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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, 2002



OR



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



Commission File Number 0-18001



WILLIAM LYON HOMES

(Exact name of registrant as specified in its charter)



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



4490
Von Karman Avenue

Newport Beach, California 92660

(Address of principal executive offices)



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



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



|Title of Each Class                    |  | Name of Each Exchange on Which Registered
|-------------------------------------- |  | -----------------------------------------
|Common Stock, par value $.01 per share |  | New York Stock Exchange                  



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



None



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



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2).  YES  x  NO ̈.



The aggregate market value of the voting stock held by
non-affiliates of the registrant as of February 14, 2003 was $93,880,139. (This calculation assumes that all officers and directors of the Company are affiliates.)



The number of shares of Common Stock outstanding as of February 14, 2003 was 9,728,747 .



DOCUMENTS INCORPORATED BY REFERENCE



None



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WILLIAM LYON HOMES



INDEX



|         |  |                                                                                                |  | Page No.
|-------- |  | ---------------------------------------------------------------------------------------------- |  | --------
|PART I  
|        
|Item 1.  |  | Business                                                                                       |  | 1       
|        
|Item 2.  |  | Properties                                                                                     |  | 13      
|        
|Item 3.  |  | Legal Proceedings                                                                              |  | 13      
|        
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 13      
|        
|PART II 
|        
|Item 5.  |  | Market for the Registrants Common Equity and Related Stockholder Matters                      |  | 14      
|        
|Item 6.  |  | Selected Financial Data                                                                        |  | 15      
|        
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 17      
|        
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 35      
|        
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 35      
|        
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 35      
|        
|PART III
|        
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | 36      
|        
|Item 11. |  | Executive Compensation                                                                         |  | 39      
|        
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 43      
|        
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  | 45      
|        
|Item 14. |  | Controls and Procedures                                                                        |  | 47      
|        
|PART IV 
|        
|Item 15. |  | Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K                   |  | 47      
|        
|         |  | Index to Consolidated Financial Statements                                                     |  | 54      



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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 unconsolidated subsidiaries have sold over 56,000 homes. The Company conducts its homebuilding operations through five geographic divisions (Southern California, San Diego, Northern California,
Arizona and Nevada) including both wholly-owned projects and projects being developed in unconsolidated joint ventures. The Company believes that it is one of the largest homebuilders in California in terms of both sales and homes delivered in 2002.
For 2002, approximately 75% of the Companys home closings were derived from its California operations. In 2002, the Company and its unconsolidated joint ventures had combined revenues of $993.1 million and delivered 2,522 homes.



The Company designs, constructs and sells a wide range of
homes designed to meet the specific needs of each of its markets, although it primarily emphasizes sales to the entry-level and move-up home buyer markets. At December 31, 2002, the Company marketed its homes through 36 sales locations in both its
wholly-owned projects and projects being developed in unconsolidated joint ventures. In 2002, the average sales price for homes delivered was $379,200, with base sales prices ranging from $110,000 to $1,035,000.



As of December 31, 2002, the Company and its unconsolidated
joint ventures owned approximately 6,110 lots (including 1,439 in unconsolidated joint ventures) and had options to purchase an additional 7,613 lots, substantially all of which are entitled. As used in this Annual Report on Form 10-K,
entitled land has a development agreement and/or vesting tentative map, or a final recorded plat or map from the appropriate county or city government. Development agreements and vesting tentative maps generally provide for the right to
develop the land in accordance with the provisions of the development agreement or vesting tentative map unless an issue arises concerning health, safety or general welfare. The Companys sources of developed lots for its homebuilding
operations are (1) development of master-planned communities, primarily through unconsolidated joint ventures at the current time, and (2) purchase of smaller projects with shorter life cycles (merchant homebuilding). The Company estimates that
its current inventory of land is adequate to supply its homebuilding operations at current operating levels for approximately 2 years.



As of December 31, 2002, the Company and certain of its subsidiaries are general partners or members in 16 active joint ventures
involved in the development and sale of residential projects. Such joint ventures are 50% or less owned by the Company and not controlled by the Company and, accordingly, the financial statements of such joint ventures are not consolidated with the
Companys financial statements. The Companys investments in unconsolidated joint ventures are accounted for using the equity method. 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. See Notes 1 and 4 of Notes to Consolidated Financial Statements for information with respect to a recently adopted accounting interpretation which could require the consolidation of assets, liabilities
and operations of certain of the Companys joint venture and land banking arrangements and for condensed combined financial information for these joint ventures. Based upon current estimates, substantially all future development and
construction costs incurred by the joint ventures will be funded by the Companys joint venture partners or from the proceeds of construction financing obtained by the joint ventures.



