacramento County:                        |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Big Horn, Elk Grove                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Plaza Walk                                |  | 2005                 |  | 106                                     |  | 66                                          |  | 2                                |  | 40                                 |  | 13                                            |  | $                   | 299,000 - 360,000
|Gallery Walk                              |  | 2005                 |  | 149                                     |  | 95                                          |  | 5                                |  | 54                                 |  | 24                                            |  | $                   | 210,000 - 299,000
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Total Joint Ventures:                     |  |                      |  | 1,092                                   |  | 211                                         |  | 12                               |  | 881                                |  | 87                                            |  |                     |                  
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|NORTHERN CALIFORNIA REGION COMBINED TOTAL |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Wholly-Owned                              |  |                      |  | 1,572                                   |  | 690                                         |  | 31                               |  | 882                                |  | 166                                           |  |                     |                  
|Joint Ventures                            |  |                      |  | 1,092                                   |  | 211                                         |  | 12                               |  | 881                                |  | 87                                            |  |                     |                  
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|                                          |  |                      |  | 2,664                                   |  | 901                                         |  | 43                               |  | 1,763                              |  | 253                                           |  |                     |                  
|                                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|                                         
|ARIZONA REGION                           
|Wholly-Owned:                             |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Maricopa County                           |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Sonoran Foothills, Phoenix                |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Desert Crown                              |  | 2004                 |  | 124                                     |  | 124                                         |  | 0                                |  | 0                                  |  | 1                                             |  | $                   | 441,000 - 544,000
|Desert Sierra                             |  | 2004                 |  | 212                                     |  | 212                                         |  | 0                                |  | 0                                  |  | 1                                             |  | $                   | 249,000 - 307,000
|Copper Canyon Ranch, Surprise             |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Sunset Point                              |  | 2004                 |  | 282                                     |  | 281                                         |  | 0                                |  | 1                                  |  | 21                                            |  | $                   | 287,000 - 383,000
|El Sendero Hills                          |  | 2004                 |  | 188                                     |  | 188                                         |  | 0                                |  | 0                                  |  | 13                                            |  | $                   | 377,000 - 470,000
|Talavera, Phoenix                         |  | 2006                 |  | 134                                     |  | 125                                         |  | 3                                |  | 9                                  |  | 79                                            |  | $                   | 256,000 - 330,000
|Coldwater Ranch, Maricopa County          |  | 2008                 |  | 368                                     |  | 0                                           |  | 0                                |  | 368                                |  | 0                                             |  | $                   | 169,000 - 218,000
|Lehi Crossing, Mesa                       |  | 2011                 |  | 880                                     |  | 0                                           |  | 0                                |  | 552                                |  | 0                                             |  | $                   | 209,000 - 288,000



10



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|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|-------------------------------------- |  | -------------------- |  | --------------------------------------- |  | ------------------------------------------- |  | -------------------------------- |  | ---------------------------------- |  | --------------------------------------------- |  | ------------------- | -----------------
|Project (County) Product               |  | Year ofFirstDelivery |  | EstimatedNumber ofHomes atCompletion(1) |  | CumulativeUnits Closedas ofDecember 31,2007 |  | Backlog atDecember 31,2007(2)(3) |  | Lots Ownedas ofDecember 31,2007(4) |  | Homes Closedfor theYear EndedDecember 31,2007 |  | Sales PriceRange(5)
|Rancho Mercado, Phoenix                |  | 2011                 |  | 1,850                                   |  | 0                                           |  | 0                                |  | 1,850                              |  | 0                                             |  | $                   | 195,000 - 282,000
|Hastings Property, Queen Creek         |  | 2010                 |  | 631                                     |  | 0                                           |  | 0                                |  | 631                                |  | 0                                             |  | $                   | 169,000 - 432,000
|Lyon's Gate, Gilbert:                  |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Pride                                  |  | 2006                 |  | 650                                     |  | 265                                         |  | 21                               |  | 385                                |  | 161                                           |  | $                   | 199,000 - 222,000
|Savanna                                |  | 2006                 |  | 174                                     |  | 112                                         |  | 10                               |  | 62                                 |  | 63                                            |  | $                   | 237,000 - 295,000
|Sahara                                 |  | 2006                 |  | 169                                     |  | 102                                         |  | 14                               |  | 67                                 |  | 59                                            |  | $                   | 293,000 - 369,000
|Acacia                                 |  | 2007                 |  | 365                                     |  | 22                                          |  | 19                               |  | 343                                |  | 22                                            |  | $                   | 221,000 - 301,000
|Future Products                        |  | 2008                 |  | 213                                     |  | 0                                           |  | 0                                |  | 213                                |  | 0                                             |  |                     |                  
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Total Wholly-Owned:                    |  |                      |  | 6,240                                   |  | 1,431                                       |  | 67                               |  | 4,481                              |  | 420                                           |  |                     |                  
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Joint Ventures:                        |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Maricopa County                        |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Circle G at the Church Farm North      |  | 2010                 |  | 1,745                                   |  | 0                                           |  | 0                                |  | 1,745                              |  | 0                                             |  | $                   | 172,000 - 441,000
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Total Joint Ventures:                  |  |                      |  | 1,745                                   |  | 0                                           |  | 0                                |  | 1,745                              |  | 0                                             |  |                     |                  
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|ARIZONA REGION TOTAL . . . . . . . . . |  |                      |  | 7,985                                   |  | 1,431                                       |  | 67                               |  | 6,226                              |  | 420                                           |  |                     |                  
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|                                      
|NEVADA REGION                         
|Wholly-Owned:                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Clark County                           |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Summerlin, Las Vegas                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|The Lyon Collection                    |  | 2005                 |  | 79                                      |  | 79                                          |  | 0                                |  | 0                                  |  | 5                                             |  | $                   | 624,000 - 659,000
|Kingwood Crossing                      |  | 2006                 |  | 100                                     |  | 60                                          |  | 3                                |  | 40                                 |  | 31                                            |  | $                   | 385,000 - 471,000
|North Las Vegas                        |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|The Cottages                           |  | 2004                 |  | 360                                     |  | 297                                         |  | 2                                |  | 63                                 |  | 26                                            |  | $                   | 202,000 - 232,000
|La Tierra                              |  | 2006                 |  | 67                                      |  | 53                                          |  | 4                                |  | 14                                 |  | 21                                            |  | $                   | 315,000 - 345,000
|Tierra Este                            |  | 2008                 |  | 126                                     |  | 0                                           |  | 0                                |  | 126                                |  | 0                                             |  | $                   | 275,000 - 305,000
|Carson Ranch, Las Vegas                |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|West Series I                          |  | 2005                 |  | 71                                      |  | 67                                          |  | 0                                |  | 4                                  |  | 0                                             |  | $                   | 395,000 - 430,000
|West Series II                         |  | 2005                 |  | 59                                      |  | 51                                          |  | 1                                |  | 8                                  |  | 22                                            |  | $                   | 406,000 - 503,000
|East Series I                          |  | 2007                 |  | 103                                     |  | 50                                          |  | 0                                |  | 53                                 |  | 20                                            |  | $                   | 355,000 - 390,000
|East Series II                         |  | 2007                 |  | 58                                      |  | 7                                           |  | 1                                |  | 51                                 |  | 7                                             |  | $                   | 406,000 - 461,000
|West Park, Las Vegas                   |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Villas                                 |  | 2006                 |  | 191                                     |  | 44                                          |  | 9                                |  | 147                                |  | 27                                            |  | $                   | 283,000 - 325,000
|Courtyards                             |  | 2006                 |  | 113                                     |  | 37                                          |  | 1                                |  | 76                                 |  | 23                                            |  | $                   | 330,000 - 380,000
|Mesa Canyon, Las Vegas                 |  | 2010                 |  | 49                                      |  | 0                                           |  | 0                                |  | 49                                 |  | 0                                             |  | $                   | 410,000 - 446,000
|The Lyon Estates, Las Vegas            |  | 2008                 |  | 129                                     |  | 0                                           |  | 0                                |  | 129                                |  | 0                                             |  | $                   | 635,000 - 700,000
|Nye County                             |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Mountain Falls, Pahrump:               |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Cascata                                |  | 2005                 |  | 147                                     |  | 137                                         |  | 0                                |  | 10                                 |  | 2                                             |  | $                   | 216,000 - 238,000
|Tramonto                               |  | 2005                 |  | 212                                     |  | 153                                         |  | 3                                |  | 59                                 |  | 17                                            |  | $                   | 256,000 - 291,000
|Tramonto Continuation                  |  | 2010                 |  | 91                                      |  | 0                                           |  | 0                                |  | 91                                 |  | 0                                             |  |                     |                  
|Bella Sera                             |  | 2005                 |  | 129                                     |  | 92                                          |  | 1                                |  | 37                                 |  | 23                                            |  | $                   | 312,000 - 352,000
|Cascata Ancora                         |  | 2007                 |  | 118                                     |  | 37                                          |  | 1                                |  | 81                                 |  | 37                                            |  | $                   | 196,000 - 218,000
|Entrata                                |  | 2007                 |  | 99                                      |  | 6                                           |  | 1                                |  | 93                                 |  | 6                                             |  | $                   | 177,000 - 199,000
|Future Projects                        |  | 2008                 |  | 1,925                                   |  | 0                                           |  | 0                                |  | 1,925                              |  | 0                                             |  |                     |                  
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|NEVADA REGION TOTAL                    |  |                      |  | 4,226                                   |  | 1,170                                       |  | 27                               |  | 3,056                              |  | 267                                           |  |                     |                  
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|GRAND TOTALS:                          |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|Wholly-Owned                           |  |                      |  | 17,374                                  |  | 5,626                                       |  | 262                              |  | 10,965                             |  | 1,963                                         |  |                     |                  
|Joint Ventures                         |  |                      |  | 3,544                                   |  | 885                                         |  | 17                               |  | 2,659                              |  | 219                                           |  |                     |                  
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  
|                                       |  |                      |  | 20,918                                  |  | 6,511                                       |  | 279                              |  | 13,624                             |  | 2,182                                         |  |                     |                  
|                                       |  |                      |  |                                         |  |                                             |  |                                  |  |                                    |  |                                               |  |                     |                  

---

|(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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



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|(3) |  | Of the total homes subject to pending sales contracts as of December 31, 2007, 252 represent homes completed or under construction and 27 represent homes not yet under construction.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Lots owned as of December 31, 2007 include lots in backlog at December 31, 2007.
|--- |  | --------------------------------------------------------------------------------

|(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, 2007. The Company consolidated the purchase price of the lots in accordance with Interpretation No. 46,
and considers the lots owned at December 31, 2007.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sales and
Marketing



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



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



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



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



The Companys homes are typically sold before or during construction through sales contracts which are usually accompanied by a small cash deposit. Such sales contracts are usually subject to certain
contingencies such as the buyers ability to qualify for financing. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company and its joint ventures projects was approximately 33% during 2007.
Cancellation rates are subject to a variety of factors beyond the Companys control such as adverse economic conditions and increases in mortgage interest rates. The Companys and its joint ventures inventory of completed and unsold
homes was 146 homes as of December 31, 2007.



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



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##### Table of Contents

such defects (which may be up to ten years in some circumstances), as determined by the law of the state in which the Company builds. The limited warranty
covering construction defects is transferable to subsequent buyers not under direct contract with the Company and requires that homebuyers agree to the definitions and procedures set forth in the warranty, including the submission of unresolved
construction-related disputes to binding arbitration. The Company began providing this limited warranty at the end of 2001.



In connection with the limited warranty covering construction defects, the Company obtained an insurance policy which expires on December 31, 2008, unless
renewed. The Company has been informed by the insurance carrier that this insurance policy will respond to construction defect claims on homes that close during each policy period for the duration of the Companys legal liability and that the
policy will respond to potential losses relating to construction, including soil subsidence. The insurance policy provides a single policy of insurance to the Company and the subcontractors enrolled in its insurance program. As a result, the Company
is no longer required to obtain proof of insurance from these subcontractors nor be named as an additional insured under their individual insurance policies. The Company still requires that subcontractors not enrolled in the insurance program
provide proof of insurance and name the Company as an additional insured under their insurance policy. Furthermore, the Company generally requires that its subcontractors provide the Company with an indemnity prior to receiving payment for their
work.



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



Sale of Lots and Land



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



Customer Financing  William Lyon Financial Services



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



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



Information Systems and Controls



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



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##### Table of Contents

Regulation



The Company and its competitors are subject to various local, state and Federal statutes, ordinances, rules and regulations concerning zoning, building
design, construction and similar matters, including local regulation which imposes restrictive zoning and density requirements in order to limit the number of homes that can ultimately be built within the boundaries of a particular project. The
Company and its competitors may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or slow-growth or no-growth initiatives that could be
implemented in the future in the states in which it operates. Because the Company usually purchases land with entitlements, the Company believes that the moratoriums would adversely affect the Company only if they arose from unforeseen health,
safety and welfare issues such as insufficient water or sewage facilities. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. However, these are normally locked-in
when the Company receives entitlements.



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



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



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



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##### Table of Contents

Competition



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



Corporate Organization and Personnel



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



The Company has organized its
operating divisions into geographic regions  Southern California, Northern California, Arizona and Nevada. Each region has a management team led by a regional president. The Southern California Region is further divided into two operating
divisions, each with a division manager and separate management team.



The Companys executive officers and regional presidents average more than 25 years of experience in the homebuilding and development industries within California and the Southwest. The Company combines decentralized management in
those aspects of its business where detailed knowledge of local market conditions is important (such as governmental processing, construction, land development and sales and marketing), with centralized management in those functions where the
Company believes central control is required (such as approval of land acquisitions, financial, treasury, human resources and legal matters).



As of December 31, 2007, the Company employed 609 full-time and 23 part-time employees, including corporate staff, supervisory personnel of
construction projects, maintenance crews to service completed projects, as well as persons engaged in administrative, finance and accounting, mortgage, engineering, land acquisition, golf course operations, sales and marketing activities.



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



Available Information



The Companys Internet address is http://www.lyonhomes.com. The Company makes available free of charge on or through its Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
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.



15



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##### Table of Contents

Item 1A.Risk Factors



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



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



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



In
2007, the homebuilding industry experienced continued decreased demand for housing, which has resulted in a decrease in new home orders, home closings, and average sales prices for the Company compared to the 2006 period. The Company has reduced
sales prices and offered greater incentives to buyers to compete for sales that have resulted in reduced margins. 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.



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, mortgage interest rates
have increased, and many subprime and other alternate mortgage products are no longer available in the marketplace. 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, and the impact may be material.



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



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##### Table of Contents

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.



In 2007, the Company incurred impairment losses on real estate assets in the amount of $231.1 million. The impairments were
primarily attributable to slower than anticipated home sales and lower than anticipated net revenue due to the decline in the homebuilding industry. The Company was required to write-down the book value of certain real estate assets in accordance
with Statement No. 144, as defined in Note 1 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.



The Company may be unable to maintain compliance with the financial covenants contained in credit facilities.



The Companys credit facilities impose restrictions on operations,
limit the amount of borrowings under the credit facilities and other sources, and require the Company to comply with various financial covenants. The financial covenants include a minimum net worth requirement, a ratio of total liabilities to
tangible net worth and a minimum liquidity requirement.



Certain of these financial ratios are being negatively impacted by current market conditions, specifically reduced homebuilding gross margins, impairment losses on real estate assets and losses realized on the bulk sale of land. As a result
of certain land sales transactions entered into in 2007 as described above, the Company would not have been in compliance with the tangible net worth covenants in certain of its revolving credit facilities. The Company reached agreement with each of
the lenders to modify the terms of the respective revolving credit facilities so that upon consummation of those land sales transactions, the Company would be in compliance with the modified terms. The modifications for two of the facilities were
effective January 1, 2008; however, the Company has received a waiver from each of the respective lenders for non-compliance with the tangible net worth covenant for the quarter ended December 31, 2007. (See Item 7, Managements
Discussion and Analysis of Financial Condition, Financial Condition and Liquidity, Revolving Credit Facilities).



There can be no assurance that the Company will remain in compliance with the financial covenants contained in the credit facilities if slowing market
conditions continue. 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 precluded from incurring additional borrowings under the credit
facilities. In addition, the Companys obligations to repay indebtedness outstanding under the credit facilities 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.



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Any difficulty in obtaining sufficient capital for planned development expenditures could cause project delays and any such delay could result in cost
increases and may adversely affect the Companys sales and future results of operations and cash flows.



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



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



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



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



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



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



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



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



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.



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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 geographical
regions: Southern California, Northern California, Arizona and Nevada. Because the Companys operations are concentrated in these geographic areas, the current 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, desirable properties,
financing, raw materials and skilled labor. The Company competes both with large homebuilding companies, some of which have greater financial, marketing and sales resources than the Company, and with smaller local builders. The consolidation of some
homebuilding companies may create competitors that have greater financial, marketing and sales resources than the Company and thus are able to compete more effectively against the Company. In addition, there may be new entrants in the markets in
which the Company currently conducts business. The Company also competes for sales with individual resales of existing homes and with available rental housing.



The Companys operating results are variable.



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



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



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



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



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



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



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



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



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



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



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



The Companys success is dependent upon the efforts
and abilities of its executive officers and other key employees, many of whom have significant experience in the homebuilding industry and in the Companys regional markets. In particular, the Company is dependent upon the services of General
William Lyon and Douglas F. Bauer, the Chairman of the Board and Chief Executive Officer and President and Chief Operating



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Officer, respectively, as well as the services of the regional presidents and division managers. 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.



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.



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



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



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



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



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



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



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



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



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



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



Certain of the Companys active joint ventures are organized as limited partnerships. The Company is the general partner in each of these and may
serve as the general partner in future joint ventures. As a general partner, the Company may be liable for a joint ventures liabilities and obligations should the joint venture fail or be unable to pay these liabilities or obligations. In
addition, the Company has provided unsecured environmental



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indemnities to some of the lenders who provide loans to the partnerships. The Company has also provided a completion guarantee for a limited partnership
under its credit facility. If the Company were required to satisfy such liabilities, obligations or completion guarantee, the results of operations could be adversely affected.



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



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



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



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



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



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



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



| |  |  | 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.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Moreover, under the indentures governing the senior notes, the Company could
engage in certain important corporate events, including acquisitions, refinancings or other recapitalizations or highly leveraged transactions,



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



Item 1B.Unresolved Staff Comments



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



As described above in Item 1Business, on March 17, 2006, the Companys principal stockholder commenced a tender
offer (the Tender Offer) to purchase all outstanding shares of the Companys common stock not already owned by him. Initially, the price offered in the Tender was $93 per share, but it 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 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 23, 2006, the Company announced that its Board had appointed a special committee of independent directors who were not members of the Companys management or employed by the Company (the Special Committee) to
consider the Tender Offer. The members of the Special Committee were Harold H. Greene, Lawrence M. Higby, and Dr. Arthur Laffer. The Company also announced that the Special Committee had retained Morgan Stanley & Co. as its financial advisor and
Gibson, Dunn & Crutcher LLP as its legal counsel.



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



On April 10, 2006, the parties to the Consolidated Delaware Action executed a
Memorandum of Understanding (MOU), detailing a proposed settlement subject to the Delaware Chancery Courts approval.



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



On April 23, 2006, Delaware Chancery Court conditionally certified a class in the Consolidated Delaware Action. The parties to the Consolidated Delaware Action agreed to a Stipulation of Settlement, and on August 9,
2006, the Delaware Chancery Court certified a class in the Consolidated Delaware Action, approved the settlement, and dismissed the Consolidated Delaware Action with prejudice as to all defendants and the class. On February 16, 2007, the fee
award to Plaintiffs counsel was appealed to the Supreme Court of the State of Delaware. On July 18, 2007, a three-judge panel of the Delaware Supreme Court heard oral argument, and, on July 19, 2007, referred the matter for consideration by
the Court en Banc, which heard oral argument on September 19, 2007. On December 21, 2007, the Delaware Supreme Court remanded the matter to the Chancery Court for further proceedings regarding the fee award to Plaintiffs counsel. Under
the appealed award, the Company has no expected liability for Plaintiffs counsel fees, which are expected to be paid by General Lyon.



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



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



Other Legal Proceedings



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



Item 4.Submission of Matters to a Vote of Security Holders



Not applicable.



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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 7 of Notes to Consolidated Financial Statements.



The Company has not paid any cash dividends on its Common Stock during the last three fiscal years and expects that for the foreseeable future it will
follow a policy of retaining earnings in order to help finance its business. Payment of dividends is within the discretion of the Companys Board of Directors and will depend upon the earnings, capital requirements, general economic conditions
and operating and financial condition of the Company, among other factors. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition and Liquidity and Note 7 of Notes
to Consolidated Financial Statements.



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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, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005 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, 2005, 2004 and 2003 and for the years ended December 31, 2004 and 2003 have been derived from the Companys audited financial statements for such years, which are not included herein. The selected historical
consolidated financial data set forth below are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under the heading Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the historical consolidated financial statements and accompanying notes included elsewhere herein.



|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|--------------------------------------------------------------------- |  | ----------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | -------- | -
|                                                                      |  | As of and for the Year Ended December 31, |           
|                                                                      |  | 2007                                      |            |   | 2006 |   |            | 2005 |  |   | 2004       |   |  | 2003 |           
|                                                                      |  | (dollars in thousands)                    |           
|                                                                      |  | (note 4)                                  |           
|Statement of Operations Data:                                         |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|Operating revenue                                                     |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|Home sales                                                            |  | $                                         | 1,002,549  |   |      | $ | 1,478,694  |      |  | $ | 1,745,067  |   |  | $    | 1,785,589  |   |  | $ | 866,657  |  
|Lots, land and other sales(1)                                         |  |                                           | 102,808    |   |      |   | 13,527     |      |  |   | 111,316    |   |  |      | 36,258     |   |  |   | 21,656   |  
|Management fees                                                       |  |                                           |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   | 9,490    |  
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|                                                                      |  |                                           | 1,105,357  |   |      |   | 1,492,221  |      |  |   | 1,856,383  |   |  |      | 1,821,847  |   |  |   | 897,803  |  
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|Operating costs                                                       |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|Cost of saleshomes                                                   |  |                                           | (873,228   | ) |      |   | (1,160,614 | )    |  |   | (1,307,027 | ) |  |      | (1,327,057 | ) |  |   | (714,385 | )
|Cost of saleslots, land and other(1)                                 |  |                                           | (205,603   | ) |      |   | (16,524    | )    |  |   | (44,774    | ) |  |      | (23,173    | ) |  |   | (13,269  | )
|Impairment loss on real estate assets(2)                              |  |                                           | (231,120   | ) |      |   | (39,895    | )    |  |   | (4,600     | ) |  |      |           |   |  |   |         |  
|Sales and marketing                                                   |  |                                           | (66,703    | ) |      |   | (72,349    | )    |  |   | (59,422    | ) |  |      | (58,792    | ) |  |   | (31,252  | )
|General and administrative                                            |  |                                           | (37,472    | ) |      |   | (61,390    | )    |  |   | (90,045    | ) |  |      | (80,784    | ) |  |   | (50,315  | )
|Other                                                                 |  |                                           | (903       | ) |      |   | (6,502     | )    |  |   | (2,450     | ) |  |      | (2,105     | ) |  |   | (1,834   | )
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|                                                                      |  |                                           | (1,415,029 | ) |      |   | (1,357,274 | )    |  |   | (1,508,318 | ) |  |      | (1,491,911 | ) |  |   | (811,055 | )
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|Equity in income (loss) of unconsolidated joint ventures              |  |                                           | 304        |   |      |   | 3,242      |      |  |   | 4,301      |   |  |      | (699       | ) |  |   | 31,236   |  
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|Minority equity in income of consolidated entities                    |  |                                           | (11,126    | ) |      |   | (16,914    | )    |  |   | (37,571    | ) |  |      | (49,661    | ) |  |   | (429     | )
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|Operating (loss) income                                               |  |                                           | (320,494   | ) |      |   | 121,275    |      |  |   | 314,795    |   |  |      | 279,576    |   |  |   | 117,555  |  
|Financial advisory expenses                                           |  |                                           |           |   |      |   | (3,165     | )    |  |   | (2,191     | ) |  |      |           |   |  |   |         |  
|Other income, net                                                     |  |                                           | 3,744      |   |      |   | 5,599      |      |  |   | 2,176      |   |  |      | 5,572      |   |  |   | 6,397    |  
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|(Loss) income before provision for income taxes                       |  |                                           | (316,750   | ) |      |   | 123,709    |      |  |   | 314,780    |   |  |      | 285,148    |   |  |   | 123,952  |  
|Provision for income taxes                                            |  |                                           | (32,658    | ) |      |   | (48,931    | )    |  |   | (124,149   | ) |  |      | (113,499   | ) |  |   | (51,815  | )
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|Net (loss) income                                                     |  | $                                         | (349,408   | ) |      | $ | 74,778     |      |  | $ | 190,631    |   |  | $    | 171,649    |   |  | $ | 72,137   |  
|                                                                      |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|Balance Sheet Data:                                                   |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|Cash and cash equivalents                                             |  | $                                         | 73,197     |   |      | $ | 38,732     |      |  | $ | 52,369     |   |  | $    | 96,074     |   |  | $ | 24,137   |  
|Real estate inventories                                               |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|Owned(2)                                                              |  |                                           | 1,061,660  |   |      |   | 1,431,753  |      |  |   | 1,303,476  |   |  |      | 1,059,173  |   |  |   | 698,047  |  
|Not owned                                                             |  |                                           | 144,265    |   |      |   | 200,667    |      |  |   | 115,772    |   |  |      |           |   |  |   |         |  
|Investments in and advances to unconsolidated joint ventures          |  |                                           | 4,671      |   |      |   | 3,560      |      |  |   | 397        |   |  |      | 17,911     |   |  |   | 45,613   |  
|Total assets                                                          |  |                                           | 1,375,328  |   |      |   | 1,878,595  |      |  |   | 1,691,002  |   |  |      | 1,274,562  |   |  |   | 839,715  |  
|Total debt                                                            |  |                                           | 814,485    |   |      |   | 851,314    |      |  |   | 672,536    |   |  |      | 595,219    |   |  |   | 326,737  |  
|Minority interest                                                     |  |                                           | 56,009     |   |      |   | 109,859    |      |  |   | 227,178    |   |  |      | 142,096    |   |  |   | 142,496  |  
|Stockholders equity                                                  |  |                                           | 282,763    |   |      |   | 625,395    |      |  |   | 542,894    |   |  |      | 347,109    |   |  |   | 252,040  |  
|                                                                      |  |                                           |            |   |     
|Operating Data (including unconsolidated joint ventures) (unaudited): |  |                                           |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |          |  
|Number of net new home orders                                         |  |                                           | 1,855      |   |      |   | 2,202      |      |  |   | 3,321      |   |  |      | 3,371      |   |  |   | 3,443    |  
|Number of homes closed                                                |  |                                           | 2,182      |   |      |   | 2,887      |      |  |   | 3,196      |   |  |      | 3,471      |   |  |   | 2,804    |  
|Average sales price of homes closed                                   |  | $                                         | 460        |   |      | $ | 512        |      |  | $ | 546        |   |  | $    | 514        |   |  | $ | 422      |  
|Cancellation rates                                                    |  |                                           | 33         | % |      |   | 33         | %    |  |   | 16         | % |  |      | 17         | % |  |   | 18       | %
|Backlog at end of period, number of homes(3)                          |  |                                           | 279        |   |      |   | 606        |      |  |   | 1,291      |   |  |      | 1,166      |   |  |   | 1,266    |  
|Backlog at end of period, aggregate sales value(3)                    |  | $                                         | 107,893    |   |      | $ | 295,505    |      |  | $ | 691,627    |   |  | $    | 623,578    |   |  | $ | 595,180  |  