The Company will continue to utilize its current inventory of lots and future land acquisitions to conduct
its operating strategy which consists of: (i) focusing on high growth core markets; (ii) maintaining conservative financial position and improving its credit profile; (iii) acquiring strong land positions through disciplined



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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 $613.3 million, $468.2 million and $417.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. Homes closed by the Company, including unconsolidated joint ventures, were 2,522, 2,566 and 2,666
for the years ended December 31, 2002, 2001 and 2000, respectively. Including unconsolidated joint ventures, the Companys dollar amount of backlog of homes sold but not closed as of December 31, 2002, was $259.1 million, a 47% increase
over the $176.5 million as of December 31, 2001. The cancellation rate of buyers who contracted to buy a home but did not close escrow was approximately 19% during 2002 and 24% during 2001.



The Companys operations are dependent to a significant
extent on debt financing and on joint venture financing. The Companys principal credit sources are its 121/2% Senior Notes, secured revolving credit facilities, unsecured revolving credit line, project construction loans, seller-provided financing, and land banking transactions. At December 31, 2002, the outstanding principal amount of the
121/2% Senior Notes was $70.3 million. The secured revolving credit facilities are revolving lines of
credit with a maximum commitment of $225.0 million at December 31, 2002 which increased to $275.0 million in January 2003. However, the credit facilities have limitations on the amounts that can be borrowed at any time based on assets which are
included in the credit facilities and the specified borrowings permitted under borrowing base calculations. The secured revolving credit facilities are secured by substantially all of the Companys assets. At December 31, 2002, the outstanding
principal amount under the secured revolving credit facilities was $118.1 million. The Companys mortgage subsidiary has a $20 million revolving credit facility to fund its mortgage operations, of which $18.1 million was outstanding at
December 31, 2002. See Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition and Liquidity and Note 5 of Notes to Consolidated Financial Statements.



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.



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



The Companys
Markets



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



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



|                              |  | Year Ended December 31, |        
|----------------------------- |  | ----------------------- | -------
|                              |  | 2002                    |        
|                              |  | Dollar Amount           |        
|                              |  |                         |        
|                              |  | (Dollars in Thousands)  |        
|Wholly-owned                  |  |                         |        
|Southern California(1)        |  | $                       | 232,868
|San Diego(2)                  |  |                         | 115,843
|Northern California(3)        |  |                         | 84,679 
|Arizona(4)                    |  |                         | 65,571 
|New Mexico(5)                 |  |                         |       
|Nevada(6)                     |  |                         | 103,449
|                              |  |                         |        
|                              |  |                         | 602,410
|                              |  |                         |        
|Unconsolidated joint ventures |  |                         |        
|Southern California(1)        |  |                         | 167,518
|San Diego(2)                  |  |                         | 90,843 
|Northern California(3)        |  |                         | 121,415
|                              |  |                         |        
|                              |  |                         | 379,776
|                              |  |                         |        
|Combined                      |  |                         |        
|Southern California(1)        |  |                         | 400,386
|San Diego(2)                  |  |                         | 206,686
|Northern California(3)        |  |                         | 206,094
|Arizona(4)                    |  |                         | 65,571 
|New Mexico(5)                 |  |                         |       
|Nevada(6)                     |  |                         | 103,449
|                              |  |                         |        
|                              |  | $                       | 982,186
|                              |  |                         |        

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|(1) |  | The Southern California Division consists of operations in the counties of Los Angeles, Orange, and Ventura and a portion of Riverside County.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | The San Diego Division consists of operations in San Diego County and a portion of Riverside County.
|--- |  | ----------------------------------------------------------------------------------------------------



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



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



|(5) |  | The New Mexico Division consisted of operations in Albuquerque and Santa Fe. The Company ceased its operations in New Mexico in mid-2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------



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



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



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LAND ACQUISITION AND
DEVELOPMENT



As of December 31, 2002, the
Company and its unconsolidated subsidiaries controlled 13,723 lots. Of these lots, 6,110 were owned and entitled.