---

|(1) |  | 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 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 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. 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
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 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, 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 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 its real estate inventories under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (Statement No. 144). Statement No. 144 requires impairment losses to be recorded on assets to be held and used by the Company when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amount of the assets. The estimation process used in determining the undiscounted cash flows of the assets is inherently uncertain because it involves estimates of future revenues
and costs. As described more fully below in the section entitled Real Estate Inventories and Cost of Sales, estimates of revenues and costs are supported by the Companys budgeting process. When an impairment loss is required for
assets to be held and used by the Company, the related assets are adjusted to their estimated fair value.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The results of operations for the year ended December 31, 2007, include a non-cash charge of $231.1 million to record an impairment loss on real estate assets held by the Company at
certain of its homebuilding projects. The impairment was primarily attributable to slower than anticipated home sales and lower than anticipated net revenue due to softening market conditions. As a result, the future undiscounted cash flows
estimated to be generated were determined to be less than the carrying amount of the assets. Accordingly, the related real estate assets were written-down to their estimated fair value. The non-cash charge is reflected in impairment loss on real
estate assets in the accompanying consolidated statements of operations.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|(3) |  | 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, 2007, 252 represent homes completed or under
construction and 27 represent homes not yet under construction. Backlog as of all dates is unaudited.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (Interpretation No. 46),
which addresses the consolidation of variable interest entities (VIEs). Under Interpretation No. 46, arrangements that are not controlled through voting or similar rights are accounted for as VIEs. An enterprise is required to
consolidate a VIE if it is the primary beneficiary of the VIE. Interpretation No. 46 applied immediately to arrangements created after January 31, 2003 and, with respect to arrangements created before February 1, 2003, the interpretation was applied
to the Company as of January 1, 2004. The adoption of Interpretation No. 46 has not affected the Companys consolidated net income. Prior period information has not been restated to conform to the presentation in the current period.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



28



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##### Table of Contents

| | on the probability of future cash flows as outlined in Interpretation No. 46. If the Company is determined to be the primary beneficiary of the VIE, the
assets, liabilities and operations of the VIE will be consolidated with the Companys financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Based on the Companys analysis of arrangements created after January 31, 2003, no VIEs had been created for the period from February 1, 2003 through December 31, 2004
with respect to option agreements as identified under clause (i) of the previous paragraph. At December 31, 2003, certain joint ventures and a land banking arrangement created after January 31, 2003 had been determined to be VIEs under
Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures and land banking arrangement had been consolidated with the Companys financial
statements as of December 31, 2003 and for the period then ended. Effective January 1, 2004, certain additional joint ventures and land banking arrangements created prior to February 1, 2003 had been determined to be VIEs under Interpretation No. 46
in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of all of these joint ventures and land banking arrangements had been consolidated with the Companys financial statements as of
January 1, 2004 and for the year ended December 31, 2004. At December 31, 2007, 2006 and 2005, certain joint ventures, lot option agreements and land banking arrangements have been determined to be VIEs under Interpretation No. 46 in which the
Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of all of these joint ventures, lot option agreements and land banking arrangements have been consolidated with the Companys financial
statements as of December 31, 2007, 2006 and 2005, and for the years ended December 31, 2007, 2006 and 2005.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 70,000 homes. The Company conducts its homebuilding operations through four geographic regions: Southern California, Northern California, Arizona and Nevada. For the year ended December 31, 2007, on a consolidated basis the Company
had revenues from home sales of $1.002 billion and delivered 2,182 homes, which includes $91.8 million of revenue and 219 delivered homes from consolidated joint ventures. The Company believes that it is well positioned for long term growth in all
of its markets. However, due to slow downs of new orders, increases in cancellation rates and increasing price competition, the Company anticipates a decline in deliveries and revenues in 2008 as compared to 2007. The Company presents information
related to its joint ventures as such information represents an important aspect of the Companys business as well as a substantial portion of its operating income.



The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of
residential projects. As described more fully in Critical Accounting PoliciesVariable Interest Entities certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary
beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Companys financial statements as of and for the years ended December 31, 2007 and 2006. Because the Company already
recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 did not affect the Companys consolidated net income. The financial statements of joint
ventures in which the Company is not considered the primary beneficiary are not consolidated with the Companys financial statements. The Companys investments in unconsolidated joint ventures are accounted for using the equity method
because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Income allocations and cash distributions to the Company from the unconsolidated joint ventures are based on
predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners priority returns and returns of partners
capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of Notes to Consolidated Financial Statements for condensed combined financial information for the joint ventures whose financial statements have
been consolidated with the Companys financial statements. See Note 5 of Notes to Consolidated Financial Statements for condensed combined financial information for the unconsolidated joint ventures. Based upon current estimates,
substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.



30



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##### Table of Contents

Results of Operations



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



|                                                      |  |                                               |          |   |                |   |         |                   |  |   |           |  
|----------------------------------------------------- |  | --------------------------------------------- | -------- | - | -------------- | - | ------- | ----------------- |  | - | --------- | -
|                                                      |  | As of and for the year endedDecember 31, 2007 |         
|                                                      |  | Wholly-Owned                                  |          |   | Joint Ventures |   |         | ConsolidatedTotal | 
|Selected Financial Information (dollars in thousands) |  |                                               |          |   |                |   |         |                   |  |   |           |  
|Homes closed                                          |  |                                               | 1,963    |   |                |   | 219     |                   |  |   | 2,182     |  
|                                                      |  |                                               |          |   |                |   |         |                   |  |   |           |  
|Home sales revenue                                    |  | $                                             | 910,728  |   |                | $ | 91,821  |                   |  | $ | 1,002,549 |  
|Cost of sales                                         |  |                                               | (803,749 | ) |                |   | (69,479 | )                 |  |   | (873,228  | )
|                                                      |  |                                               |          |   |                |   |         |                   |  |   |           |  
|Gross margin                                          |  | $                                             | 106,979  |   |                | $ | 22,342  |                   |  | $ | 129,321   |  
|                                                      |  |                                               |          |   |                |   |         |                   |  |   |           |  
|Gross margin percentage                               |  |                                               | 11.7     | % |                |   | 24.3    | %                 |  |   | 12.9      | %
|                                                      |  |                                               |          |   |                |   |         |                   |  |   |           |  
|Number of homes closed                                |  |                                               |          |   |                |   |         |                   |  |   |           |  
|California                                            |  |                                               | 1,276    |   |                |   | 219     |                   |  |   | 1,495     |  
|Arizona                                               |  |                                               | 420      |   |                |   |        |                   |  |   | 420       |  
|Nevada                                                |  |                                               | 267      |   |                |   |        |                   |  |   | 267       |  
|                                                      |  |                                               |          |   |                |   |         |                   |  |   |           |  
|Total                                                 |  |                                               | 1,963    |   |                |   | 219     |                   |  |   | 2,182     |  
|                                                      |  |                                               |          |   |                |   |         |                   |  |   |           |  
|Average sales price                                   |  |                                               |          |   |                |   |         |                   |  |   |           |  
|California                                            |  | $                                             | 554,300  |   |                | $ | 419,300 |                   |  | $ | 534,500   |  
|Arizona                                               |  |                                               | 273,600  |   |                |   |        |                   |  |   | 273,600   |  
|Nevada                                                |  |                                               | 331,700  |   |                |   |        |                   |  |   | 331,700   |  
|                                                      |  |                                               |          |   |                |   |         |                   |  |   |           |  
|Total                                                 |  | $                                             | 463,900  |   |                | $ | 419,300 |                   |  | $ | 459,500   |  
|                                                      |  |                                               |          |   |                |   |         |                   |  |   |           |  
|Number of net new home orders                         |  |                                               |          |   |                |   |         |                   |  |   |           |  
|California                                            |  |                                               | 1,141    |   |                |   | 184     |                   |  |   | 1,325     |  
|Arizona                                               |  |                                               | 296      |   |                |   |        |                   |  |   | 296       |  
|Nevada                                                |  |                                               | 234      |   |                |   |        |                   |  |   | 234       |  
|                                                      |  |                                               |          |   |                |   |         |                   |  |   |           |  
|Total                                                 |  |                                               | 1,671    |   |                |   | 184     |                   |  |   | 1,855     |  
|                                                      |  |                                               |          |   |                |   |         |                   |  |   |           |  
|Average number of sales locations during period       |  |                                               |          |   |                |   |         |                   |  |   |           |  
|California                                            |  |                                               | 36       |   |                |   | 6       |                   |  |   | 42        |  
|Arizona                                               |  |                                               | 5        |   |                |   |        |                   |  |   | 5         |  
|Nevada                                                |  |                                               | 10       |   |                |   |        |                   |  |   | 10        |  
|                                                      |  |                                               |          |   |                |   |         |                   |  |   |           |  
|Total                                                 |  |                                               | 51       |   |                |   | 6       |                   |  |   | 57        |  
|                                                      |  |                                               |          |   |                |   |         |                   |  |   |           |  



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|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|-------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | -------------- | - | ----------------- |  | - | -------
|                                                                                             |  | As of and for the year endedDecember 31, 2007
|                                                                                             |  | Wholly-Owned                                  |         | Joint Ventures |   | ConsolidatedTotal
|Backlog of homes sold but not closed at end of period                                        |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               | 168     |                |   | 17                |  |   | 185    
|Arizona                                                                                      |  |                                               | 67      |                |   |                  |  |   | 67     
|Nevada                                                                                       |  |                                               | 27      |                |   |                  |  |   | 27     
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               | 262     |                |   | 17                |  |   | 279    
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Dollar amount of backlog of homes sold but not closed at end ofperiod (dollars in thousands) |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  | $                                             | 80,310  |                | $ | 5,156             |  | $ | 85,466 
|Arizona                                                                                      |  |                                               | 15,627  |                |   |                  |  |   | 15,627 
|Nevada                                                                                       |  |                                               | 6,800   |                |   |                  |  |   | 6,800  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  | $                                             | 102,737 |                | $ | 5,156             |  | $ | 107,893
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Lots controlled at end of year                                                               |  |                                               |         |                |   |                   |  |   |        
|Owned lots                                                                                   |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               | 3,428   |                |   | 914               |  |   | 4,342  
|Arizona                                                                                      |  |                                               | 4,481   |                |   | 1,745             |  |   | 6,226  
|Nevada                                                                                       |  |                                               | 3,056   |                |   |                  |  |   | 3,056  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               | 10,965  |                |   | 2,659             |  |   | 13,624 
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Optioned lots(1)                                                                             |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               |         |                |   |                   |  |   | 534    
|Arizona                                                                                      |  |                                               |         |                |   |                   |  |   | 303    
|Nevada                                                                                       |  |                                               |         |                |   |                   |  |   |       
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               |         |                |   |                   |  |   | 837    
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total lots controlled                                                                        |  |                                               |         |                |   |                   |  |   |        
|California                                                                                   |  |                                               |         |                |   |                   |  |   | 4,876  
|Arizona                                                                                      |  |                                               |         |                |   |                   |  |   | 6,529  
|Nevada                                                                                       |  |                                               |         |                |   |                   |  |   | 3,056  
|                                                                                             |  |                                               |         |                |   |                   |  |   |        
|Total                                                                                        |  |                                               |         |                |   |                   |  |   | 14,461 
|                                                                                             |  |                                               |         |                |   |                   |  |   |        



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



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



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



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

---

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



During the last half of the fourth quarter of 2005, the Company began to
experience slowing in new orders in many of its markets, increases in cancellation rates and increasing pricing pressures from several of its competitors who initiated aggressive incentive and discounting programs. This softening in the
Companys markets continued in 2006 and 2007 and is generally expected to continue in 2008.



On a combined basis, the number of net new home orders for the year ended December 31, 2007 decreased 15.8% to 1,855 homes from 2,202 homes for the year
ended December 31, 2006. The number of homes closed on a combined basis for the year ended December 31, 2007 decreased 24.4% to 2,182 homes from 2,887 homes for the year ended December 31, 2006. On a combined basis, the backlog of homes sold but not
closed as of December 31, 2007 was 279 homes, down 54.0% from 606 homes as of December 31, 2006.



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, 2007 was $107.9 million, down 63.5% from $295.5 million as of December 31, 2006. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Companys projects was approximately 33% during 2007 and
33% during 2006. The inventory of completed and unsold homes was 146 homes as of December 31, 2007.



The Companys average number of sales locations increased to 57 for the year ended December 31, 2007, compared to 52 for the year ended December 31,
2006. The Companys number of new home orders per average



36



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sales location decreased from 42.3 for the year ended December 31, 2006 to 32.5 for the year ended December 31, 2007.



Comparisons of Years Ended December 31, 2007 and 2006



Consolidated operating revenue for the year ended December 31, 2007 was
$1.105 billion, a decrease of $387.0 million, or 25.9%, from consolidated operating revenue of $1.492 billion for the year ended December 31, 2006. Revenue from sales of wholly-owned homes decreased $416.3 million, or 31.4%, to $910.7 million in the
2007 period from $1.327 billion in the 2006 period. This decrease was comprised of (i) a decrease of $267.3 million due to a decrease in the number of wholly-owned homes closed to 1,963 in 2007 from 2,540 in 2006 and (ii) a decrease of $149.0
million due to a decrease in the average sales price of wholly-owned homes closed to $463,900 in the 2007 period from $522,600 in the 2006 period. Consolidated operating revenue includes revenue from sales of joint ventures due to the adoption of
Interpretation No. 46. Revenue from sales of joint venture homes decreased $59.6 million, or 39.4%, to $91.8 million in the 2007 period from $151.4 million in the 2006 period. This decrease was comprised of (i) a decrease of $5.9 million due to a
decrease in the average sales price of joint venture homes closed to $419,300 in the 2007 period from $436,300 in the 2006 period and (ii) a decrease of $53.7 million due to a decrease in the number of joint venture homes closed to 219 in 2007 from
347 in 2006. Revenue from sales of lots, land and other increased to $102.8 million in 2007 from $13.5 million in 2006 due to the bulk sales of land of $83.6 million in California and of $19.2 million in Arizona during 2007. The decrease in the
average sales price of units closed in wholly-owned and consolidated joint venture projects was primarily due to (i) price depreciation in certain markets and (ii) a change in product mix.



Total operating (loss) income decreased to an operating loss of $320.5
million in the 2007 period from operating income of $121.3 million in the 2006 period. The excess of revenue from sales of homes over the related costs of sales (gross margin) decreased by $189.1 million to $129.0 million in the 2007 period from
$318.1 million in the 2006 period primarily due to (i) a decrease in the number of homes closed to 2,182 in 2007 from 2,887 in the 2006 period, (ii) a decrease in the average sales price of homes closed to $459,500 in the 2007 period from $512,200
in the 2006 period, and (iii) a decrease in the gross margin percentage to 12.9% in the 2007 period from 21.5% in the 2006 period. The excess of revenue from sales of lots, land and other over the related cost of sales (gross margin) decreased to a
loss of $102.8 million in the 2007 period from a loss of $3.0 million in the 2006 period primarily due to (i) the bulk sales of land in California resulting in a loss of $88.0 million, offset by bulk sales of land in Arizona resulting in a gain of
$5.0 million (see Financial Condition and Liquidity) and the write-off of land deposits and preacquisition costs of $19.8 million related to future projects which the Company has concluded are not currently economically viable.



Operating costs for the year ended December 31, 2007 include a
non-cash charge of $231.1 million to record an impairment loss on real estate assets held by the Company at certain of its homebuilding projects. The impairment was primarily attributable to slower than anticipated home sales and lower than
anticipated net revenue due to softening market conditions. As a result, the future undiscounted cash flows estimated to be generated were determined to be less than the carrying amount of the assets. Accordingly, the related real estate assets were
written-down to their estimated fair value. Management determines the estimated fair value by present valuing the estimated future cash flows at effective discount rates which are commensurate with the risk of the project under evaluation, generally
ranging from 14% to 20%. The non-cash charge is reflected in impairment loss on real estate assets in the consolidated statements of operations.



Sales and marketing expense decreased $5.6 million to $66.7 million in the 2007 period from $72.3 million in the 2006 period primarily due to (i) a
decrease of $2.7 million in sales commissions due to the reduction in units closed and reduction in revenue from home sales in 2007 as compared to 2006, and (ii) a decrease of $2.9 million in commissions paid to outside brokers in 2007 as compared
to 2006. General and administrative expenses decreased $23.9 million in the 2007 period to $37.5 million from $61.4 million in the 2006 period primarily as a result of a decrease in bonus expense of $25.4 million to $1.9 million in the 2007 period
from $27.3 million in the 2006 period due to the reduced levels of pre-tax, pre-bonus income in certain operational



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regions and operating losses in certain operational regions. Other operating costs consist of operating losses realized by golf course operations in certain
of the Companys divisions which decreased $5.6 million to $0.9 million in the 2007 period from $6.5 million in the 2006 period. Equity in income of unconsolidated joint ventures decreased to $0.3 million in the 2007 period from
$3.2 million in the 2006 period. Minority equity in income of consolidated entities decreased to $11.1 million in the 2007 period from $16.9 million in the 2006 period, primarily due to a decrease in the number of joint venture homes
closed to 219 in 2007 from 347 in 2006.



The Company incurred
financial advisory expenses of $3.2 million in the 2006 period with no comparable amount in the 2007 period due to a transaction which was completed in 2006. See Tender Offer and Merger.



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 $31,887,000 due to the elimination of any future tax benefit by
the Company from such assets. In addition, the provision reflects a valuation allowance of $771,000. Also, due to the S corporation election, unused recognized built in losses in the amount of $19,414,000 are no longer available to
the Company.



Prior to March 15, 2008, the Company and its
shareholders expect to make a revocation of the S corporation election effective on January 1, 2008. 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
contemplated change in tax status, the Company anticipates that it will record a deferred tax asset in the range of $35.0$41.0 million as of January 1, 2008. The recorded deferred tax asset reflects the tax refund for the anticipated carry
back of the estimated 2008 tax loss to 2006 as a result of the reversal of temporary differences in 2008. The Company expects to receive the tax refund in mid-2009.



As a result of the foregoing factors, net (loss) income was a net loss of $349.4 million in the 2007 period compared to
net income of $74.8 million in the 2006 period.



Comparisons of Years Ended December 31, 2006 and 2005



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



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



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



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



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



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



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



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



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



Financial Condition and Liquidity



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



In 2007, the homebuilding industry experienced continued decreased demand for
housing, which has resulted in a decrease in new home orders, home closings, average sales prices and gross margins for the Company compared to the 2006 period. During 2007, the Company incurred impairment losses on real estate assets in the amount
of $231.1 million. The impairments were primarily attributable to slower than anticipated homes sales and lower than anticipated net revenue due to the decline in the homebuilding industry. The Company was required to write-down the book value of
certain real estate assets in accordance with Statement No. 144, as defined in Note 1 of Notes to Consolidated Financial Statements.



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 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 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. 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



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$120.1 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. The Company may consider entering into future agreements with the various affiliates of the equity partner to build and market homes in 5 of the
10 communities on behalf of the affiliates. For such services, the Company would receive fees and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved. Certain of the equity partner
affiliates have an option to acquire an additional 23 model homes in 6 of the 10 communities.



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.



In 2008, the Company expects to temporarily suspend all development, sales and marketing activities at ten of its actively-selling projects which are in the early stages of development. Management of the Company has
concluded that this strategy is 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.



Upon consummation of the land sales transactions described above, the Company
would not have been in compliance with the tangible net worth covenants in certain of the Revolving Credit Facilities. The Company has reached agreement with each of the lenders to modify the terms of the respective Revolving Credit Facilities so
that upon consummation of the land sales transactions described above, the Company would be in compliance with the modified terms.



Under the modified Revolving Credit Facilities, the aggregate loan commitment is reduced from $560.0 million to $395.0 million (including one
facility of $100.0 million, one of $70.0 million, one of $60.0 million, two of $50.0 million each, one of $35.0 million and one of $30.0 million), with maturities at various dates as follows:



|                                  |       |                                                    |   |                          |  |               
|--------------------------------- | ----- | -------------------------------------------------- | - | ------------------------ |  | --------------
|LoanCommitmentAmount(in millions) |       | BalanceOutstanding atDecember 31,2007(in millions) |   | Initial Maturity Date(1)
|$                                 | 30.0  |                                                    | $ | 10.6                     |  | May 2008      
|                                  | 50.0  |                                                    |   | 9.7                      |  | July 2008     
|                                  | 50.0  |                                                    |   | 25.3                     |  | September 2008
|                                  | 100.0 |                                                    |   | 31.4                     |  | September 2008
|                                  | 60.0  |                                                    |   | 25.2                     |  | December 2008 
|                                  | 35.0  |                                                    |   | 0.1                      |  | April 2009    
|                                  | 70.0  |                                                    |   | 37.3                     |  | June 2009     
|                                  |       |                                                    |   |                          |  |               
|$                                 | 395.0 |                                                    | $ | 139.6                    |  |               
|                                  |       |                                                    |   |                          |  |               

---

|(1) |  | After the initial maturity date, additional advances may be obtained to complete previously approved projects subject to all other requirements for advances under the borrowing
base. Repayments of borrowed amounts are required at the time a sold house closes escrow or at the time a house must be removed from the borrowing base. The final maturity date would generally be twelve to twenty-four months after the initial
maturity date.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 $175.0 million;
| | - |  | ----------------------------------------------------



| |  |  | A ratio of total liabilities to tangible net worth, each as defined, of less than 5.00 to 1; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Minimum liquidity, as defined, of at least $20.0 million.
| | - |  | ---------------------------------------------------------



The modifications for the facilities of $100.0 million and $35.0 million were effective January 1, 2008; however, the Company has received a waiver
from each of the respective lenders for non-compliance with the tangible net worth covenant for the quarter ended December 31, 2007.



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.



As discussed above, 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. Prior to March 15, 2008, the Company and its shareholders expect to make a revocation of the S corporation election effective on January 1, 2008. 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 contemplated change in tax status, the Company anticipates that it will record a deferred tax asset in the range of $35.0 - $41.0 million as
of January 1, 2008. The recorded deferred tax asset reflects the tax refund for the anticipated carry back of the estimated 2008 tax loss to 2006 as a result of the reversal of temporary differences in 2008. The Company expects to receive the tax
refund in mid-2009.



75/8% Senior Notes



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



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notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. Interest on the 75/8% Senior Notes is payable semi-annually on December 15 and June 15 of each year. Based on the current outstanding principal amount
of the 75/8% Senior Notes, the Companys semi-annual interest payments are $5.7 million.



Except as set forth in
the Indenture governing the 75/8% Senior Notes (75/8% Senior Notes Indenture), the 75/8% Senior Notes are not
redeemable prior to December 15, 2008. Thereafter, the 75/8% Senior Notes will be redeemable at the option of California Lyon,
in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.



As of December 31,
2007, the outstanding 75/8% Senior Notes with a face value of $150.0 million had a fair value of approximately $90.0 million,
based on quotes from industry sources.



103/4% Senior Notes



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



Except as set forth in the Indenture governing the 103/4% Senior Notes (103/4% Senior Notes
Indenture), the 103/4% Senior Notes are not redeemable prior to April 1, 2008. Thereafter, the 103/4% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the
principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.



As of December 31, 2007, the outstanding 103/4% Senior Notes with a face value of $247.6 million had a fair value of approximately $157.5 million, based on quotes from industry sources.



71/2% Senior Notes



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



Except as set forth in the Indenture governing the 71/2% Senior Notes (71/2% Senior Notes
Indenture), the 71/2% Senior Notes are not redeemable prior to February 15, 2009. Thereafter, the 71/2% Senior Notes will be



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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.



As of December 31, 2007, the outstanding 71/2% Senior Notes with a face value of $150.0 million had a fair value of $87.0 million, based on quotes from industry sources.



* * * * *



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



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



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



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



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



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



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



At December 31, 2007, the Company had approximately $190.6 million of secured indebtedness, (excluding approximately $76.3 million of secured indebtedness
of consolidated entities) and approximately $169.9 million of additional secured indebtedness available to be borrowed under the Companys credit facilities, as limited by the Companys borrowing base formulas.



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Revolving Credit Facilities



The Company has seven revolving credit facilities which have an aggregate maximum loan commitment of $395.0 million,
after giving effect to the modifications described above, (including one facility of $100.0 million, one of $70.0 million, one of $60.0 million, two of $50.0 million each, one of $35.0 million and one of $30.0 million), with maturities at
various dates as follows:



|                                  |       |                                                    |   |                          |  |               
|--------------------------------- | ----- | -------------------------------------------------- | - | ------------------------ |  | --------------
|LoanCommitmentAmount(in millions) |       | BalanceOutstanding atDecember 31,2007(in millions) |   | Initial Maturity Date(1)
|$                                 | 30.0  |                                                    | $ | 10.6                     |  | May 2008      
|                                  | 50.0  |                                                    |   | 9.7                      |  | July 2008     
|                                  | 50.0  |                                                    |   | 25.3                     |  | September 2008
|                                  | 100.0 |                                                    |   | 31.4                     |  | September 2008
|                                  | 60.0  |                                                    |   | 25.2                     |  | December 2008 
|                                  | 35.0  |                                                    |   | 0.1                      |  | April 2009    
|                                  | 70.0  |                                                    |   | 37.3                     |  | June 2009     
|                                  |       |                                                    |   |                          |  |               
|$                                 | 395.0 |                                                    | $ | 139.6                    |  |               
|                                  |       |                                                    |   |                          |  |               

---

|(1) |  | After the initial maturity date, additional advances may be obtained to complete previously approved projects subject to all other requirements for advances under the borrowing
base. Repayments of borrowed amounts are required at the time a sold house closes escrow or at the time a house must be removed from the borrowing base. The final maturity date would generally be twelve to twenty-four months after the initial
maturity date.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The revolving credit facilities
have similar characteristics. The Company may borrow amounts, subject to applicable borrowing base and concentration limitations, as defined. During the last year of the term of each facility, the commitment amount will decrease ratably until the
commitment under each facility is reduced to zero by the final maturity date, as defined in each respective agreement.



Availability under each credit facility is subject not only to the maximum amount committed under the respective facility, but also to both various
borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases as the asset progresses from land under development to residence subject
to contract of sale. Advances for each type of collateral become due in whole or in part, subject to possible re-borrowing, and/or the collateral becomes excluded from the borrowing base, after a specified period or earlier upon sale. Concentration
limitations further restrict availability under the credit facilities. The effect of these borrowing base and concentration limitations essentially is to mandate minimum levels of the Companys investment in a project, with higher percentages
of investment required at earlier phases of a project, and with greater absolute dollar amounts of investment required as a project progresses. Each revolving credit facility is secured by deeds of trust on the real property and improvements thereon
owned by the Company in the subdivision project(s) approved by the respective lender, as well as pledges of all net sale proceeds, related contracts and other ancillary property. Also, each credit facility includes financial covenants, which may
limit the amount that may be borrowed thereunder. Outstanding advances bear interest at various rates, which approximate the prime rate. As of December 31, 2007, $139.6 million was outstanding under these credit facilities, with a weighted-average
interest rate of 6.95%, and the undrawn availability was $169.9 million as limited by the borrowing base formulas. Interest on the revolving credit facilities is calculated on the average, outstanding daily balance and is paid following the end of
each month. During the year ended December 31, 2007, the Company borrowed $847.1 million and repaid $853.5 million under these facilities. The maximum amount outstanding was $319.7 million and the weighted average borrowings were $217.3 million
during the year ended December 31, 2007. Interest incurred on the revolving credit facilities for the year ended December 31, 2007 was $18.1 million. Delaware Lyon has



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guaranteed on an unsecured basis California Lyons obligations under certain of the revolving credit facilities and has provided an unsecured
environmental indemnity in favor of the lender under the $60.0 million bank line of credit. The Company routinely makes borrowings under its revolving credit facilities in the ordinary course of business within the maximum aggregate loan commitment
amounts to fund its operations, including its land acquisition and home building activities, and repays such borrowings, as required by the credit facilities, with the net proceeds from sales of the real property, including homes, which secure the
applicable credit facility.



Under the modified revolving
credit facilities as described above, 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 $175.0 million;
| | - |  | ----------------------------------------------------



| |  |  | A ratio of total liabilities to tangible net worth, each as defined, of less than 5.00 to 1; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Minimum liquidity, as defined, of at least $20.0 million.
| | - |  | ---------------------------------------------------------



The modifications for the facilities of $100.0 million and $35.0 million were effective January 1, 2008; however, the Company has received a waiver
from each of the respective lenders for non-compliance with the tangible net worth covenant for the quarter ended December 31, 2007.



As of and for the year ending December 31, 2007, the Company is in compliance with the covenants under its revolving credit facilities, after giving
effect to the waivers described above.



Construction
Notes Payable



At December 31, 2007, the Company had
construction notes payable on certain consolidated entities amounting to $115.8 million. The construction notes have various maturity dates through 2017 and bear interest at rates ranging from prime plus 0.25% to prime plus 1.5% at December 31,
2007. Interest is calculated on the average daily balance and is paid following the end of each month or upon maturity of the note.



Seller Financing



At December 31, 2007, the Company had no notes payable outstanding related to land acquisitions for which seller financing was provided.



Revolving Mortgage Warehouse Credit Facilities



The Company, through its mortgage subsidiary and one of its unconsolidated
joint ventures, has entered into two revolving mortgage warehouse credit facilities with banks to fund its mortgage origination operations. The original credit facility, which matures in May 2008, provides for revolving loans of up to $30.0 million
outstanding, $20.0 million of which is committed (lender obligated to lend if stated conditions are satisfied) and $10.0 million is not committed (lender advances are optional even if stated conditions are otherwise satisfied). The
Companys mortgage subsidiary and one of its unconsolidated joint ventures entered into an additional $45.0 million credit facility which matures in November 2008. The Company expects the maturities to be extended by the lender at each maturity
date for an additional year. Mortgage loans are generally held for a short period of time and are typically sold to investors within 7 to 15 days following funding. The facilities are secured by substantially all of the assets of each of the
borrowers, including the mortgage loans held for sale, all rights of each of the borrowers with respect to contractual obligations of third party investors to purchase such mortgage loans, and all proceeds of sale of such mortgage loans. The
facilities, which have LIBOR based pricing, also contain certain financial covenants requiring the borrowers to maintain minimum tangible net worth, leverage, profitability and liquidity. These facilities are non-recourse and are not guaranteed by
the Company. At December 31, 2007 the outstanding balance under these facilities was $11.5 million.



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Land Banking Arrangements



The Company enters into purchase agreements with various land sellers. In
some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Companys revolving credit facilities and other corporate financing sources and limiting the Companys risk, the Company
transfers the Companys right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the
lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 25% of the total purchase price. The Company is under no obligation to
purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities.
These land banking arrangements help the Company manage the financial and market risk associated with land holdings. The use of these land banking arrangements is dependent on, among other things, the availability of capital to the option provider,
general housing market conditions and geographic preferences. As described in Note 2 of Notes to Consolidated Financial Statements, Interpretation No. 46, requires the consolidation of the assets, liabilities and operations of two of the
Companys land banking arrangements including, as of December 31, 2007, real estate inventories of $30.9 million, which are included in real estate inventories not owned in the accompanying balance sheet.



In addition, the Company participates in two land banking arrangements, which
are not VIEs in accordance with Interpretation No. 46, but are consolidated in accordance with SFAS No. 49, Accounting for Product Financing Arrangements, (FAS 49). Under the provisions of FAS 49, the Company has determined
it is economically compelled, based on certain factors, to purchase the land in the land banking arrangements, and therefore, must record the remaining purchase price of the land of $113.4 million, which is included in real estate inventories not
owned and liabilities from inventories not owned in the accompanying balance sheet.



Summary information with respect to the Companys land banking arrangements is as follows as of December 31, 2007 (dollars in thousands):



|                                                                          |  |   |        
|------------------------------------------------------------------------- |  | - | -------
|Total number of land banking projects                                     |  |   | 4      
|                                                                          |  |   |        
|Total number of lots                                                      |  |   | 1,054  
|                                                                          |  |   |        
|Total purchase price                                                      |  | $ | 243,310
|                                                                          |  |   |        
|Balance of lots still under option and not purchased:                     |  |   |        
|Number of lots                                                            |  |   | 783    
|                                                                          |  |   |        
|Purchase price                                                            |  | $ | 144,265
|                                                                          |  |   |        
|Forfeited deposits (cash and letters of credit) if lots are not purchased |  | $ | 42,003 
|                                                                          |  |   |        



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, 2007 and 2006. Because the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 did not affect
the Companys consolidated net income. The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Companys financial statements. The Companys investments
in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the



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Company). Income allocations and cash distributions to the Company from the unconsolidated joint ventures are based on predetermined formulas between the
Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners priority returns and returns of partners capital, approximately 50% of the profits
and cash flows from joint ventures. See Note 2 of Notes to Consolidated Financial Statements for condensed combined financial information for the joint ventures whose financial statements have been consolidated with the Companys
financial statements. See Note 5 of Notes to Consolidated Financial Statements for condensed combined financial information for the unconsolidated joint ventures. Based upon current estimates, substantially all future development and
construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.



As of December 31, 2007, the Companys investment in and advances to unconsolidated joint ventures was $4.7 million and the
venture partners investment in such joint ventures was $5.8 million. As of December 31, 2007, these joint ventures had obtained financing from construction lenders which amounted to $5.0 million of outstanding indebtedness.



Assessment District Bonds



In some jurisdictions in which the Company develops and constructs property,
assessment district bonds are issued by municipalities to finance major infrastructure improvements and fees. Such financing has been an important part of financing master-planned communities due to the long-term nature of the financing, favorable
interest rates when compared to the Companys other sources of funds and the fact that the bonds are sold, administered and collected by the relevant government entity. As a landowner benefited by the improvements, the Company is responsible
for the assessments on its land. When the Companys homes or other properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. See Note 10 of Notes to Consolidated Financial
Statements.



Cash Flows  Comparison
of Years Ended December 31, 2007 and 2006



Net cash
provided by (used in) operating activities increased to a source of $134.5 million in the 2007 period from a use of $90.0 million in the 2006 period. The change was primarily as a result of (i) a decrease in real estate inventories-owned of $174.3
million in the 2007 period from an increase of $147.8 million in the 2006 period, (ii) a decrease in net changes in accrued expenses to a decrease of $44.1 million in the 2007 period from a decrease of $112.7 million in the 2006 period, (iii)
an increase in net changes in receivables to an increase of $81.4 million in the 2007 period from an increase of $24.0 million in the 2006 period, (iv) impairment loss on real estate assets of $231.1 million in the 2007 period compared to
$39.9 million in the 2006 period and (v) net loss of $349.4 million in the 2007 period compared to net income of $74.8 million in the 2006 period.



The net change in real estate inventories is primarily attributable to (i) a decrease in land acquisitions and construction expenditures during the 2007
period compared to the 2006 period due to decreased demand for housing as described above and (ii) the bulk land sale described in Item 1  Business, which reduced inventory approximately $210.7 million. The decrease in net changes
in accrued expenses is primarily attributable to a net decrease in income taxes payable of $5.2 million during the 2007 period from a balance of $4.2 million as of December 31, 2006 compared to $(1.0) million as of December 31, 2007 and a net
decrease in accrued bonus expense of $35.6 million during the 2007 period from a balance of $39.4 million as of December 31, 2006 compared to $7.1 million as of December 31, 2007. Comparatively, during the 2006 period, the net decrease in income
taxes payable was $31.3 million during the 2006 period from a balance of $35.5 million as of December 31, 2005 compared to $4.2 million as of December 31, 2006 and a net decrease in accrued bonus expense of $32.4 million during the 2006 period, from
a balance of $71.8 million as of December 31, 2005 compared to $39.4 million as of December 31, 2006. The changes identified above for the two periods in the year ending December 31, 2007 are recurring in nature and are attributable to the timing of
bonus payments and estimated income tax payments made, offset by normal accruals for the period.



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The increase in net changes in receivables is attributable to a decrease in escrow proceeds receivable 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 compared to a net increase of $37.0 million during the 2006 period, from a balance of $84.3 million
as of December 31, 2005 to a balance of $47.3 million as of December 31, 2006. The balance in escrow proceeds receivable as of December 31, 2007 and 2006 is temporary in nature and primarily due to the 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. The remaining increase in the change in receivables is primarily attributable to a net decrease in first trust deed mortgage notes receivables of $47.7 million during the 2007 period, from
a balance of $59.7 million as of December 31, 2006 to a balance of $12.0 million as of December 31, 2007 compared to a net increase of $11.9 million during the 2006 period to $59.7 million as of December 31, 2006 from $47.8 million as of December
31, 2005. This decrease was also attributable to the decrease in the number of homes closed in the last week of the year in 2007 and 2006 as described above. Substantially all of the balance of first trust deed mortgage notes receivables was
collected in the first few days of January 2008 and 2007 when the loans were sold to third party investors.



The successful issuance of the 103/4% Senior Notes in 2003 and the 71/2% Senior Notes
and 75/8% Senior Notes in 2004, offset by the repayment of the 121/2% Senior Notes, provided the Company with increased financial resources. The risks inherent in purchasing and developing land increase as consumer demand for housing
decreases. Thus, the Company may have bought and developed land on which it cannot profitably build and sell homes. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market
conditions. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, the Company may have to sell homes at
significantly lower margins or at a loss.

Net cash (used in) provided by investing activities increased to a
use of $8.3 million in the 2007 period from a use of $2.8 million in the 2006 period. The change was primarily as a result of an increase in investments in and advances to unconsolidated joint ventures of $7.1 million in the 2007 period compared to
$2.0 million in the 2006 period.

Net cash (used in) provided by financing activities decreased to a use of $91.8 million in the 2007 period
from a source of $79.1 million, primarily as a result of minority interest distributions of $26.1 million in the 2007 period compared to minority interest distributions of $79.2 million in the 2006 period, offset by a net payments on notes payable
of $65.7 million in the 2007 period compared to net borrowings on notes payable of $157.9 million in the 2006 period.



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



Net cash used in operating activities increased to $90.0 million in the
2006 period from $44.5 million in the 2005 period. The change was primarily as a result of (i) an increase in net changes in accrued expenses to a decrease of $112.7 million in the 2006 period from a decrease of $90.9 million in the 2005 period,
(ii) decreased expenditures in real estate inventories owned to $147.8 million in the 2006 period from $232.2 million in the 2005 period, (iii) an increase in net changes in receivables to an increase of $24.0 million in the 2006 period from a
decrease of $104.2 million in the 2005 period, (iv) a decrease in provision for income taxes to $48.9 million in the 2006 period from $124.1 million in the 2005 period, (v) impairment loss on real estate assets of $39.9 million in the 2006 period
compared to $4.6 million in the 2005 period, and (vi) a decrease in net income to $74.8 million in the 2006 period from $190.6 million in the 2005 period.



The decrease in real estate inventories is primarily attributable to a decrease in land acquisitions during the 2006 period. The softening in the
Companys markets which began in 2005 and continued in 2006 has decreased the amount of land acquisitions by the Company during the 2006 period. The increase in net changes in accrued



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expenses is primarily attributable to a net decrease in income taxes payable of $31.3 million during the 2006 period from a balance of $35.5 million as of
December 31, 2005 compared to $4.2 million as of December 31, 2006 and a net decrease in accrued bonus expense of $32.4 million during the 2006 period, from a balance of $71.8 million as of December 31, 2005 compared to $39.4 million as of December
31, 2006. Comparatively, during the 2005 period, the net increase in income taxes payable was $4.5 million in the 2005 period, from a balance of $31.0 as of December 31, 2004 compared to a balance of $35.5 million as of December 31, 2005 and a net
increase in accrued bonus expense of $12.2 million from a balance of $59.6 million as of December 31, 2004 compared to a balance of $71.8 million as of December 31, 2005. The changes identified above for the two periods in the year ending December
31, 2006 are recurring in nature and are attributable to the timing of bonus payments and estimated income tax payments made, offset by normal accruals for the period.



The increase in net changes in receivables is attributable to a decrease in escrow
proceeds receivable of $37.0 million during the 2006 period, from a balance of $84.3 million as of December 31, 2005 to a balance of $47.3 million as of December 31, 2006 compared to a net increase of $69.3 million during the 2005 period, from a
balance of $15.0 million as of December 31, 2004 to a balance of $84.3 million as of December 31, 2005. The large balance as of December 31, 2006 and 2005 was temporary in nature and primarily due to a significant number of homes closed in the last
five days of the year of 192 in 2006 and 254 in 2005 where the homes had closed escrow but the Company had not yet received the funds from the escrow and title companies. The entire balance of escrow proceeds receivable at December 31, 2006 and 2005
was collected within the first few days of the following period. The remaining increase in the change in receivables is primarily attributable to a net increase in first trust deed mortgage notes receivables of $11.9 million during the 2006 period
to $59.7 million as of December 31, 2006 from $47.8 million as of December 31, 2005 compared to a net increase of $33.2 million during the 2005 period to $47.8 million as of December 31, 2005 from $14.7 million as of December 31, 2004. This increase
was also attributable to the significant number of homes closed in the last week of the year in 2006 and 2005 as described above. Substantially all of the balance of first trust deed mortgage notes receivables was collected in the first few days of
January 2007 and 2006 when the loans were sold to third party investors.



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



Net cash provided by (used in) financing activities decreased to a source of $79.1 million in the 2006 period from a
use of $15.7 million in the 2005 period, primarily as a result of minority interest distributions of $79.2 million in the 2006 period compared to minority interest distributions of $76.7 million in the 2005 period, offset by an increase in net
borrowings on notes payable to $157.9 million in the 2006 period from $60.7 million in the 2005 period.



Off-Balance Sheet Arrangements



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



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Contractual Obligations



The Companys contractual obligations consisted of the following at December 31, 2007 (in thousands):



|                                      |  |                        |           |                 |   |           |  |           |         |                  |   |         |  |   |        
|------------------------------------- |  | ---------------------- | --------- | --------------- | - | --------- |  | --------- | ------- | ---------------- | - | ------- |  | - | -------
|                                      |  | Payments due by period
|Contractual obligations (note 1)      |  | Total                  |           | Less than1 year |   | 1-3 years |  | 3-5 years |         | More than5 years
|Revolving credit facilities           |  | $                      | 148,652   |                 | $ | 110,012   |  | $         | 38,640  |                  | $ |        |  | $ |       
|Construction notes payable            |  |                        | 134,144   |                 |   | 45,543    |  |           | 47,765  |                  |   | 38,371  |  |   | 2,465  
|Mortgage Warehouse Credit Facility    |  |                        | 11,710    |                 |   | 11,710    |  |           |        |                  |   |        |  |   |       
|75/8% Senior Notes                    |  |                        | 206,731   |                 |   | 11,438    |  |           | 22,875  |                  |   | 172,418 |  |   |       
|103/4% Senior Notes                   |  |                        | 391,094   |                 |   | 26,875    |  |           | 53,750  |                  |   | 53,750  |  |   | 256,719
|71/2% Senior Notes                    |  |                        | 218,906   |                 |   | 11,250    |  |           | 22,500  |                  |   | 22,500  |  |   | 162,656
|Operating leases                      |  |                        | 12,346    |                 |   | 3,499     |  |           | 5,700   |                  |   | 2,980   |  |   | 167    
|Purchase obligations:                 |  |                        |           |                 |   |           |  |           |         |                  |   |         |  |   |        
|Land purchases and option commitments |  |                        | 113,922   |                 |   | 17,846    |  |           | 71,636  |                  |   | 24,440  |  |   |       
|Project commitments                   |  |                        | 374,272   |                 |   | 287,884   |  |           | 57,592  |                  |   | 28,796  |  |   |       
|                                      |  |                        |           |                 |   |           |  |           |         |                  |   |         |  |   |        
|Total                                 |  | $                      | 1,611,777 |                 | $ | 526,057   |  | $         | 320,458 |                  | $ | 343,255 |  | $ | 422,007
|                                      |  |                        |           |                 |   |           |  |           |         |                  |   |         |  |   |        

---

|(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, 2007 and is calculated to the stated maturity date.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Inflation



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



Critical Accounting Policies



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



Real Estate Inventories and Cost of Sales



Real estate inventories are carried at cost net of
impairment losses, if any. Real estate inventories consist primarily of deposits, raw land, lots under development, homes under construction and completed homes of real estate projects. All direct and indirect land costs, offsite and onsite
improvements and applicable interest and other carrying charges are capitalized to real estate projects during periods when the project is under development. Land, offsite costs and all other common costs are allocated to land parcels benefited
based upon relative fair



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



Impairment of Real Estate Inventories



The Company accounts for its real estate inventories under Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement No. 144). Statement No. 144 requires impairment losses to be recorded on
real estate inventories when indicators of impairment are present and the undiscounted cash flows estimated to be generated by real estate inventories are less than the carrying amount of such assets. The estimation process used in determining the
undiscounted cash flows of the assets is inherently uncertain because it involves estimates of future revenues and costs. As described more fully above in the section entitled Real Estate Inventories and Cost of Sales, estimates of
revenues and costs are supported by the Companys budgeting process. When an impairment loss is required for assets to be held and used by the Company, the related assets are adjusted to their estimated fair value. Management determines the
estimated fair value by present valuing the estimated future cash flows at effective discount rates which are commensurate with the risk of the project under evaluation, generally ranging from 14% to 20%.



The results of operations for the years ended December 31, 2007 and
2006, include non-cash charges of $231.1 million and $39.9 million, respectively, 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 due to softening market conditions. As a result, the future undiscounted cash flows estimated to be generated were determined to be less than the carrying amount of the
assets. Accordingly, the related real estate assets were written-down to their estimated fair value. The non-cash charges are reflected in impairment loss on real estate assets in the accompanying consolidated statements of operations.



The results of operations for the year ended December 31, 2005 included a
non-cash charge of $4.6 million to record an impairment loss related to a golf course in the Companys San Diego Division. The impairment loss was primarily attributable to lower than expected cash flows and continued net operating losses since
the golf course opened in 2002. As a result, the future undiscounted cash flows estimated to be generated were



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determined to be less than the assets carrying amount. Accordingly, the golf course asset was written-down to its estimated fair value. The non-cash charge
is reflected in impairment loss on real estate assets in the accompanying consolidated statements of operations.



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



Sales and Profit Recognition



A sale is recorded and profit recognized when a sale is consummated, the buyers initial and continuing investments are adequate, any
receivables are not subject to future subordination, and the usual risks and rewards of ownership have been transferred to the buyer in accordance with the provisions of Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 66, Accounting for Sales of Real Estate.When it is determined that the earnings process is not complete, profit is deferred for recognition in future periods. The profit recorded by the Company is based on the calculation of
cost of sales which is dependent on the Companys allocation of costs which is described in more detail above in the section entitled Real Estate Inventories and Cost of Sales.



Variable Interest Entities



Certain land purchase contracts and lot option contracts are accounted for
in accordance with Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (Interpretation No. 46). In addition, all joint ventures are reviewed and analyzed under
Interpretation No. 46 to determine whether or not these arrangements are accounted for under the principles of Interpretation No. 46 or other accounting rules. Under Interpretation No. 46, a variable interest entity (VIE) is created when
(i) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) the entitys equity holders as a group either (a) lack
direct or indirect ability to make decisions about the entity through voting or similar rights, (b) are not obligated to absorb expected losses of the entity if they occur or (c) do not have the right to receive expected residual returns of the
entity if they occur. If an entity is deemed to be a VIE pursuant to Interpretation No. 46, the enterprise that absorbs a majority of the expected losses, receives a majority of the entitys expected residual returns, or both, is considered the
primary beneficiary and must consolidate the VIE. Expected losses and residual returns for VIEs are calculated based on the probability of estimated future cash flows as defined in Interpretation No. 46. Based on the provisions of Interpretation No.
46, whenever the Company enters into a land purchase contract or an option contract for land or lots with an entity and makes a non-refundable deposit, or enters into a joint venture, a VIE may be created and the arrangement is evaluated under
Interpretation No. 46. In order to (i) evaluate whether the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support from other parties, (ii) calculate expected losses, expected
residual returns and the probability of estimated future cash flows, and (iii) determine whether the Company is the primary beneficiary, the Company must exercise significant judgment regarding the interpretation of the terms of the underlying
agreements in light of Interpretation No. 46 and make assumptions regarding future events that may or may not occur. The terms of these agreements are subject to various interpretations and the assumptions used by the Company are inherently
uncertain. The use by the Company of different interpretations and/or assumptions could affect the Companys evaluation as to whether or not land purchase contracts, lot option contracts or joint ventures are VIEs and whether or not the Company
is the primary beneficiary of the VIE.



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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.



Tender Offer and Merger



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



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



On March 23, 2006, the Company announced that its board of directors had
formed a special committee of independent directors to consider the offer by General Lyon with the assistance of outside financial and legal advisors which the special committee retained. On April 10, 2006, General Lyon announced that he would amend
his tender offer for all the outstanding shares of William Lyon Homes by increasing the offer price to $100 per share. The special committee determined that it would recommend that stockholders tender their shares in connection with the amended
offer. General Lyon also extended his offer until Friday, April 21, 2006. General Lyon had also reached an agreement, subject to final court approval, to settle certain class action lawsuits that had been filed in Delaware on behalf of William Lyon
Homes stockholders. As described below in Note 7  Commitments and Contingencies, the Delaware Chancery Court approved the settlement on August 9, 2006. Another class action lawsuit filed in California has been stayed by the California
court.



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



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



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



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



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



Recently Issued Accounting Standards



In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value measurement and requires prospective application for fiscal years beginning after
November 15, 2007. The company does not anticipate the adoption of FAS 157 will have a material impact on the Companys consolidated financial position or results of operations.



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(FAS 159). FAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. SFAS 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007.
On January 1, 2008 the Company did not elect to apply the fair value option to any specific financial assets or liabilities.



In December 2007, the FASB issued SFAS No. 141 (Revised), Business Combinations (FAS 141R). FAS 141R establishes principles and
requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed (including intangibles), and any non-controlling interest in the acquired entity. FAS 141R
also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the
business combination. FAS 141R is effective for fiscal years beginning after December 15, 2008. The adoption of FAS 141R on January 1, 2009 will require the company to expense all transaction costs for business combinations which may be significant
to the Company based on historical acquisition activity.



In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (FAS 160). FAS 160 establishes accounting and reporting standards for a parent companys
non-controlling interest in a subsidiary and for the de-consolidation of a subsidiary. FAS 160 is effective for fiscal years beginning after December 15, 2008. The adoption of FAS No. 160 on January 1, 2009 will require the Company to record gains
or losses upon changes in control which could have a significant impact on the consolidated financial statements.



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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, 2007 of $262.2 million where the interest rate is variable based upon certain bank reference or prime rates. If interest rates were to increase by 10%, the estimated impact on the Companys consolidated financial statements
would be no reduction to income before provision for income taxes based on amounts outstanding and rates in effect at December 31, 2007, but would increase capitalized interest by approximately $2.2 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 81 and are incorporated herein by reference.



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



None.



Item 9A.Controls and Procedures



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



Changes in Internal Control Over Financial Reporting.    There have been no significant changes in the Companys internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the Companys fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.



Managements Annual Report
on Internal Control Over Financial Reporting.    The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f), and for its assessment of the effectiveness of internal control over financial reporting. Under the supervision and with the participation of the Companys management, including its principal executive officer and principal financial
officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control  Integrated Frameworkissued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Based on the Companys evaluation under the framework in Internal Control  Integrated Framework,the Companys management concluded that its internal
control over financial reporting was effective as of December 31, 2007.



This annual report does not include an audit report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was 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.



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PART III



Item 10.Directors, Executive Officers and Corporate Governance



Information Regarding the Directors of William Lyon Homes



Effective in December 2007, the Company elected to reduce the size of its Board of Directors. Accordingly, Dr. Arthur B. Laffer resigned from the Board of
Directors by letter received by the Company on December 17, 2007, and Messrs. Wade H. Cable, Lawrence M. Higby and Richard E. Frankel resigned from the Board of Directors effective December 31, 2007. The Company has no current plans to replace
any of the aforementioned directors.



The following table lists
the Directors of the Company and provides their respective ages and current positions with the Company as of March 1, 2008. 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          |  | 84  |  | Chairman of the Board of Directors and Chief Executive Officer     
|Douglas F. Bauer              |  | 46  |  | Director, President and Chief Operating Officer                    
|William H. Lyon               |  | 34  |  | Director, Executive Vice President and Chief Administrative Officer
|Douglas K. Ammerman (a, b, c) |  | 56  |  | Director                                                           
|Harold H. Greene (a, b, c)    |  | 68  |  | Director                                                           
|Gary H. Hunt (a, b, c)        |  | 59  |  | Director                                                           
|Alex Meruelo (a, b, c)        |  | 45  |  | Director                                                           

---

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



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



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



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



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



WILLIAM H. LYON, Executive Vice President and Chief Administrative Officer, son of Chairman William Lyon, worked full time with the former William Lyon Homes from November 1997 through November 1999 as



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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. 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 and a member of the American Institute of Certified Public Accountants. Mr. Ammerman is a member of the Board of Directors of Fidelity National Financial (a company listed on the New York Stock Exchange), where he also serves as Chairman
of the Audit Committee. He also is a member of the Board of Directors of 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.



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



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



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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.