The Company estimates that its current inventory of land owned is adequate to supply its homebuilding operations at current operating
levels for approximately two 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. The Companys land acquisition strategy has been to undertake projects with shorter life-cycles in order to reduce development and market risk while maintaining an inventory of owned lots sufficient for construction of homes
over a two-year period. The Companys strategy consists of the following elements:



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



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



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



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



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



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



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



|Ø |  | 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
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Ø |  | 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.



In January 2003, the Company and two unaffiliated parties formed a limited liability company for the purpose of acquiring three parcels of
land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. This unique acquisition is positioned to deliver homes in multiple product
segments in what the Company believes is one of the highest demand and supply constrained markets in the country. Upon completion of the development, the Company has the obligation under certain specific conditions to purchase approximately one-half
of the homesites. It is anticipated that homebuilding activities and first deliveries will begin in 2005. See Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition and
Liquidity for more information relating to this transaction and related financing.



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



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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, 2002, the Company had 36 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 1,183 to 1,825 square feet, and
the Companys detached housing ranges from 1,302 to 4,695 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 $299,000 to $390,000 and base sales prices for detached housing range from approximately $110,000 to $1,035,000. On a combined basis with the Companys unconsolidated subsidiaries, the average sales price of the
Companys homes for the year ended December 31, 2002 was $379,200.



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



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



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



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Description of Projects and
Communities Under Development



The
Companys homebuilding projects usually take two to three years to develop. The following table presents project information relating to each of the Companys homebuilding divisions as of December 31, 2002 and only includes projects with
lots owned as December 31, 2002 or homes closed for the year ended December 31, 2002.