Information Regarding Executive Officers of William Lyon Homes



The executive officers of the Company are chosen annually by the Board of Directors and each holds office until his or her successor is chosen and
qualified or until his or her death, resignation or removal. There are no family relationships between any director or executive officer and any other director or executive officer of the Company, except for William Lyon and William H. Lyon, who are
father and son. The following table lists the Companys executive officers and provides their respective ages as of March 1, 2008 and their current positions.



|                     |  |     |  |                                                                    
|-------------------- |  | --- |  | -------------------------------------------------------------------
|Name                 |  | Age |  | Position                                                           
|General William Lyon |  | 84  |  | Chairman of the Board of Directors and Chief Executive Officer     
|Douglas F. Bauer     |  | 46  |  | President and Chief Operating Officer                              
|William H. Lyon      |  | 34  |  | Executive Vice President and Chief Administrative Officer          
|Mary J. Connelly     |  | 56  |  | Senior Vice President and Nevada Region President                  
|W. Thomas Hickcox    |  | 55  |  | Senior Vice President and Arizona Region President                 
|Thomas J. Mitchell   |  | 47  |  | Senior Vice President and Southern California Region President     
|Michael D. Grubbs    |  | 49  |  | Senior Vice President and Chief Financial Officer                  
|W. Douglass Harris   |  | 64  |  | Senior Vice President, Corporate Controller and Corporate Secretary
|Richard S. Robinson  |  | 61  |  | Senior Vice President  Finance                                    
|Cynthia E. Hardgrave |  | 59  |  | Vice President  Tax and Internal Audit                            



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



MARY J. CONNELLY, Senior Vice President and Nevada Region President, joined The Presley Companies in May 1995, after eight years association with Gateway Development, six of which
were served as Managing Partner in Nevada. Ms. Connelly was Vice President  Finance for the Companys San Diego Division from 1985 to 1987, and she has more, than 25 years experience in the real estate development and homebuilding
industry.



W. THOMAS HICKCOX,
Senior Vice President and Arizona Region President, joined the Company in May 2000. Mr. Hickcox was previously President of Continental Homes in Phoenix, Arizona, with 16 years of service at that company. Mr. Hickcox has more than 25 years
experience in the real estate development and homebuilding industry.



THOMAS J. MITCHELL, Senior Vice President and Southern California Region President, joined the Company in 1999 when it acquired substantially all of the assets of the former William Lyon Homes, where



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Mr. Mitchell had served as a Project Manager, Vice President, and Division President since his hire in December 1988. Mr. Mitchell has more than 20
years experience in the real estate development and homebuilding industry.



MICHAEL D. GRUBBS, Senior Vice President and Chief Financial Officer, joined the Company in 1999 when it acquired substantially all of the assets of the former William Lyon Homes, where
Mr. Grubbs had served as Vice President and Corporate Controller after his hire in December 1992. Mr. Grubbs has more than 20 years experience in residential real estate and homebuilding finance.



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



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



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



Section 16(a) Beneficial Ownership Reporting Compliance



During 2007, 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, 2007 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 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.



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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, such as Kenneth R. Abel, Ph.D, as it deems appropriate. The Compensation Committee and its consultants also consider publicly-available information on the executive
compensation of other major homebuilders. Members of the Companys executive team are involved in the compensation process by assembling data to present to the Compensation Committee and by working with the outside independent compensation
consultants to give them the information necessary to enable them to complete their reports.



Internal Revenue Code Section 162(m) generally disallows a tax deduction to reporting companies for compensation over $1,000,000 paid to each of the Companys chief executive officer and the four other most
highly compensated officers, except for compensation that is performance based. 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 region president, to his region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 region 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 region 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.



Deferred Compensation



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.



As a result of retirements, involuntary and voluntary terminations of
employment and elections by participants to withdraw funds as permitted in the plans, management of the Company concluded that the cost of maintaining the deferred compensation plans for a limited number of participants and a limited amount of
invested funds was not justified. Accordingly, the deferred compensation plans were terminated by action of the Board of Directors as described above.



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Summary Compensation Table



The following table summarizes the annual and long-term compensation during 2007 and 2006 of the Companys Principal
Executive Officer and Principal Financial Officer and the three additional most highly compensated executive officers whose annual salaries and bonuses exceeded $100,000 in total during the fiscal year ended December 31, 2007 (collectively, the
Named Executive Officers).



|                                                                                                     |  |           |  |              |                     |          |   |                |  |                 |     |                                               |   |                                                                       |  |                             |                   |           |   |     |  |   |             |  |   |                    
|---------------------------------------------------------------------------------------------------- |  | --------- |  | ------------ | ------------------- | -------- | - | -------------- |  | --------------- | --- | --------------------------------------------- | - | --------------------------------------------------------------------- |  | --------------------------- | ----------------- | --------- | - | --- |  | - | ----------- |  | - | -------------------
|Name and Principal Position                                                                          |  | Year      |  | Salary($)(1) |                     | Bonus($) |   | StockAwards($) |  | OptionAwards($) |     | Non-EquityIncentive PlanCompensation($)(1)(2) |   | Change inPension ValueandNonqualifiedDeferredCompensationEarnings ($) |  | All OtherCompensation($)(3) |                   | Total ($)
|General William Lyon Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |  | 2007 2006 |  | $            | 1,000,000 1,000,000 |          | $ |              |  | $               |   |                                               | $ |                                                                     |  | $                           |  4,529,730       |           | $ |   |  | $ |           |  | $ | 1,000,000 5,529,730
|                                                                                                     |  |           |  |              |                     |          |   |                | 
|Michael D. Grubbs Senior Vice President and Chief Financial Officer (Principal Financial Officer)    |  | 2007 2006 |  |              | 225,000 225,000     |          |   |              |  |                 |   |                                               |   |                                                                     |  |                             |  754,955         |           |   |   |  |   | 6,600 6,600 |  |   | 231,600 986,555    
|                                                                                                     |  |           |  |              |                     |          |   |                | 
|Douglas F. Bauer Director, President and Chief Operating Officer                                     |  | 2007 2006 |  |              | 500,000 275,000     |          |   |              |  |                 |   |                                               |   |                                                                     |  |                             |  1,542,893       |           |   |   |  |   | 6,600 6,600 |  |   | 506,600 1,824,493  
|                                                                                                     |  |           |  |              |                     |          |   |                | 
|W. Thomas Hickcox Senior Vice President and Arizona Region President                                 |  | 2007 2006 |  |              | 200,000 200,000     |          |   |              |  |                 |   |                                               |   |                                                                     |  |                             | 610,950 1,613,400 |           |   |   |  |   | 6,600 6,600 |  |   | 817,550 1,820,000  
|                                                                                                     |  |           |  |              |                     |          |   |                | 
|William H. Lyon Director, Executive Vice President and Chief Administrative Officer                  |  | 2007 2006 |  |              | 350,000 115,000     |          |   |              |  |                 |   |                                               |   |                                                                     |  |                             |  177,475         |           |   |   |  |   | 6,600 6,600 |  |   | 356,600 299,045    

---

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



|(2) |  | The 2007 Senior Executive Bonus Plan (the Plan) provides that (i) the Chief Executive Officer (CEO) and the Chief Operating Officer (COO) are each
eligible to receive a bonus of 3% of the Companys consolidated pre-tax, pre-bonus income; (ii) the Executive Vice President (EVP) is eligible to receive a bonus of 3⁄4 of 1% of the Companys consolidated pre-tax, pre-bonus
income; and (iii) the Chief Financial Officer (CFO) is eligible to receive a bonus of 1⁄2 of 1% of the Companys consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Region President is eligible to receive a
bonus of 3% of the regions pre-tax, pre-bonus income, determined after allocation to the region of its allocable portion of corporate general and administrative expenses. Awards under the Plan will be paid over two years, with 75% paid
following the determination of the bonus awards, and 25% paid one year later. The amounts payable one year later are conditioned upon continued employment to the date of payment, except in the case of retirement, death or disability. All awards
under the Plan will be prorated downward if the sum of all calculated awards under the Plan and the Companys 2007 bonus plans for other officers and employees of the Company and its subsidiaries would exceed 20% of the Companys
consolidated pre-tax, pre-bonus income.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



The Board of Directors approved the
Companys 2007 Senior Executive Bonus Plan (the Plan) on February 27, 2007. The Plan provides that the (i) Chief Executive Officer (CEO) and the Chief Operating



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Officer (COO) are each eligible to receive a bonus of 3% of the Companys pre-tax, pre-bonus income; (ii) the Executive Vice President
(EVP) is eligible to receive a bonus of 3⁄4 of 1% of the Companys consolidated pre-tax, pre-bonus income; and (iii) the Chief Financial Officer (CFO) is eligible to receive a bonus of 1⁄2 of 1% of the
Companys consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Region President is eligible to receive a bonus of 3% of the divisions pre-tax, pre-bonus income, determined after allocation to the division of its
allocable portion of corporate general and administrative expenses. All other participants under the Plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus
income. In addition, the Companys board of directors has approved a cash bonus plan applicable in 2007 for all of its full-time, salaried employees who are not included in the Companys 2007 Senior Executive Bonus Plan. All participants
under this cash bonus plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income.



On February 26, 2008, the Compensation Committee of the Board of Directors approved the 2008 Cash Bonus Plan (including the
2008 Senior Executive Bonus Plan) with terms substantially similar to those of the 2007 Plan.



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



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



Grants of Plan-Based Awards



The following table sets forth information concerning each grant of an award to each of the Named Executive Officers in the year ended December 31, 2007:



|                     |  |                   |  |                                                              |   |                                                           |   |                                                         |  |                                                               |   |                                             |   |                                                |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |  
|-------------------- |  | ----------------- |  | ------------------------------------------------------------ | - | --------------------------------------------------------- | - | ------------------------------------------------------- |  | ------------------------------------------------------------- | - | ------------------------------------------- | - | ---------------------------------------------- |  | - | - |  | - | - |  | - | - |  | - | - |  | - | - |  | - | -
|                     |  |                   |  | Estimated Future PayoutsUnder Non-Equity IncentivePlanAwards |   | Estimated Future PayoutsUnder Equity Incentive PlanAwards |   | All OtherStockAwards:Numberof Sharesof Stockor Units(#) |  | All OtherOptionAwards:Number ofSecuritiesUnderlyingOptions(#) |   | Exerciseor BasePrice ofOptionAwards($ / Sh) |   | Grant DateFair Valueof StockandOptionAwards($)
|Name                 |  | Grant Date        |  | Threshold($)(3)                                              |   | Target($)(1)(2)                                           |   | Maximum($)(3)                                           |  | Threshold(#)                                                  |   | Target(#)                                   |   | Maximum(#)                                     |  |   |   | 
|General William Lyon |  | February 26, 2008 |  | $                                                            |  |                                                           | $ |                                                        |  | $                                                             |  |                                             | $ |                                               |  | $ |  |  | $ |  |  | $ |  |  | $ |  |  | $ |  |  | $ | 
|Michael D. Grubbs    |  | February 26, 2008 |  |                                                              |  |                                                           |   |                                                        |  |                                                               |  |                                             |   |                                               |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   | 
|Douglas F. Bauer     |  | February 26, 2008 |  |                                                              |  |                                                           |   |                                                        |  |                                                               |  |                                             |   |                                               |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   | 
|W. Thomas Hickcox    |  | February 26, 2008 |  |                                                              |  |                                                           |   | 610,950                                                 |  |                                                               |  |                                             |   |                                               |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   | 
|William H. Lyon      |  | February 26, 2008 |  |                                                              |  |                                                           |   |                                                        |  |                                                               |  |                                             |   |                                               |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   | 

---

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



|(2) |  | The 2007 Senior Executive Bonus Plan (the Plan) provides that (i) the Chief Executive Officer (CEO) and the Chief Operating Officer
(COO) are each eligible to receive a bonus of 3% of the Companys consolidated pre-tax, pre-bonus income; (ii) the Executive Vice President (EVP) is eligible to receive a bonus of 3⁄4 of 1% of the Companys
consolidated pre-tax, pre-bonus income; and (iii) the Chief Financial Officer (CFO) is eligible to receive a bonus of 1⁄2 of 1% of the Companys consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Region
President is eligible to receive a bonus of 3% of the regions pre-tax, pre-bonus income, determined after allocation to the region of its allocable portion of corporate general and administrative expenses. Awards under the Plan will be paid
over two years, with
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 75% paid following the determination of the bonus awards, and 25% paid one year later. The amounts payable one year later are conditioned upon continued
employment to the date of payment, except in the case of retirement, death or disability. All awards under the Plan will be prorated downward if the sum of all calculated awards under the Plan and the Companys 2007 bonus plans for other
officers and employees of the Company and its subsidiaries would exceed 20% of the Companys consolidated pre-tax, pre-bonus income. The Compensation Committee retains the discretion to increase the bonus of a named executive officer in the
event of an extraordinary performance, or decrease it in the case of a substandard performance, and may make this determination on the basis of objective or subjective criteria, including, but not limited to, the pay levels of executives at other
major homebuilders.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



No options were granted during 2007 to any director or Named Executive Officer. No options are outstanding as of December 31, 2007.



Option Exercises and Stock Vested Table



No exercises of stock options and no vesting of stock occurred during the
fiscal year ended December 31, 2007 by any of the Named Executive Officers. No options are outstanding as of December 31, 2007.



Nonqualified Deferred Compensation Table



The following table sets forth information concerning nonqualified deferred compensation during the fiscal year ended December 31, 2007 for each of the
Named Executive Officers.



|                     |  |                                                |         |                                              |   |                                        |   |                                       |  |                                                 |  |   |        
|-------------------- |  | ---------------------------------------------- | ------- | -------------------------------------------- | - | -------------------------------------- | - | ------------------------------------- |  | ----------------------------------------------- |  | - | -------
|Name                 |  | ExecutiveContributionsin LastFiscal Year($)(1) |         | RegistrantContributionsin LastFiscal Year($) |   | AggregateEarningsin LastFiscal Year($) |   | AggregateWithdrawals/Distributions($) |  | AggregateBalance atLast FiscalYear-End($)(2)(3)
|General William Lyon |  |                                                |        |                                              |  |                                        |   |                                      |  |                                                |  |   |       
|Michael D. Grubbs    |  | $                                              | 100,000 |                                              |  |                                        | $ | 68,766                                |  |                                                |  | $ | 661,284
|Douglas F. Bauer     |  |                                                | 50,000  |                                              |  |                                        |   | 18,971                                |  |                                                |  |   | 179,519
|W. Thomas Hickcox    |  |                                                |        |                                              |  |                                        |   |                                      |  |                                                |  |   |       
|William H. Lyon      |  |                                                |        |                                              |  |                                        |   | 22,578                                |  |                                                |  |   | 154,118



---

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



|(2) |  | Amounts shown as Aggregate Balance at Last Fiscal Year End include amounts shown as Executive Contributions in Last Fiscal Year and also include executive contributions in previous
years amounting to $425,000 for Mr. Grubbs, $100,000 for Mr. Bauer and $102,492 for Mr. William H. Lyon.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | The aggregate balance at December 31, 2007 was paid to the Named Executive Officers in cash on January 18, 2008 as a result of the termination of the Companys Executive
Deferred Plans as described above.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



65



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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, Michael D. Grubbs, Douglas F. Bauer, W. Thomas Hickcox and William H. Lyon provide for an annual salary effective
January 1, 2008 of $1,000,000, $225,000, $500,000, $200,000 and $350,000 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, 2007.



Compensation Committee



Gary H. Hunt, Chairman

Douglas K. Ammerman

Harold H. Greene

Alex Meruelo



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Director Compensation



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



The following table sets forth information concerning the compensation of the directors during the fiscal year ended December 31, 2007.



|                      |  |                              |        |                |   |                 |   |                                         |   |                                                                       |   |                          |   |          |   |       
|--------------------- |  | ---------------------------- | ------ | -------------- | - | --------------- | - | --------------------------------------- | - | --------------------------------------------------------------------- | - | ------------------------ | - | -------- | - | ------
|Name                  |  | Fees Earnedor Paidin Cash($) |        | StockAwards($) |   | OptionAwards($) |   | Non-EquityIncentive PlanCompensation($) |   | Change inPension Valueand NonqualifiedDeferredCompensationEarnings($) |   | All OtherCompensation($) |   | Total($)
|Douglas K. Ammerman   |  | $                            | 76,000 |                |  |                 |  |                                         |  |                                                                       |  |                          |  |          | $ | 76,000
|Richard E. Frankel(1) |  |                              | 73,000 |                |  |                 |  |                                         |  |                                                                       |  |                          |  |          |   | 73,000
|Harold H. Greene      |  |                              | 87,000 |                |  |                 |  |                                         |  |                                                                       |  |                          |  |          |   | 87,000
|Lawrence M. Higby(1)  |  |                              | 74,000 |                |  |                 |  |                                         |  |                                                                       |  |                          |  |          |   | 74,000
|Gary H. Hunt          |  |                              | 83,125 |                |  |                 |  |                                         |  |                                                                       |  |                          |  |          |   | 83,125
|Arthur B. Laffer(2)   |  |                              | 76,875 |                |  |                 |  |                                         |  |                                                                       |  |                          |  |          |   | 76,875
|Alex Meruelo          |  |                              | 84,500 |                |  |                 |  |                                         |  |                                                                       |  |                          |  |          |   | 84,500

---

|(1) |  | Messrs. Frankel and Higby resigned as directors effective on December 31, 2007.
|--- |  | -------------------------------------------------------------------------------



|(2) |  | Dr. Laffer resigned as a director effective on December 7, 2007.
|--- |  | ----------------------------------------------------------------



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



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
1, 2008. The following table includes information for (a) each person or group that is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (b) each of the directors and nominees of the Company,
(c) each Named Executive Officer named in the Summary Compensation Table, and (d) all directors and executive officers of the Company as a group.



|                                                             |  |                          |     |  |                               |  
|------------------------------------------------------------ |  | ------------------------ | --- |  | ----------------------------- | -
|                                                             |  | As of March 1, 2008      |    
|                                                             |  | Shares BeneficiallyOwned |     |  | Percentage of AllCommon Stock |  
|General William Lyon(1)                                      |  | 664                      |     |  | 66.4                          | %
|The William Harwell Lyon 1987 Trust(2)                       |  | 282                      |     |  | 28.2                          | %
|The William Harwell Lyon Separate Property Trust(2)          |  | 54                       |     |  | 5.4                           | %
|William H. Lyon(1)                                           |  | 0                        | (3) |  | 0.00                          | %
|Douglas K. Ammerman(1)                                       |  | 0                        |     |  | 0.00                          | %
|Douglas F. Bauer(1)                                          |  | 0                        |     |  | 0.00                          | %
|Harold H. Greene(1)                                          |  | 0                        |     |  | 0.00                          | %
|Gary H. Hunt(1)                                              |  | 0                        |     |  | 0.00                          | %
|Alex Meruelo(1)                                              |  | 0                        |     |  | 0.00                          | %
|Michael D. Grubbs(1)                                         |  | 0                        |     |  | 0.00                          | %
|W. Thomas Hickcox(1)                                         |  | 0                        |     |  | 0.00                          | %
|All directors and executive officers as a group (14 persons) |  | 664                      | (3) |  | 66.4                          | %

---

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



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



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



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, 2007, 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 $12,000,000 in cash to a limited
liability corporation 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 two



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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 $18,737,000 resulting in a loss on the transaction of $6,737,000.



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 $12,581,000 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 and during the year ended December 31,
2007, $8,305,000 was paid to the seller and a total cumulative amount of $14,015,000 has been paid to the seller as of December 31, 2007. This land acquisition qualified as an affiliate transaction under the Companys 121/2% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994 (Indenture). Pursuant to the terms of the
Indenture, the Company determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company delivered to
the Trustee under the Indenture a resolution of the Companys Board of Directors set forth in an Officers Certificate certifying that the land acquisition is on terms that are no less favorable to the Company than those that would have
been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition was approved by a majority of the disinterested members of the Companys Board of Directors of the Company. Further, the Company
delivered to the Trustee under the Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.



Purchase of Land from Joint Ventures.



The Company purchased land for a total purchase price of $17,342,000,
$6,221,000 and $116,773,000 during the years ended December 31, 2007, 2006 and 2005, respectively, from certain of its joint ventures.



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



For the years ended December 31, 2007, 2006 and 2005, the Company incurred reimbursable on-site labor costs of $224,000, $133,000 and
$146,000, respectively, for providing customer service to real estate projects developed by entities controlled by General William Lyon and William H. Lyon, of which $89,000 and $1,000 was due to the Company at December 31, 2007 and 2006,
respectively. In addition, the Company earned fees of $90,000, $98,000 and $121,000, respectively, for tax and accounting services performed for entities controlled by General William Lyon and William H. Lyon during the years ended December 31,
2007, 2006 and 2005.



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



For each
of the years ended December 31, 2007, 2006, and 2005, the Company incurred charges of $755,000 related to rent on the Companys corporate office, from a trust of which William H. Lyon is the sole beneficiary.



Charges Incurred Related to the Charter and Use of Aircraft.



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



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Company with respect to all functions necessary to the operation, maintenance and administration of the aircraft. The Companys business plan for the
aircraft includes (i) use by Company executives for traveling on Company business to the Companys divisional offices and other destinations, (ii) charter service to outside third parties and (iii) charter service to General William Lyon
personally. Charter services for outside third parties are contracted for at market rates. As compensation to the Affiliate for its management and consulting services under the agreement, the Company pays the Affiliate a fee equal to (i) the amount
equal to 107% of compensation paid by the Affiliate for the pilots supplied pursuant to the agreement, (ii) $50 per operating hour for the aircraft and (iii) $9,000 per month for hangar rent. In addition, all maintenance work, inspections and
repairs performed by the Affiliate on the aircraft are charged to the Company at the Affiliates published rates for maintenance, inspection and repairs in effect at the time such work is completed. The total compensation paid to the Affiliate
under the agreement amounted to $1,423,000, $1,488,000 and $1,414,000 during the years ended December 31, 2007, 2006 and 2005, respectively.



Effective July 1, 2006, General William Lyon entered into a time sharing agreement (the Agreement) with the Company pertaining to his personal
use of the aircraft. The agreement calls for General Lyon to reimburse the company for all costs incurred by the Company during his personal flights plus a surcharge on fuel consumption of two times the cost. Pursuant to the Agreement and the rates
charged to General Lyon prior to the Agreement, the Company had earned revenue of $564,000, $524,000 and $457,000 for charter services provided to General William Lyon personally, for the years ended December 31, 2007, 2006 and 2005, respectively,
of which $337,000 and $333,000 was due to the Company at December 31, 2007 and 2006.



Mortgage Loans.



In 2007, the Company offered
home mortgage loans to its employees and directors through its mortgage company subsidiary, William Lyon Financial Services (formerly Duxford Financial, Inc.). These loans were made in the ordinary course of business and on substantially the same
terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. These loans did not involve more than the normal risk of collectability or present other unfavorable features and were
sold to investors typically within 7 to 15 days.



Finders Fee
Agreement.



The Company and Alex Meruelo are parties to an
agreement pursuant to which Mr. Meruelo is eligible to receive a finders fee based upon the cash distributions received by a subsidiary of the Company from a joint venture development project relating to a portion of the Fort Ord military base
in Monterey County, California. The joint venture development project resulted from Mr. Meruelos introduction of the Company to Woodman Development Company, LLC (Woodman) and the subsequent formation of East Garrison Partners I,
LLC (EGP) as a joint venture between Woodman and Lyon East Garrison Company I, LLC (EGC). The finders fee will equal 5% of all net cash distributions distributed by EGP to EGC with respect to EGCs existing 50%
interest in EGP that are in excess of distributions with respect to certain deficit advances, deficit preferred returns, returns of capital and preferred returns on unreturned capital. The calculation of the finders fee will be based on net
cash distributions received from EGP on land sales and will not be determined on the basis of any revenues, profits or distributions received from any affiliate of EGC for the construction and sale or leasing of residential or commercial buildings
on such lots. Mr. Meruelo is not obligated to perform any services for EGC other than the introduction to Woodman. As of December 31, 2007, no amounts had been paid to Mr. Meruelo under this agreement.



Certain Family Relationships.



William H. Lyon, one of the Companys directors and the Executive Vice
President and Chief Administrative Officer of the Company, is the son of General William Lyon. General William Lyon is the Companys Chairman of the Board of Directors and the Chief Executive Officer. In 2007, William H. Lyon received a base
salary of $350,000 and a monthly car allowance of $400 from the Company. No bonuses were earned by Mr. Lyon during 2007.



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Terry A. Connelly, who is Senior Vice President and Director of Operations of the Companys Nevada
Region, is married to Mary J. Connelly, President of the Nevada Region. In 2007, 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 $177,000 in 2007.



Jeffrey D. Frankel, who is a Project Manager in the Companys
Northern California Region, is the son of Richard E. Frankel, a director of the Company until December 31, 2007. In 2007, Mr. Frankel received a base salary of $105,000 and a monthly car allowance of $400 from the Company. No bonuses were earned by
Mr. Frankel in 2007.



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.



Item 14.Principal Accountant Fees and Services



The fees for professional services provided by Ernst & Young LLP in fiscal years 2007 and 2006 were:



|                   |  |      |         |      |   |          
|------------------ |  | ---- | ------- | ---- | - | ---------
|Type of Fees       |  | 2007 |         | 2006
|Audit Fees         |  | $    | 555,500 |      | $ | 1,086,000
|Audit-Related Fees |  |      | 75,500  |      |   | 94,000   
|Tax Fees           |  |      | 111,500 |      |   | 92,000   
|                   |  |      |         |      |   |          
|Total Fees         |  | $    | 742,500 |      | $ | 1,272,000
|                   |  |      |         |      |   |          



In the above table, in
accordance with the definitions of the SEC, Audit Fees include fees for the audit of the Companys consolidated financial statements included in its Annual Report on Form 10-K, review of the unaudited financial statements included
in its quarterly reports on Form 10-Q, comfort letters, consents, assistance with documents filed with the SEC, and accounting and reporting consultation in connection with the audit and/or quarterly reviews. For the year ended December 31,
2006, Audit Fees also includes fees incurred in connection with the audit of the Companys internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Tax Fees include fees
for tax compliance and tax planning. Audit-Related Fees are fees for assurance and related services that are reasonably related to the performance of the audit or review of the Companys financial statements and includes fees for
audits of separate financial statements of consolidated joint ventures.



Pre-Approval Policies and Procedures:    The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax services, and other services performed by the independent
registered public accounting firm. The policy provides for pre-approval by the Audit Committee of specifically defined



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audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the Audit Committee must approve the
permitted service before the independent auditors are engaged to perform it. The Audit Committee has delegated to the Chair of the Audit Committee authority to approve permitted services provided that the Chair reports any decisions to the Committee
at its next scheduled meeting.



The Audit Committee considered
the compatibility of the provision of other services by Ernst & Young LLP with the maintenance of Ernst & Young LLPs independence. The Audit Committee approved all audit and non-audit services provided by Ernst & Young LLP in
2007.



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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                                      |  |     
|Report of Independent Registered Public Accounting Firm |  | 82  
|Consolidated Balance Sheets                             |  | 83  
|Consolidated Statements of Operations                   |  | 84  
|Consolidated Statements of Stockholders Equity         |  | 85  
|Consolidated Statements of Cash Flows                   |  | 86  
|Notes to Consolidated Financial Statements              |  | 88  



(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(35)       |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                          
|3.4(35)       |  | Certificate of Amendment of Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                     
|3.5(2)        |  | Bylaws of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                                                         
|4.1(23)       |  | Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and
guarantees).                                                                                                                                                                                                            
|4.2(15)       |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as
Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).  
|4.3(24)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee
(supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).             
|4.4(3)        |  | Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and
guarantees).                                                                                                                                                                                                          
|4.5(15)       |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as
Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                    
|4.6(24)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee
(supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).            
|4.7(14)       |  | Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and
guarantees).                                                                                                                                                                                                          
|4.8(15)       |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as
Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
|4.9(24)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee
(supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).           
|10.1(11)      |  | Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a Delaware
corporation.                                                                                                                                                                                                                     
|10.2(34)      |  | First Amendment dated as of August 17, 2006 to Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC
Construction Funding Corp., a Delaware corporation.                                                                                                                                                                      
|10.3(39)      |  | Second Amendment dated as of January 23, 2008 to Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC
Construction Funding, LLC, a Delaware limited liability company, formerly known as RFC Construction Funding Corp.                                                                                                      
|10.4(4)       |  | Master Loan Agreement dated as of August 31, 2000 by and between William Lyon Homes, Inc., a California corporation (Borrower) and Guaranty Federal Bank, F.S.B., a federal savings
bank organized and existing under the laws of the United States (Lender).                                                                                                                                              
|10.5(39)      |  | Amended and Restated Master Loan Agreement dated as of January 28, 2008 by and between William Lyon Homes, Inc., a California corporation (Borrower) and Guaranty Bank, a federal
savings bank organized and existing under the laws of the United States (Lender).                                                                                                                                        
|10.6(6)       |  | Agreement for First Modification of Deeds of Trust and Other Loan Instruments, dated as of June 8, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.                                                  
|10.7(5)       |  | Agreement for Second Modification of Deeds of Trust and Other Loan Instruments, dated as of July 23, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.                                                
|10.8(5)       |  | Agreement for Third Modification of Deeds of Trust and Other Loan Instruments, dated as of December 19, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.                                             
|10.9(5)       |  | Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments, dated as of May 29, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.                                                 



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|              |  |                                                                                                                                                                                                                                                                                                                                                                  
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                      
|10.10(7)      |  | Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.     
|10.11(3)      |  | Agreement for Sixth Modification of Deeds of Trust and Other Loan Agreements, dated as of November 14, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.
|10.12(12)     |  | Agreement for Seventh Modification of Deeds of Trust and Other Loan Instruments dated as of October 6, 2004 by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.                                                     
|10.13(24)     |  | Agreement for Eighth Modification of Deeds of Trust and Other Loan Instruments dated as of October 14, 2005 by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.                                                     
|10.14(34)     |  | Agreement for Ninth Modification of Deeds of Trust and Other Loan Instruments dated as of October 31, 2006 by and between William Lyon Homes, Inc., a California corporation, and Guaranty
Bank, a federal savings bank organized and existing under the laws of the United States, as lender.                                                                   
|10.15(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.                                                                                                                                  
|10.16(17)     |  | Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of September 18, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
California Bank & Trust, a California banking corporation, as lender.                                                                                                 
|10.17(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.                                                                                           
|10.18(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.                                                                                             
|10.19(11)     |  | Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes,
Inc., a California corporation.                                                                                                                                          
|10.20(25)     |  | 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.                                                                                                                                                                                 
|10.21(31)     |  | 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.                                                                                                                      
|10.22(39)     |  | 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.                                                                                                                  
|10.23(39)     |  | 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.                                                                                                                   
|10.24(7)      |  | Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as
Lender.                                                                                                                                                                              
|10.25(10)     |  | Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2004 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as
Lender.                                                                                                                                                                              



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|              |  |                                                                                                                                                                                                                                                                                                   
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                       
|10.26(29)     |  | Mortgage Warehouse Loan and Security Agreement dated June 29, 2006 by and between Duxford Financial, Inc. dba William Lyon Financial Services and/or Bayport Mortgage, L.P. and/or California
Pacific Mortgage, L.P., as Borrower and First Tennessee Bank as Lender.                             
|10.27(8)      |  | Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                                                        
|10.28(3)      |  | Amendment No. 1 to Credit Agreement dated as of January 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                              
|10.29(15)     |  | First Amendment to Credit Agreement dated as of August 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                               
|10.30(13)     |  | Amendment No. 2 to Credit Agreement dated as of November 15, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                             
|10.31(9)      |  | Revolving Line of Credit Loan Agreement, dated as of March 11, 2003, by and among Moffett Meadows Partners, LLC, a Delaware limited liability company, as borrower, and California Bank &
Trust, a California banking corporation, and the other financial institutions named therein, as lenders.
|10.32(9)      |  | Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware corporation.                                                                                                                                                     
|10.33(10)     |  | Borrowing Base Revolving Line of Credit Agreement, dated as of June 28, 2004, by and between William Lyon Homes, Inc., a California corporation, and Bank One, NA, a national banking
association.                                                                                                
|10.34(15)     |  | Modification Agreement, dated as of December 7, 2004, by and between William Lyon Homes, Inc., a California corporation, and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA, a
national banking association).                                                                     
|10.35(25)     |  | 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).                                                                              
|10.36(33)     |  | 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.                                                         
|10.37(36)     |  | 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.                                                         
|10.38(39)     |  | 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.                                                        
|10.39(18)     |  | Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.                                                                                                                                                            
|10.40(18)     |  | Property Management Agreement between Corporate Enterprises, Inc., a California corporation (Owner) and William Lyon Homes, Inc., a California corporation (Manager) dated and effective
November 5, 1999.                                                                                        
|10.41(18)     |  | Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5,
1999.                                                                                                             
|10.42(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.                                                                                                 
|10.43(26)     |  | Adjustment of Salary of Douglas F. Bauer.                                                                                                                                                                                                                                                         
|10.44(35)     |  | Description of 2006 Cash Bonus Plan.                                                                                                                                                                                                                                                              
|10.45(35)     |  | 2006 Senior Executive Bonus Plan.                                                                                                                                                                                                                                                                 
|10.46(35)     |  | Description of 2007 Cash Bonus Plan.                                                                                                                                                                                                                                                              
|10.47(35)     |  | 2007 Senior Executive Bonus Plan.                                                                                                                                                                                                                                                                 



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                            
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                
|10.48(19)     |  | Standard Industrial/Commercial Single-Tenant Lease  Net between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.                                                                                                                                                                                                                                    
|10.49(20)     |  | William Lyon Homes Executive Deferred Compensation Plan effective as of February 11, 2002.                                                                                                                                                                                                                                                                                                 
|10.50(21)     |  | William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002.                                                                                                                                                                                                                                                                                         
|10.51(5)      |  | The Presley Companies Non-Qualified Retirement Plan for Outside Directors.                                                                                                                                                                                                                                                                                                                 
|10.52(16)     |  | William Lyon Homes 2004 Executive Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                                              
|10.53(16)     |  | William Lyon Homes 2004 Outside Directors Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                                      
|10.54(27)     |  | Summary of Director Compensation.                                                                                                                                                                                                                                                                                                                                                          
|10.55(27)     |  | Borrowing Base Revolving Line of Credit Agreement, dated as of February 14, 2006, by and between William Lyon Homes, Inc., a California corporation, and Wachovia Financial Services, Inc, a
North Carolina corporation, by and through its Agent, Wachovia Bank, National Association, a national banking association.                                                                    
|10.56(32)     |  | First Amendment to Borrowing Base Revolving Line of Credit Agreement dated September 29, 2006 by and between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National
Association, a national banking association.                                                                                                                                                   
|10.57(39)     |  | Third Amendment to Borrowing Base Revolving Line of Credit Agreement dated January 23, 2008 between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National Association,
a national banking association, formerly referenced as Agent for Wachovia Financial Services, Inc., a North Carolina corporation.                                                          
|10.58(30)     |  | Borrowing Base Revolving Line of Credit Agreement dated as of July 10, 2006 by and between William Lyon Homes, Inc., a California corporation, and California National Bank.                                                                                                                                                                                                               
|10.59(37)     |  | Extension and Modification Agreement dated as of August 2, 2007 by and between William Lyon Homes, Inc., a California corporation, and California National Bank                                                                                                                                                                                                                            
|10.60(28)     |  | Revolving Line of Credit Loan Agreement dated as of March 8, 2006 by and between William Lyon Homes, Inc., a California corporation, and Comerica Bank.                                                                                                                                                                                                                                    
|10.61(39)     |  | Amendment Agreement entered into as of February 28, 2008, by and between William Lyon Homes, Inc., a California corporation and Comerica Bank                                                                                                                                                                                                                                              
|10.62(38)     |  | Loan Agreement dated as of January 30, 2007, by and between East Garrison Partners I, a California limited liability company, and Residential Funding Company, LLC, a Delaware limited
liability company.                                                                                                                                                                                  
|10.63(38)     |  | Completion Guaranty dated as of January 30, 2007, by and between William Lyon Homes, Inc., a California corporation, and other guarantors in favor of Residential Funding Company,
LLC.                                                                                                                                                                                                    
|10.64(39)     |  | First Amendment to Loan Agreement dated as of February 25, 2008, but effective as of December 31, 2007, by and between East Garrison Partners I, LLC, a California limited liability company,
and RFC Construction Funding, LLC, a Delaware limited liability company, as successor in interest to and assignee of Residential Funding Company, LLC., a Delaware limited liability company.
|12.1(39)      |  | Statement of computation of ratio of earnings to fixed charges.                                                                                                                                                                                                                                                                                                                            
|21.1(39)      |  | List of Subsidiaries of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                        
|31.1(39)      |  | Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                        
|31.2(39)      |  | Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                        
|32.1(39)      |  | 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(39)      |  | 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.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



77



---

##### Table of Contents

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

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

|(4) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000 and incorporated herein by this reference
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(6) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 and incorporated herein by this reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

|(10) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

|(18) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(19) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(20) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-8 (SEC Registration No. 333-82448), and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(21) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(22) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(23) |  | 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.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(24) |  | 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.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(25) |  | 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.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|(26) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005 and incorporated herein by this reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(27) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



78



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##### Table of Contents

|(28) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed April 3, 2006 and incorporated herein by reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------

|(29) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed July 6, 2006 and incorporated herein by reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------

|(30) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed August 1, 2006 and incorporated herein by reference.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------

|(31) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed September 27, 2006 and incorporated herein by reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|(32) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed October 17, 2006 and incorporated herein by reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|(33) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed October 27, 2006 and incorporated herein by reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|(34) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed December 11, 2006 and incorporated herein by reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|(35) |  | 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.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(36) |  | 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.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|(37) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on August 6, 2007 and incorporated herein by reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|(38) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on February 2, 2007 and incorporated herein by reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|(39) |  | Filed herewith.
|---- |  | ---------------



79



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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 7, 2008 |  |  |  | By:                |  | /s/    MICHAEL D. GRUBBS             
|              |  |  |  |                    |  | Michael D. Grubbs                    
|              |  |  |  |                    |  | Senior Vice President,               
|              |  |  |  |                    |  | Chief Financial Officer and Treasurer



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



|                                              |  |                                                                                                    |  |              
|--------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | -------------
|Name                                          |  | Title                                                                                              |  | Date         
|                                              |  |                                                                                                   
|/S/    WILLIAM LYONWilliam Lyon               |  | Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)          |  | March 7, 2008
|                                              |  |                                                                                                   
|/S/    DOUGLAS F.
BAUERDouglas F. Bauer       |  | Director, President and Chief Operating Officer                                                    |  | March 7, 2008
|                                              |  |                                                                                                   
|/S/    WILLIAM H.
LYONWilliam H. Lyon         |  | Director, Executive Vice President and Chief Administrative Officer                                |  | March 7, 2008
|                                              |  |                                                                                                   
|/S/    DOUGLAS K.
AMMERMANDouglas K. Ammerman |  | Director                                                                                           |  | March 7, 2008
|                                              |  |                                                                                                   
|/S/    HAROLD H.
GREENEHarold H. Greene       |  | Director                                                                                           |  | March 7, 2008
|                                              |  |                                                                                                   
|/S/    GARY H. HUNTGary H. Hunt               |  | Director                                                                                           |  | March 7, 2008
|                                              |  |                                                                                                   
|/S/    ALEX MERUELOAlex Meruelo               |  | Director                                                                                           |  | March 7, 2008
|                                              |  |                                                                                                   
|/S/    MICHAEL D.
GRUBBSMichael D. Grubbs     |  | Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)         |  | March 7, 2008
|                                              |  |                                                                                                   
|/S/    W. DOUGLASS
HARRISW. Douglass Harris   |  | Senior Vice President, Corporate Controller and Corporate Secretary (Principal Accounting Officer) |  | March 7, 2008



80



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##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|                                                        | 
|William Lyon Homes                                      |  |     
|                                                        | 
|Report of Independent Registered Public Accounting Firm |  | 82  
|Consolidated Balance Sheets                             |  | 83  
|Consolidated Statements of Operations                   |  | 84  
|Consolidated Statements of Stockholders Equity         |  | 85  
|Consolidated Statements of Cash Flows                   |  | 86  
|Notes to Consolidated Financial Statements              |  | 88  



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.



81



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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 sheets of William Lyon Homes as of December 31, 2007 and 2006,
and the related consolidated statements of operations, stockholders equity and cash flows for each of the three years in the period ended December 31, 2007. 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, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.



/S/    ERNST & YOUNG LLP



Irvine, California

February 26, 2008



82



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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,
|                                                                                                                         |  | 2007         |           | 2006
|ASSETS                                                                                                                  
|Cash and cash equivalents                                                                                                |  | $            | 73,197    |      | $ | 38,732   
|Receivables  Note 3                                                                                                     |  |              | 45,267    |      |   | 119,491  
|Real estate inventories  Notes 2 and 4                                                                                  |  |              |           |      |   |          
|Owned                                                                                                                    |  |              | 1,061,660 |      |   | 1,431,753
|Not owned                                                                                                                |  |              | 144,265   |      |   | 200,667  
|Investments in and advances to unconsolidated joint ventures  Note 5                                                    |  |              | 4,671     |      |   | 3,560    
|Property and equipment, less accumulated depreciation of $12,093 and $12,465 at December 31, 2007 and 2006,
respectively |  |              | 16,092    |      |   | 16,828   
|Deferred loan costs                                                                                                      |  |              | 9,645     |      |   | 11,258   
|Goodwill  Note 1                                                                                                        |  |              | 5,896     |      |   | 5,896    
|Other assets                                                                                                             |  |              | 14,635    |      |   | 50,410   
|                                                                                                                         |  |              |           |      |   |          
|                                                                                                                         |  | $            | 1,375,328 |      | $ | 1,878,595
|                                                                                                                         |  |              |           |      |   |          
|                                                                                                                        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                    
|Accounts payable                                                                                                         |  | $            | 40,890    |      | $ | 48,592   
|Accrued expenses                                                                                                         |  |              | 67,786    |      |   | 111,871  
|Liabilities from inventories not owned                                                                                   |  |              | 113,395   |      |   | 131,564  
|Notes payable  Note 6                                                                                                   |  |              | 266,932   |      |   | 304,096  
|75/8% Senior Notes
due December 15, 2012  Note 6                                                                        |  |              | 150,000   |      |   | 150,000  
|103/4% Senior Notes
due April 1, 2013  Note 6                                                                           |  |              | 247,553   |      |   | 247,218  
|71/2% Senior Notes
due February 15, 2014  Note 6                                                                        |  |              | 150,000   |      |   | 150,000  
|                                                                                                                         |  |              |           |      |   |          
|                                                                                                                         |  |              | 1,036,556 |      |   | 1,143,341
|                                                                                                                         |  |              |           |      |   |          
|Minority interest in consolidated entities  Note 2                                                                      |  |              | 56,009    |      |   | 109,859  
|                                                                                                                         |  |              |           |      |   |          
|Commitments and contingencies  Note 11                                                                                  |  |              |           |      |   |          
|                                                                                                                         |  |             
|Stockholders equity  Note 8                                                                                            |  |              |           |      |   |          
|Common stock, par value $.01 per share; 3,000 shares authorized; 1,000 shares outstanding at December 31, 2007 and 2006  |  |              |          |      |   |         
|Additional paid-in capital                                                                                               |  |              | 48,867    |      |   | 43,213   
|Retained earnings                                                                                                        |  |              | 233,896   |      |   | 582,182  
|                                                                                                                         |  |              |           |      |   |          
|                                                                                                                         |  |              | 282,763   |      |   | 625,395  
|                                                                                                                         |  |              |           |      |   |          
|                                                                                                                         |  | $            | 1,375,328 |      | $ | 1,878,595
|                                                                                                                         |  |              |           |      |   |          



See accompanying notes.



83



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##### Table of Contents

WILLIAM LYON HOMES



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)



|                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|----------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                            |  | Year Ended December 31, |           
|                                                            |  | 2007                    |            |   | 2006 |   |            | 2005 | 
|Operating revenue                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|Home sales                                                  |  | $                       | 1,002,549  |   |      | $ | 1,478,694  |      |  | $ | 1,745,067  |  
|Lots, land and other sales                                  |  |                         | 102,808    |   |      |   | 13,527     |      |  |   | 111,316    |  
|                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|                                                            |  |                         | 1,105,357  |   |      |   | 1,492,221  |      |  |   | 1,856,383  |  
|                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Operating costs                                             |  |                         |            |   |      |   |            |      |  |   |            |  
|Cost of sales  homes                                       |  |                         | (873,228   | ) |      |   | (1,160,614 | )    |  |   | (1,307,027 | )
|Cost of sales  lots, land and other                        |  |                         | (205,603   | ) |      |   | (16,524    | )    |  |   | (44,774    | )
|Impairment loss on real estate assets  Note 1              |  |                         | (231,120   | ) |      |   | (39,895    | )    |  |   | (4,600     | )
|Sales and marketing                                         |  |                         | (66,703    | ) |      |   | (72,349    | )    |  |   | (59,422    | )
|General and administrative                                  |  |                         | (37,472    | ) |      |   | (61,390    | )    |  |   | (90,045    | )
|Other                                                       |  |                         | (903       | ) |      |   | (6,502     | )    |  |   | (2,450     | )
|                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|                                                            |  |                         | (1,415,029 | ) |      |   | (1,357,274 | )    |  |   | (1,508,318 | )
|                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Equity in income of unconsolidated joint ventures  Note 5  |  |                         | 304        |   |      |   | 3,242      |      |  |   | 4,301      |  
|                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Minority equity in income of consolidated entities  Note 2 |  |                         | (11,126    | ) |      |   | (16,914    | )    |  |   | (37,571    | )
|                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Operating (loss) income                                     |  |                         | (320,494   | ) |      |   | 121,275    |      |  |   | 314,795    |  
|Financial advisory expenses  Note 7                        |  |                         |           |   |      |   | (3,165     | )    |  |   | (2,191     | )
|Other income (expense), net                                 |  |                         | 3,744      |   |      |   | 5,599      |      |  |   | 2,176      |  
|                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|(Loss) income before provision for income taxes             |  |                         | (316,750   | ) |      |   | 123,709    |      |  |   | 314,780    |  
|Provision for income taxes  Note 9                         |  |                         | (32,658    | ) |      |   | (48,931    | )    |  |   | (124,149   | )
|                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Net (loss) income                                           |  | $                       | (349,408   | ) |      | $ | 74,778     |      |  | $ | 190,631    |  
|                                                            |  |                         |            |   |      |   |            |      |  |   |            |  





See accompanying notes.



84



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##### Table of Contents

WILLIAM LYON HOMES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)



|                                                                                                    |  |              |   |  |                          |     |                  |  |   |        |  |   |          |   |  |   |          |  
|--------------------------------------------------------------------------------------------------- |  | ------------ | - |  | ------------------------ | --- | ---------------- |  | - | ------ |  | - | -------- | - |  | - | -------- | -
|                                                                                                    |  | Common Stock |   |  | AdditionalPaid-InCapital |     | RetainedEarnings |  |   |        | 
|                                                                                                    |  | Shares       |   |  | Amount                   |     |                  |  |   | Total  | 
|Balance  December 31, 2004                                                                         |  | 8,616        |   |  | $                        | 86  |                  |  | $ | 30,250 |  | $ | 316,773  |   |  | $ | 347,109  |  
|Issuance of common stock upon exercise of stock options and related income tax benefit and other    |  | 36           |   |  |                          |    |                  |  |   | 5,154  |  |   |         |   |  |   | 5,154    |  
|Net income                                                                                          |  |             |   |  |                          |    |                  |  |   |       |  |   | 190,631  |   |  |   | 190,631  |  
|                                                                                                    |  |              |   |  |                          |     |                  |  |   |        |  |   |          |   |  |   |          |  
|                                                                                                    |  |              |   |  |                         
|Balance  December 31, 2005                                                                         |  | 8,652        |   |  |                          | 86  |                  |  |   | 35,404 |  |   | 507,404  |   |  |   | 542,894  |  
|Income tax benefit from unused recognized built-in losses  Note 9                                  |  |             |   |  |                          |    |                  |  |   | 4,229  |  |   |         |   |  |   | 4,229    |  
|Issuance of common stock upon exercise of stock options and related income tax benefit              |  | 50           |   |  |                          | 1   |                  |  |   | 3,493  |  |   |         |   |  |   | 3,494    |  
|Elimination of common stock upon merger of WLH Acquisition Corp with and into Company  Note 7      |  | (8,702       | ) |  |                          | (87 | )                |  |   | 87     |  |   |         |   |  |   |         |  
|Surviving common stock upon merger of WLH Acquisition Corp with and into the Company  Note 7       |  | 1            |   |  |                          |    |                  |  |   |       |  |   |         |   |  |   |         |  
|Net income                                                                                          |  |             |   |  |                          |    |                  |  |   |       |  |   | 74,778   |   |  |   | 74,778   |  
|                                                                                                    |  |              |   |  |                          |     |                  |  |   |        |  |   |          |   |  |   |          |  
|Balance  December 31, 2006                                                                         |  | 1            |   |  |                          |    |                  |  |   | 43,213 |  |   | 582,182  |   |  |   | 625,395  |  
|Income tax benefit and related interest recognized as the result of the adoption of FIN 48  Note 9 |  |             |   |  |                          |    |                  |  |   | 5,654  |  |   | 1,122    |   |  |   | 6,776    |  
|Net loss                                                                                            |  |              |   |  |                          |     |                  |  |   |        |  |   | (349,408 | ) |  |   | (349,408 | )
|                                                                                                    |  |              |   |  |                          |     |                  |  |   |        |  |   |          |   |  |   |          |  
|Balance  December 31, 2007                                                                         |  | 1            |   |  | $                        |    |                  |  | $ | 48,867 |  | $ | 233,896  |   |  | $ | 282,763  |  
|                                                                                                    |  |              |   |  |                          |     |                  |  |   |        |  |   |          |   |  |   |          |  



See accompanying notes.



85



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##### Table of Contents

WILLIAM LYON HOMES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                   |  | Year Ended December 31, |           
|                                                                                                   |  | 2007                    |            |   | 2006 |   |            | 2005 | 
|Operating activities                                                                               |  |                         |            |   |      |   |            |      |  |   |            |  
|Net (loss) income                                                                                  |  | $                       | (349,408   | ) |      | $ | 74,778     |      |  | $ | 190,631    |  
|Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |  |                         |            |   |      |   |            |      |  |   |            |  
|Depreciation and amortization                                                                      |  |                         | 2,460      |   |      |   | 2,529      |      |  |   | 2,092      |  
|Impairment loss on real estate assets                                                              |  |                         | 231,120    |   |      |   | 39,895     |      |  |   | 4,600      |  
|Equity in income of unconsolidated joint ventures                                                  |  |                         | (304       | ) |      |   | (3,242     | )    |  |   | (4,301     | )
|Distributions of income from unconsolidated joint ventures                                         |  |                         |           |   |      |   | 2,599      |      |  |   | 2,708      |  
|Minority equity in income of consolidated entities                                                 |  |                         | 11,126     |   |      |   | 16,914     |      |  |   | 37,571     |  
|State income tax refund credited to additional paid-in capital                                     |  |                         |           |   |      |   | 10         |      |  |   | 1,845      |  
|Federal income tax refund credited to additional paid-in capital                                   |  |                         |           |   |      |   | 1,820      |      |  |   |           |  
|Provision for income taxes                                                                         |  |                         | 32,658     |   |      |   | 48,931     |      |  |   | 124,149    |  
|Net changes in operating assets and liabilities:                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Receivables                                                                                        |  |                         | 81,365     |   |      |   | 23,990     |      |  |   | (104,179   | )
|Real estate inventories  owned                                                                    |  |                         | 174,318    |   |      |   | (147,790   | )    |  |   | (232,240   | )
|Deferred loan costs                                                                                |  |                         | 1,613      |   |      |   | 1,065      |      |  |   | 1,659      |  
|Other assets                                                                                       |  |                         | 3,113      |   |      |   | (20,079    | )    |  |   | (6,173     | )
|Accounts payable                                                                                   |  |                         | (9,469     | ) |      |   | (18,734    | )    |  |   | 27,962     |  
|Accrued expenses                                                                                   |  |                         | (44,079    | ) |      |   | (112,669   | )    |  |   | (90,858    | )
|                                                                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) operating activities                                                |  |                         | 134,513    |   |      |   | (89,983    | )    |  |   | (44,534    | )
|                                                                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Investing activities                                                                               |  |                         |            |   |      |   |            |      |  |   |            |  
|Investment in and advances to unconsolidated joint ventures                                        |  |                         | (7,106     | ) |      |   | (1,976     | )    |  |   | (1,379     | )
|Net cash paid for purchase of partners interest in unconsolidated joint venture                   |  |                         | (1,484     | ) |      |   |           |      |  |   |           |  
|Distributions of capital from unconsolidated joint ventures                                        |  |                         | 1,095      |   |      |   |           |      |  |   | 20,486     |  
|Purchases of property and equipment                                                                |  |                         | (766       | ) |      |   | (804       | )    |  |   | (2,579     | )
|                                                                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Net cash (used in) provided by investing activities                                                |  |                         | (8,261     | ) |      |   | (2,780     | )    |  |   | 16,528     |  
|                                                                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Financing activities                                                                               |  |                         |            |   |      |   |            |      |  |   |            |  
|Proceeds from borrowings on notes payable                                                          |  |                         | 1,699,700  |   |      |   | 2,139,789  |      |  |   | 1,855,452  |  
|Principal payments on notes payable                                                                |  |                         | (1,765,368 | ) |      |   | (1,981,937 | )    |  |   | (1,794,799 | )
|Minority interest distributions, net                                                               |  |                         | (26,119    | ) |      |   | (79,160    | )    |  |   | (76,664    | )
|Common stock issued for exercised options                                                          |  |                         |           |   |      |   | 434        |      |  |   | 312        |  
|                                                                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Net cash (used in) provided by financing activities                                                |  |                         | (91,787    | ) |      |   | 79,126     |      |  |   | (15,699    | )
|                                                                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Net increase (decrease) in cash and cash equivalents                                               |  |                         | 34,465     |   |      |   | (13,637    | )    |  |   | (43,705    | )
|Cash and cash equivalents  beginning of year                                                      |  |                         | 38,732     |   |      |   | 52,369     |      |  |   | 96,074     |  
|                                                                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents  end of year                                                            |  | $                       | 73,197     |   |      | $ | 38,732     |      |  | $ | 52,369     |  
|                                                                                                   |  |                         |            |   |      |   |            |      |  |   |            |  



See accompanying notes.



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WILLIAM LYON HOMES



CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)



|                                                                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                              |  | Year Ended December 31, |        
|                                                                                                              |  | 2007                    |         |   | 2006 |   |          | 2005 | 
|Supplemental disclosures of non-cash activities:                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|Issuance of notes payable for land acquisitions                                                               |  | $                       |        |   |      | $ | 20,625   |      |  | $ | 11,686   |  
|                                                                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|Issuance of note payable to secure land option agreement                                                      |  | $                       |        |   |      | $ |         |      |  | $ | 4,709    |  
|                                                                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|Net real estate inventories not owned                                                                         |  | $                       | (56,402 | ) |      | $ | 84,895   |      |  | $ | 115,771  |  
|                                                                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|Consolidation of other assets and minority interest from variable interest entities                           |  | $                       |        |   |      | $ | (8,404   | )    |  | $ | 8,404    |  
|                                                                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|Net liabilities from inventories not owned                                                                    |  | $                       | 18,169  |   |      | $ | (131,564 | )    |  | $ |         |  
|                                                                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|Net minority interests                                                                                        |  | $                       | 38,233  |   |      | $ | 55,073   |      |  | $ | (124,175 | )
|                                                                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|Income tax benefit credited to additional paid-in capital in connection with stock option exercises and other |  | $                       |        |   |      | $ | 5,459    |      |  | $ | 2,997    |  
|                                                                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|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.



Segment Information



The Company designs, constructs and sells a wide range of homes designed to
meet the specific needs of each of its markets. For internal reporting purposes, the Company is organized into four geographic home building regions and its mortgage origination operation. Because each of the Companys geographic home building
regions has similar economic characteristics, housing products and class of prospective buyers, the geographic home building regions have been aggregated into a single home building segment. The Companys mortgage origination operations did not
meet the materiality thresholds which would require disclosure for the years ended December 31, 2007, 2006 and 2005, and accordingly, are not separately reported.



The Company evaluates performance and allocates resources primarily based on the operating (loss) income of individual home
building projects. Operating (loss) income is defined by the Company as operating revenue less operating costs plus equity in (loss) income of unconsolidated joint ventures less minority equity in income of consolidated entities. Accordingly,
operating (loss) income excludes certain expenses included in the determination of net income. Operating (loss) income from home building operations totaled $(320,494,000), $121,275,000 and $314,795,000 for the years ended December 31, 2007,
2006 and 2005, respectively.



Substantially all revenues are
from external customers. There were no customers that contributed 10% or more of the Companys total revenues during the years ended December 31, 2007, 2006 or 2005.



Real Estate Inventories and Related Indebtedness



Real estate inventories are carried at cost net of impairment losses, if any. Real estate inventories consist primarily of
deposits, raw land, lots under development, homes under construction and completed homes of real estate projects. All direct and indirect land costs, offsite and onsite improvements and applicable interest and other carrying charges are capitalized
to real estate projects during periods when the project is under development. Land, offsite costs and all other common costs are allocated to land parcels benefited based upon relative fair values before construction. Onsite construction costs and
related carrying charges (principally interest and property taxes) are allocated to the individual homes within a phase based upon the relative sales value of the homes. The Company relieves its accumulated real estate inventories through cost of
sales for the cost of homes sold. Selling expenses and other marketing costs are expensed in the period incurred. A provision



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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



|                                                                |  |              |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                |  | December 31, |        
|                                                                |  | 2007         |         |   | 2006 |   |         | 2005 | 
|                                                                |  |              |         |   |      |   |         |      | 
|Warranty liability, beginning of year                           |  | $            | 23,364  |   |      | $ | 20,219  |      |  | $ | 14,308  |  
|Warranty provision during year                                  |  |              | 10,182  |   |      |   | 14,679  |      |  |   | 16,647  |  
|Warranty payments during year                                   |  |              | (12,030 | ) |      |   | (17,582 | )    |  |   | (16,294 | )
|Warranty charges related to pre-existing warranties during year |  |              | 8,532   |   |      |   | 6,048   |      |  |   | 5,558   |  
|                                                                |  |              |         |   |      |   |         |      |  |   |         |  
|Warranty liability, end of year                                 |  | $            | 30,048  |   |      | $ | 23,364  |      |  | $ | 20,219  |  
|                                                                |  |              |         |   |      |   |         |      |  |   |         |  



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



The Company accounts for its real estate inventories under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement No.
144). Statement No. 144 requires impairment losses to be recorded on real estate inventories when indicators of impairment are present and the undiscounted cash flows estimated to be generated by real estate inventories are less than the
carrying amount of such assets. When an impairment loss is required for real estate inventories, the related assets are adjusted to their estimated fair value. Management determines the estimated fair value by present valuing the estimated future
cash flows at effective discount rates which are commensurate with the risk of the project under evaluation, generally ranging from 14% to 20%.



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



The results of operations for the year ended December 31, 2007 and 2006, include non-cash charges of $231,120,000 and
$39,895,000, respectively, 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 due to softening market conditions. As a result, the future undiscounted cash flows estimated to be generated were determined to be less than the carrying amount of the assets. Accordingly, the related real estate assets were
written-down to their estimated fair value. The non-cash charges are reflected in impairment loss on real estate assets in the accompanying consolidated statements of operations.



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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



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 10, the Company owns an aircraft which is
being depreciated using the straight-line method over an estimated useful life of fifteen years.



Deferred Loan Costs



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



Goodwill



The amount paid for business acquisitions over the net fair value of assets
acquired and liabilities assumed is reflected as goodwill, which is subject to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement No. 142). Under Statement No. 142, goodwill
is subject to impairment tests. The Company determined that there have been no indicators of impairment related to the Companys goodwill as of December 31, 2007 and 2006.



Sales and Profit Recognition



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



Income Taxes



Income taxes are accounted for under the provisions of Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Effective as of January 1, 1994, the Company completed a capital restructuring and quasi-reorganization. The quasi-reorganization resulted
in the adjustment of assets and liabilities to estimated fair values and the elimination of an accumulated deficit effective January 1, 1994. Income tax benefits resulting from the utilization of net operating loss and other carryforwards
existing at January 1, 1994 and temporary differences existing prior to or resulting from the quasi-reorganization are excluded from the results of operations and credited to additional paid-in capital.



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Financial Instruments



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



For those instruments, as defined under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, for which it is practical to estimate fair value, management has determined that the carrying amounts of the Companys financial instruments approximate
their fair value at December 31, 2007, except for the 103/4% Senior Notes, 71/2% Senior Notes and 75/8% Senior Notes as described
in Note 6.



The Company is an issuer of,
or subject to, financial instruments with off-balance sheet risk in the normal course of business which exposes it to credit risks. These financial instruments include letters of credit and obligations in connection with assessment district bonds.
These off-balance sheet financial instruments are described in more detail in Note 11.



Cash and Cash Equivalents



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



Earnings Per Common Share



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



Use of Estimates



The preparation of the Companys financial statements in conformity
with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 2007 and 2006 and revenues and expenses for each of the three
years in the period ended December 31, 2007. Accordingly, actual results could differ from those estimates.



Impact of New Accounting Pronouncements



In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



measurement and requires prospective application for fiscal years beginning after November 15, 2007. The company does not anticipate the adoption of FAS 157
will have a material impact on the Companys consolidated financial position or results of operations.



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159). FAS 159
permits all entities to choose to measure eligible items at fair value at specified election dates. SFAS 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. On January 1, 2008 the Company
did not elect to apply the fair value option to any specific financial assets or liabilities.



In December 2007, the FASB issued SFAS No. 141 (Revised), Business Combinations (FAS 141R). FAS 141R establishes principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed (including intangibles), and any non-controlling interest in the acquired entity. FAS 141R also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141R is effective for fiscal years
beginning after December 15, 2008. The adoption of FAS 141R on January 1, 2009 will require the company to expense all transaction costs for business combinations which may be significant to the Company based on historical acquisition activity.



In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (FAS 160). FAS 160 establishes accounting and reporting standards for a parent companys non-controlling interest in a subsidiary and
for the de-consolidation of a subsidiary. FAS 160 is effective for fiscal years beginning after December 15, 2008. The adoption of FAS No. 160 on January 1, 2009 will require the Company to record gains or losses upon changes in control which could
have a significant impact on the consolidated financial statements.



Reclassifications



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



Note
2  Consolidation of Variable Interest Entities



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



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



Based on the provisions of Interpretation No. 46, the Company has concluded
that under certain circumstances when the Company (i) enters into option agreements for the purchase of land or lots from an entity



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



and pays a non-refundable deposit, (ii) enters into land banking arrangements (see Note 11) or (iii) enters into arrangements with a financial partner for
the formation of joint ventures which engage in homebuilding and land development activities, a VIE may be created under condition (ii) (b) or (c) of the previous paragraph. The Company may be deemed to have provided subordinated financial support,
which refers to variable interests that will absorb some or all of an entitys expected losses if they occur. For each VIE created, the Company has computed expected losses and residual returns based on the probability of future cash flows as
outlined in Interpretation No. 46. If the Company is determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE are consolidated with the Companys financial statements.



At December 31, 2007, 2006 and 2005, certain joint ventures, lot option
agreements and land banking arrangements have been determined to be VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of all of these joint ventures, lot
option agreements and land banking arrangements have been consolidated with the Companys financial statements as of December 31, 2007 and 2006, and for the three years in the period ended December 31, 2007. Supplemental consolidating financial
information of the Company, specifically including information for the joint ventures, lot option arrangements and land banking arrangements consolidated under Interpretation No. 46, is presented below to allow investors to determine the nature of
assets held and the operations of the consolidated entities. Investments in consolidated entities in the financial statements of wholly-owned entities presented below use the equity method of accounting. Consolidated real estate inventories-owned
include land deposits under option agreements or land banking arrangements (see Note 11) of $15,318,000 and $34,517,000 at December 31, 2007 and 2006, respectively. As of December 31, 2007, the Companys remaining total contractual obligations
for land purchases and option commitments was approximately $113,922,000.



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



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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, 2007
|                                                             |  | Wholly-Owned      |           | Variable InterestEntities UnderInterpretationNo. 46 |   | EliminatingEntries |  |   | ConsolidatedTotal
|                                                            
|ASSETS                                                      
|                                                             |  |                   |           |                                                    
|Cash and cash equivalents                                    |  | $                 | 64,357    |                                                     | $ | 8,840              |  | $ |                  |   |  | $ | 73,197   
|Receivables                                                  |  |                   | 45,262    |                                                     |   | 5                  |  |   |                  |   |  |   | 45,267   
|Real estate inventories                                      |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          
|Owned                                                        |  |                   | 906,254   |                                                     |   | 155,406            |  |   |                  |   |  |   | 1,061,660
|Not owned                                                    |  |                   | 113,395   |                                                     |   | 30,870             |  |   |                  |   |  |   | 144,265  
|Investments in and advances to unconsolidated joint ventures |  |                   | 4,671     |                                                     |   |                   |  |   |                  |   |  |   | 4,671    
|Investments in consolidated entities                         |  |                   | 52,211    |                                                     |   |                   |  |   | (52,211           | ) |  |   |         
|Other assets                                                 |  |                   | 46,268    |                                                     |   |                   |  |   |                  |   |  |   | 46,268   
|Intercompany receivables                                     |  |                   | 1,853     |                                                     |   |                   |  |   | (1,853            | ) |  |   |         
|                                                             |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          
|                                                             |  | $                 | 1,234,271 |                                                     | $ | 195,121            |  | $ | (54,064           | ) |  | $ | 1,375,328
|                                                             |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          
|                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY                        
|                                                             |  |                   |           |                                                    
|Accounts payable and accrued expenses                        |  | $                 | 100,039   |                                                     | $ | 8,637              |  | $ |                  |   |  | $ | 108,676  
|Liabilities from inventories not owned                       |  |                   | 113,395   |                                                     |   |                   |  |   |                  |   |  |   | 113,395  
|Notes payable                                                |  |                   | 190,521   |                                                     |   | 76,411             |  |   |                  |   |  |   | 266,932  
|75/8% Senior Notes
due December 15, 2012                     |  |                   | 150,000   |                                                     |   |                   |  |   |                  |   |  |   | 150,000  
|103/4% Senior Notes
due April 1, 2013                        |  |                   | 247,553   |                                                     |   |                   |  |   |                  |   |  |   | 247,553  
|71/2% Senior Notes
due February 15, 2014                     |  |                   | 150,000   |                                                     |   |                   |  |   |                  |   |  |   | 150,000  
|Intercompany payables                                        |  |                   |          |                                                     |   | 1,853              |  |   | (1,853            | ) |  |   |         
|                                                             |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          
|Total liabilities                                            |  |                   | 951,508   |                                                     |   | 86,901             |  |   | (1,853            | ) |  |   | 1,036,556
|Minority interest in consolidated entities                   |  |                   |          |                                                     |   |                   |  |   | 56,009            |   |  |   | 56,009   
|Owners capital                                              |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          
|William Lyon Homes                                           |  |                   |          |                                                     |   | 52,211             |  |   | (52,211           | ) |  |   |         
|Others                                                       |  |                   |          |                                                     |   | 56,009             |  |   | (56,009           | ) |  |   |         
|Stockholders equity                                         |  |                   | 282,763   |                                                     |   |                   |  |   |                  |   |  |   | 282,763  
|                                                             |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          
|                                                             |  | $                 | 1,234,271 |                                                     | $ | 195,121            |  | $ | (54,064           | ) |  | $ | 1,375,328
|                                                             |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          



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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, 2006
|                                                             |  | Wholly-Owned      |           | Variable InterestEntities UnderInterpretationNo. 46 |   | EliminatingEntries |  |   | ConsolidatedTotal
|                                                            
|ASSETS                                                      
|                                                             |  |                   |           |                                                    
|Cash and cash equivalents                                    |  | $                 | 24,123    |                                                     | $ | 14,609             |  | $ |                  |   |  | $ | 38,732   
|Receivables                                                  |  |                   | 118,260   |                                                     |   | 1,231              |  |   |                  |   |  | $ | 119,491  
|Real estate inventories                                      |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          
|Owned                                                        |  |                   | 1,248,735 |                                                     |   | 183,018            |  |   |                  |   |  |   | 1,431,753
|Not owned                                                    |  |                   | 131,564   |                                                     |   | 69,103             |  |   |                  |   |  |   | 200,667  
|Investments in and advances to unconsolidated joint ventures |  |                   | 3,560     |                                                     |   |                   |  |   |                  |   |  |   | 3,560    
|Investments in consolidated entities                         |  |                   | 76,833    |                                                     |   |                   |  |   | (76,833           | ) |  |   |         
|Other assets                                                 |  |                   | 84,392    |                                                     |   |                   |  |   |                  |   |  |   | 84,392   
|Intercompany receivables                                     |  |                   |          |                                                     |   | 3,367              |  |   | (3,367            | ) |  |   |         
|                                                             |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          
|                                                             |  | $                 | 1,687,467 |                                                     | $ | 271,328            |  | $ | (80,200           | ) |  | $ | 1,878,595
|                                                             |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          
|                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY                        
|                                                             |  |                   |           |                                                    
|Accounts payable and accrued expenses                        |  | $                 | 146,286   |                                                     | $ | 14,177             |  | $ |                  |   |  | $ | 160,463  
|Liabilities from inventories not owned                       |  |                   | 131,564   |                                                     |   |                   |  |   |                  |   |  |   | 131,564  
|Notes payable                                                |  |                   | 233,688   |                                                     |   | 70,408             |  |   |                  |   |  |   | 304,096  
|75/8% Senior Notes
due December 15, 2012                     |  |                   | 150,000   |                                                     |   |                   |  |   |                  |   |  |   | 150,000  
|103/4% Senior Notes
due April 1, 2013                        |  |                   | 247,218   |                                                     |   |                   |  |   |                  |   |  |   | 247,218  
|71/2% Senior Notes
due February 15, 2014                     |  |                   | 150,000   |                                                     |   |                   |  |   |                  |   |  |   | 150,000  
|Intercompany payables                                        |  |                   | 3,316     |                                                     |   | 51                 |  |   | (3,367            | ) |  |   |         
|                                                             |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          
|Total liabilities                                            |  |                   | 1,062,072 |                                                     |   | 84,636             |  |   | (3,367            | ) |  |   | 1,143,341
|Minority interest in consolidated entities                   |  |                   |          |                                                     |   |                   |  |   | 109,859           |   |  |   | 109,859  
|Owners capital                                              |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          
|William Lyon Homes                                           |  |                   |          |                                                     |   | 76,833             |  |   | (76,833           | ) |  |   |         
|Others                                                       |  |                   |          |                                                     |   | 109,859            |  |   | (109,859          | ) |  |   |         
|Stockholders equity                                         |  |                   | 625,395   |                                                     |   |                   |  |   |                  |   |  |   | 625,395  
|                                                             |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          
|                                                             |  | $                 | 1,687,467 |                                                     | $ | 271,328            |  | $ | (80,200           | ) |  | $ | 1,878,595
|                                                             |  |                   |           |                                                     |   |                    |  |   |                   |   |  |   |          



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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 UnderInterpretationNo. 46 |   |         | 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            | ) |  |   |           |  
|                                                   |  |                              |            |   |                                                     |   |         |                    |  |   |                   |   |  |   |            |  
|Minority equity in income of consolidated entities |  |                              |           |   |                                                     |   |        |                    |  |   | (11,126           | ) |  |   | (11,126    | )
|                                                   |  |                              |            |   |                                                     |   |         |                    |  |   |                   |   |  |   |            |  
|Operating (loss) income                            |  |                              | (320,137   | ) |                                                     |   | 17,067  |                    |  |   | (17,424           | ) |  |   | (320,494   | )
|Other income, net                                  |  |                              | 3,387      |   |                                                     |   | 357     |                    |  |   |                  |   |  |   | 3,744      |  
|                                                   |  |                              |            |   |                                                     |   |         |                    |  |   |                   |   |  |   |            |  
|(Loss) income before provision for income taxes    |  |                              | (316,750   | ) |                                                     |   | 17,424  |                    |  |   | (17,424           | ) |  |   | (316,750   | )
|Provision for income taxes                         |  |                              | (32,658    | ) |                                                     |   |        |                    |  |   |                  |   |  |   | (32,658    | )
|                                                   |  |                              |            |   |                                                     |   |         |                    |  |   |                   |   |  |   |            |  
|Net (loss) income                                  |  | $                            | (349,408   | ) |                                                     | $ | 17,424  |                    |  | $ | (17,424           | ) |  | $ | (349,408   | )
|                                                   |  |                              |            |   |                                                     |   |         |                    |  |   |                   |   |  |   |            |  



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



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



98



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 3  Receivables



Receivables consist of the following (in thousands):



|                                                                                                                   |  |              |        |      |   |        
|------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------ | ---- | - | -------
|                                                                                                                   |  | December 31,
|                                                                                                                   |  | 2007         |        | 2006
|First trust deed mortgage notes receivable, pledged as collateral for revolving mortgage warehouse credit facility |  | $            | 11,971 |      | $ | 59,734 
|Other receivables  primarily escrow proceeds                                                                      |  |              | 33,296 |      |   | 59,757 
|                                                                                                                   |  |              |        |      |   |        
|                                                                                                                   |  | $            | 45,267 |      | $ | 119,491
|                                                                                                                   |  |              |        |      |   |        



Note 4  Real Estate
Inventories



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



|                                                      |  |              |           |      |   |          
|----------------------------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                                      |  | December 31,
|                                                      |  | 2007         |           | 2006
|Inventories owned:                                    |  |              |           |      |   |          
|Deposits                                              |  | $            | 15,318    |      | $ | 34,517   
|Land                                                  |  |              | 356,678   |      |   | 676,274  
|Construction in progress                              |  |              | 497,510   |      |   | 548,762  
|Completed inventory, including model homes            |  |              | 192,154   |      |   | 172,200  
|                                                      |  |              |           |      |   |          
|Total                                                 |  | $            | 1,061,660 |      | $ | 1,431,753
|                                                      |  |              |           |      |   |          
|Inventories not owned: (1)                            |  |              |           |      |   |          
|Variable interest entities  land banking arrangement |  | $            | 30,870    |      | $ | 69,103   
|Other land options contracts                          |  |              | 113,395   |      |   | 131,564  
|                                                      |  |              |           |      |   |          
|Total inventories not owned                           |  | $            | 144,265   |      | $ | 200,667  
|                                                      |  |              |           |      |   |          

---

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



During 2007 and 2006, the Company incurred impairment losses on real estate assets in the amount of $231,120,000 and
$39,895,000, respectively. The impairments were primarily attributable to slower than anticipated homes sales and lower than anticipated net revenue due to the decline in the homebuilding industry. The Company was required to write-down the book
value of certain real estate assets in accordance with Statement No. 144, as defined in Note 1 of Notes to Consolidated Financial Statements.



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 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 purchase price of
$90,650,000 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 $65,929,000 and the remainder of the residential lots closed on



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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 $210,739,000, resulting in a total loss on the sales transactions of $120,089,000. The loss of $40,282,000 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. The Company may consider entering into future agreements with the various affiliates of the equity partner to build and market homes in 5 of the 10
communities on behalf of the affiliates. For such services, the Company would receive fees and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved. Certain of the equity partner affiliates
have an option to acquire an additional 23 model homes in 6 of the 10 communities.



On December 27, 2007, the Company sold certain land in San Diego County, California for $12,000,000 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
$18,737,000 resulting in a loss on the transaction of $6,737,000.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 5  Investments in and Advances to Unconsolidated Joint Ventures



The Company and certain of its subsidiaries are general partners or members
in joint ventures involved in the development and sale of residential projects. The consolidated financial statements of the Company include the accounts of the Company, all majority-owned and controlled subsidiaries and certain joint ventures which
have been determined to be variable interest entities in which the Company is considered the primary beneficiary (see Note 2). The financial statements of joint ventures which have not been determined to be variable interest entities in which the
Company is considered the primary beneficiary are not consolidated with the Companys financial statements. The Companys investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50%
or less voting or economic interest (and thus such joint ventures are not controlled by the Company). Condensed combined financial information of these unconsolidated joint ventures as of December 31, 2007 and 2006, and for each of the three years
in the period ended December 31, 2007 are summarized as follows:



CONDENSED COMBINED BALANCE SHEETS

(In thousands)



|                                           |  |              |        |      |   |       
|------------------------------------------ |  | ------------ | ------ | ---- | - | ------
|                                           |  | December 31,
|                                           |  | 2007         |        | 2006
|ASSETS                                    
|Cash and cash equivalents                  |  | $            | 1,912  |      | $ | 328   
|Receivables                                |  |              |       |      |   | 309   
|Real estate inventories                    |  |              | 9,910  |      |   | 40,913
|Investment in unconsolidated joint venture |  |              | 3,899  |      |   | 2,048 
|Property and equipment                     |  |              |       |      |   | 985   
|                                           |  |              |        |      |   |       
|                                           |  | $            | 15,721 |      | $ | 44,583
|                                           |  |              |        |      |   |       
|LIABILITIES AND OWNERS CAPITAL           
|Accounts payable                           |  | $            | 294    |      | $ | 765   
|Notes payable                              |  |              | 4,991  |      |   | 38,525
|Advances from William Lyon Homes           |  |              |       |      |   | 1,825 
|                                           |  |              |        |      |   |       
|                                           |  |              | 5,285  |      |   | 41,115
|                                           |  |              |        |      |   |       
|Owners Capital                            |  |              |        |      |   |       
|William Lyon Homes                         |  |              | 4,671  |      |   | 1,735 
|Others                                     |  |              | 5,765  |      |   | 1,733 
|                                           |  |              |        |      |   |       
|                                           |  |              | 10,436 |      |   | 3,468 
|                                           |  |              |        |      |   |       
|                                           |  | $            | 15,721 |      | $ | 44,583
|                                           |  |              |        |      |   |       



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED COMBINED STATEMENTS OF INCOME

(In thousands)



|                                                  |  |                         |        |   |      |   |         |      |  |   |         |  
|------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                  |  | Year Ended December 31, |       
|                                                  |  | 2007                    |        |   | 2006 |   |         | 2005 | 
|Operating revenue                                 |  |                         |        |   |      |   |         |      |  |   |         |  
|Land sales                                        |  | $                       |       |   |      | $ | 17,046  |      |  | $ | 26,091  |  
|                                                  |  |                         |        |   |      |   |         |      |  |   |         |  
|                                                  |  |                         |       |   |      |   | 17,046  |      |  |   | 26,091  |  
|                                                  |  |                         |        |   |      |   |         |      |  |   |         |  
|Operating costs                                   |  |                         |        |   |      |   |         |      |  |   |         |  
|Cost of sales  land                              |  |                         |       |   |      |   | (13,315 | )    |  |   | (23,338 | )
|Sales and marketing                               |  |                         |       |   |      |   |        |      |  |   | (342    | )
|General and administrative                        |  |                         | (467   | ) |      |   |        |      |  |   | (17     | )
|Other                                             |  |                         | (743   | ) |      |   | (1,579  | )    |  |   | (1,380  | )
|                                                  |  |                         |        |   |      |   |         |      |  |   |         |  
|                                                  |  |                         | (1,210 | ) |      |   | (14,894 | )    |  |   | (25,077 | )
|                                                  |  |                         |        |   |      |   |         |      |  |   |         |  
|Equity in income of unconsolidated joint ventures |  |                         | 1,710  |   |      |   | 5,037   |      |  |   | 19,687  |  
|                                                  |  |                         |        |   |      |   |         |      |  |   |         |  
|Operating income                                  |  |                         | 500    |   |      |   | 7,189   |      |  |   | 20,701  |  
|Other income, net                                 |  |                         | 108    |   |      |   | 384     |      |  |   |        |  
|                                                  |  |                         |        |   |      |   |         |      |  |   |         |  
|Net income                                        |  | $                       | 608    |   |      | $ | 7,573   |      |  | $ | 20,701  |  
|                                                  |  |                         |        |   |      |   |         |      |  |   |         |  
|Allocation to owners                              |  |                         |        |   |      |   |         |      |  |   |         |  
|William Lyon Homes                                |  | $                       | 304    |   |      | $ | 3,786   |      |  | $ | 10,350  |  
|Others                                            |  |                         | 304    |   |      |   | 3,787   |      |  |   | 10,351  |  
|                                                  |  |                         |        |   |      |   |         |      |  |   |         |  
|                                                  |  | $                       | 608    |   |      | $ | 7,573   |      |  | $ | 20,701  |  
|                                                  |  |                         |        |   |      |   |         |      |  |   |         |  



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



Certain joint ventures have obtained financing from construction lenders which amounted to $4,991,000 at December 31, 2007. As common practice required by
commercial lenders, all of the joint ventures that have obtained financing are obligated to repay loans to a level such that they do not exceed certain required loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by
appraising the property securing the loan at the time. Either a decrease in the value of the property securing the loan or an increase in the construction costs could trigger this pay down obligation. The term of the obligation corresponds with the
term of the loan and is limited to the outstanding loan balance.



The Company is a member in an unconsolidated joint venture limited liability company formed for the purpose of acquiring and developing land in Nevada. The Company had a 50% direct interest in the limited liability company which began
development activities in 2004. In July 2007, the Company purchased the interest of the other member in the limited liability company for $2,100,000 in cash and assumed all of the members debt ($18,387,000) in the entity. Upon completion of
the transaction, the assets and liabilities of the entity are consolidated with the Companys financial statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 6  Notes Payable and Senior Notes



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



|                                                                                                                                                |  |              |         |      |   |        
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                                                                                                                                |  | December 31,
|                                                                                                                                                |  | 2007         |         | 2006
|Notes payable:                                                                                                                                  |  |              |         |      |   |        
|Revolving credit facilities                                                                                                                     |  | $            | 139,642 |      | $ | 145,990
|Construction notes payable                                                                                                                      |  |              | 115,836 |      |   | 70,408 
|Seller financing                                                                                                                                |  |              |        |      |   | 28,339 
|Collateralized mortgage obligations under revolving mortgage warehouse credit facilities, secured by first trust deed mortgage notes
receivable |  |              | 11,454  |      |   | 59,359 
|                                                                                                                                                |  |              |         |      |   |        
|                                                                                                                                                |  |              | 266,932 |      |   | 304,096
|                                                                                                                                                |  |              |         |      |   |        
|Senior Notes:                                                                                                                                   |  |              |         |      |   |        
|75/8% Senior Notes
due December 15, 2012                                                                                                        |  |              | 150,000 |      |   | 150,000
|103/4% Senior Notes
due April 1, 2013                                                                                                           |  |              | 247,553 |      |   | 247,218
|71/2% Senior Notes
due February 15, 2014                                                                                                        |  |              | 150,000 |      |   | 150,000
|                                                                                                                                                |  |              |         |      |   |        
|                                                                                                                                                |  |              | 547,553 |      |   | 547,218
|                                                                                                                                                |  |              |         |      |   |        
|                                                                                                                                                |  | $            | 814,485 |      | $ | 851,314
|                                                                                                                                                |  |              |         |      |   |        



During the years ended
December 31, 2007, 2006 and 2005, the Company incurred and capitalized interest relating to the above debt of $76,497,000, $80,173,000 and $73,209,000, respectively.



Maturities of the notes payable and Senior Notes are as follows as of December 31, 2007:



|                        |  |                |        
|----------------------- |  | -------------- | -------
|Year Ended December 31, |  | (in thousands)
|2008                    |  | $              | 152,294
|2009                    |  |                | 38,569 
|2010                    |  |                | 36,498 
|2011                    |  |                | 37,821 
|2012                    |  |                | 247,553
|Thereafter              |  |                | 301,750
|                        |  |                |        
|                        |  | $              | 814,485
|                        |  |                |        



75/8% Senior Notes



On November 22, 2004, the Companys 100% owned subsidiary,
William Lyon Homes, Inc., a California corporation, (California Lyon) closed its offering of $150,000,000 principal amount of 75/8% Senior Notes due 2012 (the 75/8% Senior Notes). The notes were sold pursuant to
Rule 144A. The notes were issued at par, resulting in net proceeds to the Company of approximately $148,500,000. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the
notes for publicly tradeable notes having substantially identical terms. On January 12, 2005, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an offer to exchange any and all of its
outstanding $150,000,000 aggregate principal amount of 75/8% Senior Notes due 2012, which are not registered under the
Securities Act of 1933, for a like amount of its new 75/8% Senior Notes due 2012, which are registered under the Securities Act
of 1933, upon the terms and subject to the conditions set



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



forth in the prospectus dated January 12, 2005. The exchange offer was completed for $146,500,000 principal amount of the 75/8% Senior Notes on February 18, 2005. The remaining $3,500,000 principal amount of the old notes remains outstanding. The terms of the new notes are identical
in all material respects to those of the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. Interest on the 75/8% Senior Notes is payable semi-annually on December 15 and June 15 of each year. Based on the current outstanding principal amount of the 75/8% Senior Notes, the Companys semi-annual interest payments are $5,700,000.



Except as set forth in
the Indenture governing the 75/8% Senior Notes (75/8% Senior Notes Indenture), the 75/8% Senior Notes are not
redeemable prior to December 15, 2008. Thereafter, the 75/8% Senior Notes will be redeemable at the option of California Lyon,
in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.



As of December 31,
2007, the outstanding 75/8% Senior Notes with a face value of $150,000,000 had a fair value of approximately $90,000,000 based
on quotes from industry sources.



103/4% Senior Notes



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



Except as set forth in
the Indenture governing the 103/4% Senior Notes (103/4% Senior Notes Indenture), the 103/4% Senior Notes are not
redeemable prior to April 1, 2008. Thereafter, the 103/4% Senior Notes will be redeemable at the option of California Lyon, in
whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.



As of December 31,
2007, the outstanding 103/4% Senior Notes with a face value of $247,553,000 had a fair value of approximately $157,500,000 based
on quotes from industry sources.



71/2% Senior Notes



On February 6, 2004, California Lyon closed its offering of
$150,000,000 principal amount of 71/2% Senior Notes due 2014 (the 71/2% Senior Notes). The notes were sold pursuant to Rule 144A and outside the United States to non-U.S. persons in reliance on Regulation S. The notes were issued at
par, resulting in net proceeds to the Company of approximately $147,600,000. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes
having substantially identical terms. On July 16, 2004, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an offer to exchange any and all of its outstanding $150,000,000 aggregate
principal amount of 71/2% Senior Notes due 2014, which are not registered under the Securities Act of 1933, for a like amount of
its new 71/2% Senior Notes due 2014, which are registered under the Securities Act of 1933, upon the terms and subject to the
conditions set forth in the prospectus dated



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



July 16, 2004. The exchange offer was completed for the full principal amount of the 71/2% Senior Notes on August 17, 2004. The terms of the new notes are identical in all material respects to those of the old notes, except for certain transfer restrictions, registration rights and
liquidated damages provisions relating to the old notes. The new notes have been listed on the New York Stock Exchange. Interest on the 71/2% Senior Notes is payable on February 15 and August 15 of each year. Based on the current outstanding principal amount of 71/2% Senior Notes the Companys semi-annual interest payments are $5,600,000.



Except as set forth in the Indenture governing the 71/2% Senior Notes (71/2% Senior Notes
Indenture), the 71/2% Senior Notes are not redeemable prior to February 15, 2009. Thereafter, the 71/2% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the
principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.



As of December 31, 2007, the outstanding 71/2% Senior Notes with a face value of $150,000,000 had a fair value of approximately $87,000,000 based on quotes from industry sources.



* * * * *



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



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



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



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



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



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)



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



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



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



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING BALANCE SHEET



December 31, 2007

(in thousands)



|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|------------------------------------------------------------ |  | -------------- | ------- | -------------- | - | --------------------- |  | ------------------------- | ------- | ------------------ | - | ------- | ------------------- | - | -------- | - |  | - | ---------
|                                                             |  | Unconsolidated |         |                |   |                       | 
|                                                             |  | DelawareLyon   |         | CaliforniaLyon |   | GuarantorSubsidiaries |  | Non-GuarantorSubsidiaries |         | EliminatingEntries |   |         | ConsolidatedCompany
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                    
|ASSETS                                                       |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|Cash and cash equivalents                                    |  | $              |        |                | $ | 55,412                |  | $                         | 6,931   |                    | $ | 10,854  |                     | $ |         |   |  | $ | 73,197   
|Receivables                                                  |  |                |        |                |   | 32,345                |  |                           | 12,901  |                    |   | 21      |                     |   |         |   |  |   | 45,267   
|Real estate inventories                                      |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|Owned                                                        |  |                |        |                |   | 897,880               |  |                           |        |                    |   | 163,780 |                     |   |         |   |  |   | 1,061,660
|Not owned                                                    |  |                |        |                |   | 144,265               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 144,265  
|Investments in and advances to unconsolidated joint ventures |  |                |        |                |   | 4,671                 |  |                           |        |                    |   |        |                     |   |         |   |  |   | 4,671    
|Property and equipment, net                                  |  |                |        |                |   | 2,592                 |  |                           | 13,500  |                    |   |        |                     |   |         |   |  |   | 16,092   
|Deferred loan costs                                          |  |                |        |                |   | 9,645                 |  |                           |        |                    |   |        |                     |   |         |   |  |   | 9,645    
|Goodwill                                                     |  |                |        |                |   | 5,896                 |  |                           |        |                    |   |        |                     |   |         |   |  |   | 5,896    
|Other assets                                                 |  |                |        |                |   | 12,243                |  |                           | 2,392   |                    |   |        |                     |   |         |   |  |   | 14,635   
|Investments in subsidiaries                                  |  |                | 282,763 |                |   | 67,430                |  |                           | 8,693   |                    |   |        |                     |   | (358,886 | ) |  |   |         
|Intercompany receivables                                     |  |                |        |                |   |                      |  |                           | 192,714 |                    |   | 4,075   |                     |   | (196,789 | ) |  |   |         
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|                                                             |  | $              | 282,763 |                | $ | 1,232,379             |  | $                         | 237,131 |                    | $ | 178,730 |                     | $ | (555,675 | ) |  | $ | 1,375,328
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|                                                             |  |                |         |               
|LIABILITIES AND STOCKHOLDERS EQUITY                         |  |                |         |                |   |                       |  |                           |         |                    |   |         |                    
|Accounts payable                                             |  | $              |        |                | $ | 33,028                |  | $                         | 391     |                    | $ | 7,471   |                     | $ |         |   |  | $ | 40,890   
|Accrued expenses                                             |  |                |        |                |   | 62,125                |  |                           | 3,493   |                    |   | 2,168   |                     |   |         |   |  |   | 67,786   
|Liabilities from inventories not owned                       |  |                |        |                |   | 113,395               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 113,395  
|Notes payable                                                |  |                |        |                |   | 179,067               |  |                           | 11,454  |                    |   | 76,411  |                     |   |         |   |  |   | 266,932  
|75/8% Senior Notes                                           |  |                |        |                |   | 150,000               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 150,000  
|103/4% Senior Notes                                          |  |                |        |                |   | 247,553               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 247,553  
|71/2% Senior Notes                                           |  |                |        |                |   | 150,000               |  |                           |        |                    |   |        |                     |   |         |   |  |   | 150,000  
|Intercompany payables                                        |  |                |        |                |   | 196,678               |  |                           |        |                    |   | 111     |                     |   | (196,789 | ) |  |   |         
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|Total liabilities                                            |  |                |        |                |   | 1,131,846             |  |                           | 15,338  |                    |   | 86,161  |                     |   | (196,789 | ) |  |   | 1,036,556
|Minority interest in consolidated entities                   |  |                |        |                |   |                      |  |                           |        |                    |   |        |                     |   | 56,009   |   |  |   | 56,009   
|Stockholders equity                                         |  |                | 282,763 |                |   | 100,533               |  |                           | 221,793 |                    |   | 92,569  |                     |   | (414,895 | ) |  |   | 282,763  
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          
|                                                             |  | $              | 282,763 |                | $ | 1,232,379             |  | $                         | 237,131 |                    | $ | 178,730 |                     | $ | (555,675 | ) |  | $ | 1,375,328
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |          



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING BALANCE SHEET



December 31, 2006

(in thousands)



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



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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 unconsolidated joint ventures |  |                |         |   |                |   | 676        |                       |  |   | (372                      | ) |  |                    |         |   |                     |   |        |   |  |   | 304        |  
|                                                         |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|(Loss) income from subsidiaries                          |  |                | (349,408 | ) |                |   | 20,034     |                       |  |   | 191                       |   |  |                    |         |   |                     |   | 329,183 |   |  |   |           |  
|                                                         |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|Minority equity in income of consolidated entities       |  |                |         |   |                |   |           |                       |  |   |                          |   |  |                    |         |   |                     |   | (11,126 | ) |  |   | (11,126    | )
|                                                         |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|Operating (loss) income                                  |  |                | (349,408 | ) |                |   | (321,274   | )                     |  |   | 16,051                    |   |  |                    | 16,080   |   |                     |   | 318,057 |   |  |   | (320,494   | )
|Other income (expense), net                              |  |                |         |   |                |   | (247       | )                     |  |   | 3,551                     |   |  |                    | 440      |   |                     |   |        |   |  |   | 3,744      |  
|                                                         |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|(Loss) income before provision for income taxes          |  |                | (349,408 | ) |                |   | (321,521   | )                     |  |   | 19,602                    |   |  |                    | 16,520   |   |                     |   | 318,057 |   |  |   | (316,750   | )
|Provision for income taxes                               |  |                |         |   |                |   | (32,645    | )                     |  |   |                          |   |  |                    | (13      | ) |                     |   |        |   |  |   | (32,658    | )
|                                                         |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  
|Net (loss) income                                        |  | $              | (349,408 | ) |                | $ | (354,166   | )                     |  | $ | 19,602                    |   |  | $                  | 16,507   |   |                     | $ | 318,057 |   |  | $ | (349,408   | )
|                                                         |  |                |          |   |                |   |            |                       |  |   |                           |   |  |                    |          |   |                     |   |         |   |  |   |            |  



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF OPERATIONS



Year Ended December 31, 2006

(in thousands)



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



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF OPERATIONS



Year Ended December 31, 2005

(in thousands)



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



111



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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, 2007

(in thousands)



|                                                                                            |  |                |          |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | -------------- | - | -------- | --------------------- |  | - | ----------------------------- | - |  | ------------------ | ------- | - | ------------------- | - | -------- | - |  | - | ---------- | -
|                                                                                            |  | Unconsolidated |          |   |                |   |          |                       | 
|                                                                                            |  | DelawareLyon   |          |   | CaliforniaLyon |   |          | GuarantorSubsidiaries |  |   | Non-Guarantor    Subsidiaries |   |  | EliminatingEntries |         |   | ConsolidatedCompany |  
|                                                                                            |  |                |          |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |  
|Operating activities:                                                                       |  |                |          |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Net (loss) income                                                                           |  | $              | (349,408 | ) |                | $ | (354,166 | )                     |  | $ | 19,602                        |   |  | $                  | 16,507  |   |                     | $ | 318,057  |   |  | $ | (349,408   | )
|Adjustments to reconcile net income to net cash provided by (used in) 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 | ) |  |   |           |  
|Minority equity in income of consolidated entities                                          |  |                |         |   |                |   |         |                       |  |   |                              |   |  |                    |        |   |                     |   | 11,126   |   |  |   | 11,126     |  
|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     |  
|Intercompany receivables/payables                                                           |  |                |         |   |                |   | 38,233   |                       |  |   | (22,731                       | ) |  |                    | (648    | ) |                     |   | (14,854  | ) |  |   |           |  
|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 (used in) operating activities                                         |  |                |         |   |                |   | 72,273   |                       |  |   | 45,525                        |   |  |                    | 31,569  |   |                     |   | (14,854  | ) |  |   | 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 from (to) 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    | )
|Advances from (to) affiliates                                                               |  |                |         |   |                |   |         |                       |  |   | (916                          | ) |  |                    | (41,975 | ) |                     |   | 42,891   |   |  |   |           |  
|                                                                                            |  |                |          |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Net cash (used in) provided by financing activities                                         |  |                |         |   |                |   | (23,766  | )                     |  |   | (48,821                       | ) |  |                    | (35,972 | ) |                     |   | 16,772   |   |  |   | (91,787    | )
|                                                                                            |  |                |          |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |          |   |  |   |            |  
|Net increase 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     |  
|                                                                                            |  |                |          |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |          |   |  |   |            |  



112



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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, 2006

(in thousands)



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



113



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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, 2005

(in thousands)



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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



At December 31, 2007, the Company had approximately $190,622,000 of secured indebtedness, (excluding
approximately $76,310,000 of secured indebtedness of consolidated entities) and approximately $169,902,000 of additional secured indebtedness available to be borrowed under the Companys credit facilities, as limited by the Companys
borrowing base formulas.



Revolving Credit Facilities



As of December 31, 2007, the Company has seven revolving
credit facilities which previously had an aggregate maximum loan commitment of $560,000,000. Upon consummation of the land sales transactions described in Note 4 of Notes to Consolidated Financial Statements, the Company would not have been in
compliance with the tangible net worth covenants in certain of the revolving credit facilities. The Company has reached agreement with each of the lenders to modify the terms of the respective revolving credit facilities so that upon consummation of
the land sales transactions described above, the Company would be in compliance with the modified terms.



Under the modified revolving credit facilities, the aggregate loan commitment is reduced to $395,000,000 (including one facility of $100,000,000, one of
$70,000,000, one of $60,000,000, two of $50,000,000 each, one of $35,000,000 and one of $30,000,000), with maturities at various dates as follows:



|                                   |  |                                                      |  |                         
|---------------------------------- |  | ---------------------------------------------------- |  | ------------------------
|LoanCommitmentAmount(in thousands) |  | BalanceOutstanding atDecember 31,2007 (in thousands) |  | Initial Maturity Date(1)
|$  30,000                          |  | $  10,600                                            |  | May 2008                
|50,000                             |  | 9,700                                                |  | July 2008               
|50,000                             |  | 25,300                                               |  | September 2008          
|100,000                            |  | 31,400                                               |  | September 2008          
|60,000                             |  | 25,200                                               |  | December 2008           
|35,000                             |  | 100                                                  |  | April 2009              
|70,000                             |  | 37,300                                               |  | June 2009               
|                                   |  |                                                      |  |                         
|$395,000                           |  | $139,600                                             |  |                         
|                                   |  |                                                      |  |                         

---

|(1) |  | After the initial maturity date, additional advances may be obtained to complete previously approved projects subject to all other requirements for advances under the borrowing
base. Repayments of borrowed amounts are required at the time a sold house closes escrow or at the time a house must be removed from the borrowing base. The final maturity date would generally be twelve to twenty-four months after the initial
maturity date.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 $175,000,000;
| | - |  | --------------------------------------------------



| |  |  | A ratio of total liabilities to tangible net worth, each as defined, of less than 5.00 to 1; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Minimum liquidity, as defined, of at least $20,000,000.
| | - |  | -------------------------------------------------------



The modifications for the facilities of $100,000,000 and $35,000,000 were effective January 1, 2008; however, the Company has received a waiver from
each of the respective lenders for non-compliance with the tangible net worth covenant for the quarter ended December 31, 2007.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



As of and for the year ending December 31, 2007, the Company is in compliance with the covenants
under its revolving credit facilities, after giving effect to the waivers described above.



The revolving credit facilities have similar characteristics. The Company may borrow amounts, subject to applicable borrowing base and concentration limitations, as defined. During the last year of the term of each
facility, the commitment amount will decrease ratably until the commitment under each facility is reduced to zero by the final maturity date, as defined in each respective agreement.



Availability under each credit facility is subject not only to the maximum amount committed under the respective facility,
but also to both various borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases as the asset progresses from land under
development to residence subject to contract of sale. Advances for each type of collateral become due in whole or in part, subject to possible re-borrowing, and/or the collateral becomes excluded from the borrowing base, after a specified period or
earlier upon sale. Concentration limitations further restrict availability under the credit facilities. The effect of these borrowing base and concentration limitations essentially is to mandate minimum levels of the Companys investment in a
project, with higher percentages of investment required at earlier phases of a project, and with greater absolute dollar amounts of investment required as a project progresses. Each revolving credit facility is secured by deeds of trust on the real
property and improvements thereon owned by the Company in the subdivision project(s) approved by the respective lender, as well as pledges of all net sale proceeds, related contracts and other ancillary property. Also, each credit facility includes
financial covenants, which may limit the amount that may be borrowed thereunder. Outstanding advances bear interest at various rates, which approximate the prime rate. As of December 31, 2007, $139,642,000 was outstanding under these credit
facilities, with a weighted-average interest rate of 6.95%, and the undrawn availability was $169,902,000 as limited by the Companys borrowing base formulas. Interest on the revolving credit facilities is calculated on the average, outstanding
daily balance and is paid following the end of each month. During the year ended December 31, 2007, the Company borrowed $847,083,000 and repaid $853,431,000 under these facilities. The maximum amount outstanding was $319,726,000 and the weighted
average borrowings were $217,317,000 during the year ended December 31, 2007. Interest incurred on the revolving credit facilities for the year ended December 31, 2007 was $18,107,000. Delaware Lyon has guaranteed on an unsecured basis California
Lyons obligations under certain of the revolving credit facilities and has provided an unsecured environmental indemnity in favor of the lender under the $60,000,000 bank line of credit. The Company routinely makes borrowings under its
revolving credit facilities in the ordinary course of business within the maximum aggregate loan commitment amounts to fund its operations, including its land acquisition and home building activities, and repays such borrowings, as required by the
credit facilities, with the net proceeds from sales of the real property, including homes, which secure the applicable credit facility.



These facilities include a number of other covenants with respect to such matters as the posting of cash or letters of credit in certain circumstances,
the application or deposit of excess net sales proceeds, maintenance of specified ratios, limitations on investments in joint ventures, maintenance of fixed charge coverages, stock ownership changes, and lot ownership.



As a common practice required by commercial lenders, the Company is obligated
to repay loans to a level such that they do not exceed certain required loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by appraising the property securing the loan at any time. Either a decrease in the value of
the property securing the loan or an increase in the construction costs could trigger this pay down obligation. The term of the obligation corresponds with the term of the loan and is limited to the outstanding loan balance. The entire revolving
credit facilities balance is subject to these obligations as of December 31, 2007.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Construction Notes Payable



At December 31, 2007, the Company had construction notes payable on certain consolidated entities amounting to $115,836,000.
The construction notes have various maturity dates through 2017 and bear interest at rates ranging from prime plus 0.25% to prime plus 1.5% at December 31, 2007. Interest is calculated on the average daily balance and is paid following the end of
each month.



Seller Financing



At December 31, 2007, the Company had no notes payable outstanding related
to land acquisitions for which seller financing was provided.



Revolving Mortgage Warehouse Credit Facilities



The Company, through its mortgage subsidiary and one of its unconsolidated joint ventures, has entered into two revolving mortgage warehouse credit facilities with banks to fund its mortgage origination operations. The original credit
facility, which matures in May 2008, provides for revolving loans of up to $30,000,000 outstanding, $20,000,000 of which is committed (lender obligated to lend if stated conditions are satisfied) and $10,000,000 of which is not committed (lender
advances are optional even if stated conditions are otherwise satisfied). The Companys mortgage subsidiary and one of its unconsolidated joint ventures entered into an additional $50,000,000 credit facility which matures in November 2008. The
Company expects the maturities to be extended by the lender at each maturity date for an additional year. Mortgage loans are generally held for a short period of time and are typically sold to investors within 7 to 15 days following funding. The
facilities are secured by substantially all of the assets of each of the borrowers, including the mortgage loans held for sale, all rights of each of the borrowers with respect to contractual obligations of third party investors to purchase such
mortgage loans, and all proceeds of sale of such mortgage loans. The facilities, which have LIBOR based pricing, also contain certain financial covenants requiring the borrowers to maintain minimum tangible net worth, leverage, profitability and
liquidity. These facilities are non-recourse and are not guaranteed by the Company. At December 31, 2007 the outstanding balance under these facilities was $11,454,000.



Prime Interest Rates



The prime interest rates at December 31, 2007, 2006 and 2005 were 7.25%, 8.25% and 7.25%, respectively. The weighted-average prime interest rates
for each of the three years ended December 31, 2007, 2006 and 2005 were 8.05%, 7.96% and 6.19%, respectively.



Note 7  Tender Offer and Merger



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



The offer was subject to the non-waivable condition that there shall have been validly tendered and not withdrawn before the
offer expires at least a majority of the outstanding shares not owned by General Lyon, The William Harwell Lyon 1987 Trust, The William Harwell Lyon Separate Property Trust or the officers and directors of William Lyon Homes immediately before the
commencement of the offer. The offer was also subject to the receipt by General Lyon of the proceeds under his financing commitment from Lehman Commercial Paper Inc. and Lehman Brothers Inc. The offer was also subject to other terms and conditions
as set forth in the tender



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



offer materials filed with the Securities and Exchange Commission and distributed to William Lyon Homes stockholders, and was initially subject to the
further condition that sufficient shares were tendered in the offer such that the tendered shares, together with the shares already directly or indirectly owned by General Lyon and the trusts, would represent at least 90% of the shares outstanding
upon expiration of the offer.



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



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



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



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



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



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



outstanding. The Company will continue as a privately held company, wholly owned by General Lyon and the two trusts.



The Company has incurred approximately $3,165,000 in financial advisory
expenses related to the tender offer which are reflected as financial advisory expenses in the accompanying consolidated statement of operations for the year ended December 31, 2006.



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



Note 8  Stockholders Equity



Incentive Compensation Plans



The Companys 2007 Senior Executive Bonus Plan (the Plan)
provides that (i) the Chief Executive Officer (CEO) and the Chief Operating Officer (COO) are each eligible to receive a bonus of 3% of the Companys consolidated pre-tax, pre-bonus income; (ii) the Executive Vice
President (EVP) is eligible to receive a bonus of 3⁄4 of 1% of the Companys consolidated pre-tax, pre-bonus income; and (iii) the Chief Financial Officer (CFO) is eligible to receive a bonus of 1⁄2 of 1% of the
Companys consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Region President is eligible to receive a bonus of 3% of the regions pre-tax, pre-bonus income, determined after allocation to the region of its allocable
portion of corporate general and administrative expenses. In addition, the Companys Board of Directors has approved a cash bonus plan applicable in 2007 for all of its full-time, salaried employees who are not included in the Plan. All other
participants under this cash bonus plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income.



For the CEO, COO, EVP CFO, region presidents, executives and managers, awards under bonus plans are paid over two years with
75% paid following the determination of bonus awards, and 25% paid one year later. The deferred amounts would be forfeited in the event of termination for any reason except retirement, death or disability. All awards under the Plan will be prorated
downward if the sum of all calculated awards under the Plan and the Companys 2007 bonus plans for other officers and employees of the Company and its subsidiaries would exceed 20% of the Companys consolidated pre-tax, pre-bonus income.



Executive Deferred Compensation Plans



Until December 2007, the Company maintained deferred compensation plans
which allow certain officers and employees to defer a portion of total income (base salary and bonuses). The deferral amount could be up to 20% of total income with a minimum of $10,000 annually. The Company was required to accrue the deferred
compensation liability but cannot deduct such amounts for income tax purposes until actually paid to the employee.



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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 9  Income Taxes



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



|         |  |                         |         |   |      |   |         |      |  |   |          |  
|-------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|         |  | Year Ended December 31, |        
|         |  | 2007                    |         |   | 2006 |   |         | 2005 | 
|Current  |  |                         |         |   |      |   |         |      |  |   |          |  
|Federal  |  | $                       | (234    | ) |      | $ | (47,250 | )    |  | $ | (103,314 | )
|State    |  |                         | 240     |   |      |   | (12,285 | )    |  |   | (24,532  | )
|         |  |                         |         |   |      |   |         |      |  |   |          |  
|         |  |                         | 6       |   |      |   | (59,535 | )    |  |   | (127,846 | )
|         |  |                         |         |   |      |   |         |      |  |   |          |  
|Deferred |  |                         |         |   |      |   |         |      |  |   |          |  
|Federal  |  |                         | (27,148 | ) |      |   | 7,766   |      |  |   | 3,141    |  
|State    |  |                         | (5,516  | ) |      |   | 2,838   |      |  |   | 556      |  
|         |  |                         |         |   |      |   |         |      |  |   |          |  
|         |  |                         | (32,664 | ) |      |   | 10,604  |      |  |   | 3,697    |  
|         |  |                         |         |   |      |   |         |      |  |   |          |  
|         |  | $                       | (32,658 | ) |      | $ | (48,931 | )    |  | $ | (124,149 | )
|         |  |                         |         |   |      |   |         |      |  |   |          |  



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



|                                                                                           |  |                         |         |   |      |   |         |      |  |   |          |  
|------------------------------------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                           |  | Year Ended December 31, |        
|                                                                                           |  | 2007                    |         |   | 2006 |   |         | 2005 | 
|Provision for Federal income taxes at the statutory rate                                   |  | $                       |        |   |      | $ | (43,298 | )    |  | $ | (110,173 | )
|Provision for state income taxes, net of Federal income tax benefits                       |  |                         |        |   |      |   | (6,111  | )    |  |   | (15,528  | )
|Valuation allowance                                                                        |  |                         | (771    | ) |      |   |        |      |  |   |         |  
|Reduction of deferred tax assets as a result of election to be taxed as an S corporation |  |                         | (31,887 | ) |      |   |        |      |  |   |         |  
|Other                                                                                      |  |                         |        |   |      |   | 478     |      |  |   | 1,552    |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |          |  
|                                                                                           |  | $                       | (32,658 | ) |      | $ | (48,931 | )    |  | $ | (124,149 | )
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |          |  



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



|                                                                                  |  |              |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                                                                  |  | December 31, |       
|                                                                                  |  | 2007         |        |   | 2006 |  
|Deferred tax assets                                                               |  |              |        |   |      |   |        |  
|Reserves deducted for financial reporting purposes not allowable for tax purposes |  | $            | 2,698  |   |      | $ | 29,799 |  
|Compensation deductible for tax purposes when paid                                |  |              | 21     |   |      |   | 6,175  |  
|State income tax provisions deductible when paid for Federal tax purposes         |  |              |       |   |      |   | 1,543  |  
|Effect of book/tax differences for joint ventures                                 |  |              | 36     |   |      |   | 1,181  |  
|Net operating loss                                                                |  |              | 1,851  |   |      |   |       |  
|Valuation allowance                                                               |  |              | (4,486 | ) |      |   |       |  
|                                                                                  |  |              |        |   |      |   |        |  
|                                                                                  |  |              | 120    |   |      |   | 38,698 |  
|Deferred tax liabilities                                                          |  |              |        |   |      |   |        |  
|Effect of book/tax differences for joint ventures                                 |  |              | (120   | ) |      |   | (6,034 | )
|                                                                                  |  |              |        |   |      |   |        |  
|                                                                                  |  | $            |       |   |      | $ | 32,664 |  
|                                                                                  |  |              |        |   |      |   |        |  



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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 $31,887,000 due to the elimination of any future tax benefit by the Company from
such assets. In addition, the provision reflects a valuation allowance of $771,000. Also, due to the S corporation election, unused recognized built in losses in the amount of $19,414,000 are no longer available to the Company.



Prior to March 15, 2008, the Company and its shareholders
expect to make a revocation of the S corporation election effective on January 1, 2008. 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 contemplated change in
tax status, the Company anticipates that it will record a deferred tax asset in the range of $35,000,000$41,000,000 as of January 1, 2008. The recorded deferred tax asset reflects the tax refund for the anticipated carry back of the estimated
2008 tax loss to 2006 as a result of the reversal of temporary differences in 2008. The Company expects to receive the tax refund in mid-2009.



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). FIN 48 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 FIN 48, effective January 1, 2007, the Company recorded an income tax refund receivable of $5,654,000 and recognized the associated tax benefit as an increase in additional paid-in capital. In connection therewith, the Company recorded
interest receivable of $1,122,000 and recognized the associated tax benefit as an increase in retained earnings. At January 1, 2007 and December 31, 2007, the Company has no unrecognized tax benefits.



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



The estimated overall effective tax rate for the years ending
December 31, 2007, 2006 and 2005 are (10.3%), 39.5% and 39.4%, 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
2002 through 2007. The Company is subject to various state income tax examinations for calendar tax years ending 2004 through 2007.



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The Company currently is under income tax examination by the Internal Revenue Service for years ended
December 31, 2002, 2003 and 2004. 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 $12,000,000 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 $18,737,000 resulting in a loss on the transaction of $6,737,000.



On October 26, 2000,
the Companys Board of Directors (with Messrs. William Lyon and William H. Lyon abstaining) approved the purchase of 579 lots for a total purchase price of $12,581,000 from an entity controlled by William Lyon and William H. Lyon. 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 and during the year ended December 31, 2007,
$8,305,000 was paid to the seller and a total amount of $14,015,000 has been paid to the seller as of December 31, 2007. This land acquisition qualified as an affiliate transaction under the Companys 121/2% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994, as amended (the Old Indenture). Pursuant
to the terms of the Old Indenture, the Company determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person.
The Company delivered to the Trustee under the Old Indenture a resolution of the Board of Directors of the Company set forth in an Officers Certificate certifying that the land acquisition is on terms that are no less favorable to the Company
than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition was approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the
Company delivered to the Trustee under the Old Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.



The Company purchased land for a total purchase price of $17,342,000,
$6,221,000 and $116,773,000 during the years ended December 31, 2007, 2006 and 2005, respectively, from certain of its joint ventures.



For the years ended December 31, 2007, 2006 and 2005, the Company incurred reimbursable on-site labor costs of $224,000, $133,000 and $146,000,
respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon, of which $89,000 and $1,000 was due to the Company at December 31, 2007 and 2006, respectively. In
addition, the Company earned fees of $90,000, $98,000 and $121,000, respectively, for tax and accounting services performed for entities controlled by William Lyon and William H. Lyon during the years ended December 31, 2007, 2006 and 2005.



For each of the years ended December 31, 2007, 2006 and
2005, the Company incurred charges of $755,000, related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary.



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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 William Lyon personally. Charter services for outside third parties are contracted for at market rates. As compensation to the
Affiliate for its management and consulting services under the agreement, the Company pays the Affiliate a fee equal to (i) the amount equal to 107% of compensation paid by the Affiliate for the pilots supplied pursuant to the agreement, (ii) $50
per operating hour for the aircraft and (iii) $9,000 per month for hangar rent. In addition, all maintenance work, inspections and repairs performed by the Affiliate on the aircraft are charged to the Company at the Affiliates published rates
for maintenance, inspection and repairs in effect at the time such work is completed. The total compensation paid to the Affiliate under the agreement amounted to $1,423,000, $1,488,000 and $1,414,000 during the years ended December 31, 2007,
2006 and 2005, respectively.



Effective July 1, 2006,
General William Lyon entered into a time sharing agreement (the Agreement) with the Company pertaining to his personal use of the aircraft. The agreement calls for General Lyon to reimburse the company for all costs incurred by the
Company during his personal flights plus a surcharge on fuel consumption of two times the cost. Pursuant to the agreement and the rates charged to General Lyon prior to the agreement, the Company had earned revenue of $564,000, $524,000 and $457,000
for charter services provided to William Lyon personally, during the years ended December 31, 2007, 2006 and 2005, respectively, of which $337,000 and $333,000 was due to the Company at December 31, 2007 and 2006.



The Company and one of the Companys directors, Alex Meruelo, are
parties to an agreement pursuant to which Mr. Meruelo is eligible to receive a finders fee based upon the cash distributions received by a subsidiary of the Company from a joint venture development project relating to a portion of the Fort Ord
military base in Monterey County, California. The joint venture development project resulted from Mr. Meruelos introduction of the Company to Woodman Development Company, LLC (Woodman) and the subsequent formation of East Garrison
Partners I, LLC (EGP) as a joint venture between Woodman and Lyon East Garrison Company I, LLC (EGC). The finders fee will equal 5% of all net cash distributions distributed by EGP to EGC with respect to EGCs
existing 50% interest in EGP that are in excess of distributions with respect to certain deficit advances, deficit preferred returns, returns of capital and preferred returns on unreturned capital. The calculation of the finders fee will be
based on net cash distributions received from EGP on land sales and will not be determined on the basis of any revenues, profits or distributions received from any affiliate of EGC for the construction and sale or leasing of residential or
commercial buildings on such lots. Mr. Meruelo is not obligated to perform any services for EGC other than the introduction to Woodman. As of December 31, 2007, no amounts had been paid to Mr. Meruelo under this agreement.



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



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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.



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



Litigation Arising from General Lyons Tender
Offer



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



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



On March 23, 2006, the Company announced that its Board had appointed a
special committee of independent directors who are not members of the Companys management or employed by the Company (the Special Committee) to consider the Tender Offer. The members of the Special Committee were Harold H.



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Greene, Lawrence M. Higby, and Dr. Arthur Laffer. The Company also announced that the Special Committee had retained Morgan Stanley & Co. as its
financial advisor and Gibson, Dunn & Crutcher LLP as its legal counsel.



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



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



On April 23, 2006, Delaware Chancery Court conditionally certified a class in the Consolidated Delaware Action. The parties
to the Consolidated Delaware Action agreed to a Stipulation of Settlement, and on August 9, 2006, the Delaware Chancery Court certified a class in the Consolidated Delaware Action, approved the settlement, and dismissed the Consolidated Delaware
Action with prejudice as to all defendants and the class. On February 16, 2007, the fee award to Plaintiffs counsel was appealed to the Supreme Court of the State of Delaware. On July 18, 2007, a three-judge panel of the Delaware Supreme Court
heard oral argument, and, on July 19, 2007, referred the matter for consideration by the Court en Banc, which heard oral argument on September 19, 2007. On December 21, 2007, the Delaware Supreme Court remanded the matter to the Chancery
Court for further proceedings regarding the fee award to Plaintiffs counsel. Under the appealed award, the Company has no expected liability for Plaintiffs counsel fees, which are expected to be paid by General Lyon.



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



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



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



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Land Banking Arrangements



The Company enters into purchase agreements with various land sellers. In
some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Companys revolving credit facilities and other corporate financing sources and limiting the Companys risk, the Company
transfers the Companys right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the
lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 25% of the total purchase price. The Company is under no obligation to
purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities.
These land banking arrangements help the Company manage the financial and market risk associated with land holdings. As described in Note 2, above, Interpretation No. 46, requires the consolidation of the assets, liabilities and operations of two of
the Companys land banking arrangements including, as of December 31, 2007, real estate inventories of $30,870,000, which are included in real estate inventories not owned in the accompanying balance sheet.



In addition, the Company participates in two land banking arrangements, which
are not VIEs in accordance with Interpretation No. 46, but are consolidated in accordance with SFAS No. 49, Accounting for Product Financing Arrangements, (FAS 49). Under the provisions of FAS 49, the Company has determined
it is economically compelled, based on certain factors, to purchase the land in the land banking arrangements, and therefore, must record the remaining purchase price of the land of $113,395,000, which is included in real estate inventories not
owned and liabilities from inventories not owned in the accompanying balance sheet.



Summary information with respect to the Companys land banking arrangements is as follows as of December 31, 2007 (dollars in thousands):



|                                                                          |  |   |        
|------------------------------------------------------------------------- |  | - | -------
|Total number of land banking projects                                     |  |   | 4      
|                                                                          |  |   |        
|Total number of lots                                                      |  |   | 1,054  
|                                                                          |  |   |        
|Total purchase price                                                      |  | $ | 243,310
|                                                                          |  |   |        
|Balance of lots still under option and not purchased:                     |  |   |        
|Number of lots                                                            |  |   | 783    
|                                                                          |  |   |        
|Purchase price                                                            |  | $ | 144,265
|                                                                          |  |   |        
|Forfeited deposits (cash and letters of credit) if lots are not purchased |  | $ | 42,003 
|                                                                          |  |   |        



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



As of December 31, 2007, the Company had $19,929,000 of outstanding irrevocable standby letters of credit to guarantee the Companys financial obligations under certain land banking arrangements and other contractual



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arrangements in the normal course of business. The beneficiary may draw upon these letters of credit in the event of a contractual default by the Company
relating to each respective obligation. These letters of credit have a stated term of 12 months and have varying maturities throughout 2009, at which time the Company may be required to renew to coincide with the term of the respective arrangement.



The Company also had outstanding performance and surety bonds
of $262,052,000 at December 31, 2007 related principally to its obligations for site improvements at various projects. The Company does not believe that draws upon these bonds, if any, will have a material effect on the Companys financial
position, results of operations or cash flows.



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



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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 12  Unaudited Summarized Quarterly Financial Information



Summarized unaudited quarterly financial information for the years ended
December 31, 2007, 2006 and 2005 is as follows (in thousands except per common share amounts):



|                                                |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|----------------------------------------------- |  | ------------------ | -------- | - | ------------ | - | -------- | ----------------- |  | - | ---------------- | - |  | - | -------- | -
|                                                | 
|                                                |  | 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           |  |                    | (30,436  | ) |              |   | (116,031 | )                 |  |   | (82,935          | ) |  |   | (113,874 | )
|                                                |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Income (loss) before provision for income taxes |  |                    | 5,804    |   |              |   | (77,786  | )                 |  |   | (61,312          | ) |  |   | (183,456 | )
|Benefit (provision) for income taxes            |  |                    | (32,388  | ) |              |   | 914      |                   |  |   | 1,300            |   |  |   | (2,484   | )
|                                                |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net (loss) income                               |  | $                  | (26,584  | ) |              | $ | (76,872  | )                 |  | $ | (60,012          | ) |  | $ | (185,940 | )
|                                                |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|                                                | 
|                                                |  | Three Months Ended |         
|                                                |  | March 31,2006      |          |   | June 30,2006 |   |          | September 30,2006 |  |   | December 31,2006 |  
|Sales                                           |  | $                  | 307,381  |   |              | $ | 408,254  |                   |  | $ | 311,248          |   |  | $ | 465,338  |  
|Cost of sales                                   |  |                    | (229,873 | ) |              |   | (315,993 | )                 |  |   | (247,099         | ) |  |   | (388,073 | )
|                                                |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Gross profit                                    |  |                    | 77,508   |   |              |   | 92,261   |                   |  |   | 64,149           |   |  |   | 77,265   |  
|Other income, costs and expenses, net           |  |                    | (34,386  | ) |              |   | (42,283  | )                 |  |   | (46,382          | ) |  |   | (64,423  | )
|                                                |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Income before provision for income taxes        |  |                    | 43,122   |   |              |   | 49,978   |                   |  |   | 17,767           |   |  |   | 12,842   |  
|Provision for income taxes                      |  |                    | (16,908  | ) |              |   | (19,597  | )                 |  |   | (7,265           | ) |  |   | (5,161   | )
|                                                |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net income                                      |  | $                  | 26,214   |   |              | $ | 30,381   |                   |  | $ | 10,502           |   |  | $ | 7,681    |  
|                                                |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|                                                | 
|                                                |  | Three Months Ended |         
|                                                |  | March 31,2005      |          |   | June 30,2005 |   |          | September 30,2005 |  |   | December 31,2005 |  
|Sales                                           |  | $                  | 246,682  |   |              | $ | 407,489  |                   |  | $ | 376,331          |   |  | $ | 825,881  |  
|Cost of sales                                   |  |                    | (176,795 | ) |              |   | (288,976 | )                 |  |   | (279,063         | ) |  |   | (606,967 | )
|                                                |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Gross profit                                    |  |                    | 69,887   |   |              |   | 118,513  |                   |  |   | 97,268           |   |  |   | 218,914  |  
|Other income, costs and expenses, net           |  |                    | (36,014  | ) |              |   | (45,621  | )                 |  |   | (34,321          | ) |  |   | (73,846  | )
|                                                |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Income before provision for income taxes        |  |                    | 33,873   |   |              |   | 72,892   |                   |  |   | 62,947           |   |  |   | 145,068  |  
|Provision for income taxes                      |  |                    | (13,380  | ) |              |   | (28,792  | )                 |  |   | (24,864          | ) |  |   | (57,113  | )
|                                                |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net income                                      |  | $                  | 20,493   |   |              | $ | 44,100   |                   |  | $ | 38,083           |   |  | $ | 87,955   |  
|                                                |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  



128



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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(35)       |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                           
|3.4(35)       |  | Certificate of Amendment of Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                      
|3.5(2)        |  | Bylaws of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                                                          
|4.1(23)       |  | Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and
guarantees).                                                                                                                                                                                                             
|4.2(15)       |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as
Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).   
|4.3(24)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee
(supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).              
|4.4(3)        |  | Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and
guarantees).                                                                                                                                                                                                           
|4.5(15)       |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as
Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee). 
|4.6(24)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee
(supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).            
|4.7(14)       |  | Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and
guarantees).                                                                                                                                                                                                          
|4.8(15)       |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as
Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
|4.9(24)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee
(supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).           
|10.1(11)      |  | Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a Delaware
corporation.                                                                                                                                                                                                                     
|10.2(34)      |  | First Amendment dated as of August 17, 2006 to Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC
Construction Funding Corp., a Delaware corporation.                                                                                                                                                                      



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                       
|10.3(39)      |  | Second Amendment dated as of January 23, 2008 to Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC
Construction Funding, LLC, a Delaware limited liability company, formerly known as RFC Construction Funding Corp.                                                         
|10.4(4)       |  | Master Loan Agreement dated as of August 31, 2000 by and between William Lyon Homes, Inc., a California corporation (Borrower) and Guaranty Federal Bank, F.S.B., a federal savings
bank organized and existing under the laws of the United States (Lender).                                                                                                 
|10.5(39)      |  | Amended and Restated Master Loan Agreement dated as of January 28, 2008 by and between William Lyon Homes, Inc., a California corporation (Borrower) and Guaranty Bank, a federal
savings bank organized and existing under the laws of the United States (Lender).                                                                                           
|10.6(6)       |  | Agreement for First Modification of Deeds of Trust and Other Loan Instruments, dated as of June 8, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.     
|10.7(5)       |  | Agreement for Second Modification of Deeds of Trust and Other Loan Instruments, dated as of July 23, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.   
|10.8(5)       |  | Agreement for Third Modification of Deeds of Trust and Other Loan Instruments, dated as of December 19, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.
|10.9(5)       |  | Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments, dated as of May 29, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.    
|10.10(7)      |  | Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.      
|10.11(3)      |  | Agreement for Sixth Modification of Deeds of Trust and Other Loan Agreements, dated as of November 14, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender. 
|10.12(12)     |  | Agreement for Seventh Modification of Deeds of Trust and Other Loan Instruments dated as of October 6, 2004 by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.                                                      
|10.13(24)     |  | Agreement for Eighth Modification of Deeds of Trust and Other Loan Instruments dated as of October 14, 2005 by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.                                                      
|10.14(34)     |  | Agreement for Ninth Modification of Deeds of Trust and Other Loan Instruments dated as of October 31, 2006 by and between William Lyon Homes, Inc., a California corporation, and Guaranty
Bank, a federal savings bank organized and existing under the laws of the United States, as lender.                                                                    
|10.15(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.                                                                                                                                   
|10.16(17)     |  | Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of September 18, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
California Bank & Trust, a California banking corporation, as lender.                                                                                                  



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                   
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                       
|10.17(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.                            
|10.18(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.                              
|10.19(11)     |  | Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes,
Inc., a California corporation.                                                                           
|10.20(25)     |  | 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.                                                                                                                  
|10.21(31)     |  | 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.                                                       
|10.22(39)     |  | 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.                                                   
|10.23(39)     |  | 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.                                                    
|10.24(7)      |  | Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as
Lender.                                                                                                               
|10.25(10)     |  | Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2004 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as
Lender.                                                                                                               
|10.26(29)     |  | Mortgage Warehouse Loan and Security Agreement dated June 29, 2006 by and between Duxford Financial, Inc. dba William Lyon Financial Services and/or Bayport Mortgage, L.P. and/or California
Pacific Mortgage, L.P., as Borrower and First Tennessee Bank as Lender.                             
|10.27(8)      |  | Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                                                        
|10.28(3)      |  | Amendment No. 1 to Credit Agreement dated as of January 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                              
|10.29(15)     |  | First Amendment to Credit Agreement dated as of August 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                               
|10.30(13)     |  | Amendment No. 2 to Credit Agreement dated as of November 15, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                             
|10.31(9)      |  | Revolving Line of Credit Loan Agreement, dated as of March 11, 2003, by and among Moffett Meadows Partners, LLC, a Delaware limited liability company, as borrower, and California Bank &
Trust, a California banking corporation, and the other financial institutions named therein, as lenders.
|10.32(9)      |  | Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware corporation.                                                                                                                                                     
|10.33(10)     |  | Borrowing Base Revolving Line of Credit Agreement, dated as of June 28, 2004, by and between William Lyon Homes, Inc., a California corporation, and Bank One, NA, a national banking
association.                                                                                                
|10.34(15)     |  | Modification Agreement, dated as of December 7, 2004, by and between William Lyon Homes, Inc., a California corporation, and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA, a
national banking association).                                                                     
|10.35(25)     |  | 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).                                                                              
|10.36(33)     |  | 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.                                                         



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                  
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                      
|10.37(36)     |  | 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.                                                                                        
|10.38(39)     |  | 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.                                                                                       
|10.39(18)     |  | Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.                                                                                                                                                                                           
|10.40(18)     |  | Property Management Agreement between Corporate Enterprises, Inc., a California corporation (Owner) and William Lyon Homes, Inc., a California corporation (Manager) dated and effective
November 5, 1999.                                                                                                                       
|10.41(18)     |  | Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5,
1999.                                                                                                                                            
|10.42(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.                                                                                                                                
|10.43(26)     |  | Adjustment of Salary of Douglas F. Bauer.                                                                                                                                                                                                                                                                                        
|10.44(35)     |  | Description of 2006 Cash Bonus Plan.                                                                                                                                                                                                                                                                                             
|10.45(35)     |  | 2006 Senior Executive Bonus Plan.                                                                                                                                                                                                                                                                                                
|10.46(35)     |  | Description of 2007 Cash Bonus Plan.                                                                                                                                                                                                                                                                                             
|10.47(35)     |  | 2007 Senior Executive Bonus Plan.                                                                                                                                                                                                                                                                                                
|10.48(19)     |  | Standard Industrial/Commercial Single-Tenant Lease  Net between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.                                                                                                                                                                          
|10.49(20)     |  | William Lyon Homes Executive Deferred Compensation Plan effective as of February 11, 2002.                                                                                                                                                                                                                                       
|10.50(21)     |  | William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002.                                                                                                                                                                                                                               
|10.51(5)      |  | The Presley Companies Non-Qualified Retirement Plan for Outside Directors.                                                                                                                                                                                                                                                       
|10.52(16)     |  | William Lyon Homes 2004 Executive Deferred Compensation Plan.                                                                                                                                                                                                                                                                    
|10.53(16)     |  | William Lyon Homes 2004 Outside Directors Deferred Compensation Plan.                                                                                                                                                                                                                                                            
|10.54(27)     |  | Summary of Director Compensation.                                                                                                                                                                                                                                                                                                
|10.55(27)     |  | Borrowing Base Revolving Line of Credit Agreement, dated as of February 14, 2006, by and between William Lyon Homes, Inc., a California corporation, and Wachovia Financial Services, Inc, a
North Carolina corporation, by and through its Agent, Wachovia Bank, National Association, a national banking association.          
|10.56(32)     |  | First Amendment to Borrowing Base Revolving Line of Credit Agreement dated September 29, 2006 by and between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National
Association, a national banking association.                                                                                         
|10.57(39)     |  | Third Amendment to Borrowing Base Revolving Line of Credit Agreement dated January 23, 2008 between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National Association,
a national banking association, formerly referenced as Agent for Wachovia Financial Services, Inc., a North Carolina corporation.
|10.58(30)     |  | Borrowing Base Revolving Line of Credit Agreement dated as of July 10, 2006 by and between William Lyon Homes, Inc., a California corporation, and California National Bank.                                                                                                                                                     
|10.59(37)     |  | Extension and Modification Agreement dated as of August 2, 2007 by and between William Lyon Homes, Inc., a California corporation, and California National Bank                                                                                                                                                                  
|10.60(28)     |  | Revolving Line of Credit Loan Agreement dated as of March 8, 2006 by and between William Lyon Homes, Inc., a California corporation, and Comerica Bank.                                                                                                                                                                          
|10.61(39)     |  | Amendment Agreement entered into as of February 28, 2008, by and between William Lyon Homes, Inc., a California corporation and Comerica Bank                                                                                                                                                                                    
|10.62(38)     |  | Loan Agreement dated as of January 30, 2007, by and between East Garrison Partners I, a California limited liability company, and Residential Funding Company, LLC, a Delaware limited
liability company.                                                                                                                        



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                                            
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                
|10.63(38)     |  | Completion Guaranty dated as of January 30, 2007, by and between William Lyon Homes, Inc., a California corporation, and other guarantors in favor of Residential Funding Company,
LLC.                                                                                                                                                                                                    
|10.64(39)     |  | First Amendment to Loan Agreement dated as of February 25, 2008, but effective as of December 31, 2007, by and between East Garrison Partners I, LLC, a California limited liability company,
and RFC Construction Funding, LLC, a Delaware limited liability company, as successor in interest to and assignee of Residential Funding Company, LLC., a Delaware limited liability company.
|12.1(39)      |  | Statement of computation of ratio of earnings to fixed charges.                                                                                                                                                                                                                                                                                                                            
|21.1(39)      |  | List of Subsidiaries of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                        
|31.1(39)      |  | Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                        
|31.2(39)      |  | Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                        
|32.1(39)      |  | 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(39)      |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                         



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

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

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

|(4) | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000 and incorporated herein by this reference
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(6) | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 and incorporated herein by this reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

|(10) | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 and incorporated herein by this reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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



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##### Table of Contents

|(18) | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by this reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(19) | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by this reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(20) | Previously filed as an exhibit to the Companys Registration Statement on Form S-8 (SEC Registration No. 333-82448), and incorporated herein by this reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(21) | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by this reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(22) | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 and incorporated herein by this reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(23) | 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.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(24) | 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.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(25) | 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.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------

|(26) | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005 and incorporated herein by this reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(27) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.
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|(28) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed April 3, 2006 and incorporated herein by reference.
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|(29) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed July 6, 2006 and incorporated herein by reference.
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|(30) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed August 1, 2006 and incorporated herein by reference.
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|(31) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed September 27, 2006 and incorporated herein by reference.
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|(32) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed October 17, 2006 and incorporated herein by reference.
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|(33) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed October 27, 2006 and incorporated herein by reference.
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|(34) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed December 11, 2006 and incorporated herein by reference.
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|(35) |  | 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.
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|(36) |  | 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.
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|(37) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on August 6, 2007 and incorporated herein by reference.
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|(38) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on February 2, 2007 and incorporated herein by reference.
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|(39) |  | Filed herewith.
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