|Project (County) Product                |  | Year of First Delivery |  | Estimated Number of Homes at Completion(1) |  | Units Closed as of December 31, 2002 |  | Backlog at December 31, 2002(2)(3) |  | Lots Owned as of December 31, 2002(4) |  | Homes Closed for the Year Ended December 31, 2002 |  | Sales Price Range(5)
|--------------------------------------- |  | ---------------------- |  | ------------------------------------------ |  | ------------------------------------ |  | ---------------------------------- |  | ------------------------------------- |  | ------------------------------------------------- |  | --------------------
|                                       
|SOUTHERN
CALIFORNIA                    
|Wholly-owned:                           |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Orange County                           |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Andover, West Irvine                    |  | 2001                   |  | 138                                        |  | 138                                  |  | 0                                  |  | 0                                     |  | 65                                                |  | $299,000  331,000  
|Terraza at Vista del Verde, Yorba Linda |  | 2001                   |  | 106                                        |  | 100                                  |  | 3                                  |  | 6                                     |  | 77                                                |  | $565,000  615,000  
|Monticello, Irvine                      |  | 2002                   |  | 112                                        |  | 98                                   |  | 8                                  |  | 14                                    |  | 98                                                |  | $330,000  390,000  
|Montellano at Talega, San Clemente      |  | 2002                   |  | 61                                         |  | 28                                   |  | 17                                 |  | 33                                    |  | 28                                                |  | $955,000  1,035,000
|Castellon at Talega, San Clemente       |  | 2003                   |  | 76                                         |  | 0                                    |  | 0                                  |  | 76                                    |  | 0                                                 |  | $805,000  885,000  
|Sterling Glen, Ladera Ranch             |  | 2002                   |  | 102                                        |  | 91                                   |  | 11                                 |  | 11                                    |  | 91                                                |  | $502,000  535,000  
|Davenport, Ladera Ranch                 |  | 2003                   |  | 163                                        |  | 0                                    |  | 0                                  |  | 163                                   |  | 0                                                 |  | $297,000  335,000  
|Weatherhaven, Ladera Ranch              |  | 2002                   |  | 71                                         |  | 3                                    |  | 19                                 |  | 68                                    |  | 3                                                 |  | $461,000  526,000  
|Laurel at Quail Hill, Irvine            |  | 2003                   |  | 83                                         |  | 0                                    |  | 11                                 |  | 21                                    |  | 0                                                 |  | $426,000  576,000  
|Linden at Quail Hill, Irvine            |  | 2003                   |  | 100                                        |  | 0                                    |  | 14                                 |  | 38                                    |  | 0                                                 |  | $521,000  586,000  
|Riverside County                        |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Providence Ranch, Corona                |  | 2002                   |  | 97                                         |  | 92                                   |  | 0                                  |  | 5                                     |  | 0                                                 |  | $270,000  305,000  
|Providence Ranch North, Corona          |  | 2002                   |  | 83                                         |  | 81                                   |  | 2                                  |  | 2                                     |  | 81                                                |  | $246,000  300,000  
|Providence Ranch III, Corona            |  | 2003                   |  | 67                                         |  | 0                                    |  | 22                                 |  | 67                                    |  | 0                                                 |  | $275,000  330,000  
|Ventura County                          |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Cantada, Oxnard                         |  | 2002                   |  | 113                                        |  | 112                                  |  | 1                                  |  | 1                                     |  | 85                                                |  | $343,000  363,000  
|                                        |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Total wholly-owned                      |  |                        |  | 1,372                                      |  | 743                                  |  | 108                                |  | 505                                   |  | 528                                               |  |                     
|                                        |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Unconsolidated joint ventures:          |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Orange County                           |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Reston, Ladera Ranch                    |  | 2000                   |  | 117                                        |  | 117                                  |  | 0                                  |  | 0                                     |  | 15                                                |  | $365,000  425,000  
|Hampton Road, Ladera Ranch              |  | 2000                   |  | 82                                         |  | 82                                   |  | 0                                  |  | 0                                     |  | 19                                                |  | $447,000  477,000  
|Compass Pointe, San Clemente            |  | 2000                   |  | 92                                         |  | 92                                   |  | 0                                  |  | 0                                     |  | 11                                                |  | $540,000  575,000  
|Avalon, Huntington Beach                |  | 2000                   |  | 113                                        |  | 113                                  |  | 0                                  |  | 0                                     |  | 4                                                 |  | $460,000  490,000  
|Beachside, Huntington Beach             |  | 2001                   |  | 86                                         |  | 81                                   |  | 4                                  |  | 5                                     |  | 74                                                |  | $620,000  640,000  
|Riverside County                        |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Heartland 1, North Corona               |  | 2003                   |  | 163                                        |  | 0                                    |  | 0                                  |  | 163                                   |  | 0                                                 |  | $265,000  290,000  
|Heartland 2, North Corona               |  | 2003                   |  | 167                                        |  | 0                                    |  | 0                                  |  | 167                                   |  | 0                                                 |  | $275,000  310,000  
|Heartland 3, North Corona               |  | 2003                   |  | 121                                        |  | 0                                    |  | 0                                  |  | 121                                   |  | 0                                                 |  |                     
|Ventura County                          |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Quintana, Thousand Oaks                 |  | 2001                   |  | 90                                         |  | 57                                   |  | 25                                 |  | 33                                    |  | 49                                                |  | $555,000  650,000  
|Coronado, Oxnard                        |  | 2002                   |  | 110                                        |  | 74                                   |  | 5                                  |  | 36                                    |  | 74                                                |  | $435,000  460,000  
|Cantabria, Oxnard                       |  | 2002                   |  | 87                                         |  | 74                                   |  | 11                                 |  | 13                                    |  | 74                                                |  | $350,000  370,000  
|Los Angeles County                      |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Toscana, Moorpark                       |  | 2002                   |  | 70                                         |  | 26                                   |  | 25                                 |  | 44                                    |  | 26                                                |  | $503,000  538,000  
|Westridge, Valencia                     |  | 2003                   |  | 87                                         |  | 0                                    |  | 0                                  |  | 87                                    |  | 0                                                 |  | $625,000  775,000  
|                                        |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Total unconsolidated joint ventures.    |  |                        |  | 1,385                                      |  | 716                                  |  | 70                                 |  | 669                                   |  | 346                                               |  |                     
|                                        |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|SOUTHERN CALIFORNIA DIVISION TOTAL      |  |                        |  | 2,757                                      |  | 1,459                                |  | 178                                |  | 1,174                                 |  | 874                                               |  |                     
|                                        |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     



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|Project (County) Product             |  | Year of First Delivery |  | Estimated Number of Homes at Completion(1) |  | Units Closed as of December 31, 2002 |  | Backlog at December 31, 2002(2)(3) |  | Lots Owned as of December 31, 2002(4) |  | Homes Closed for the Year Ended December 31, 2002 |  | Sales Price Range(5)
|------------------------------------ |  | ---------------------- |  | ------------------------------------------ |  | ------------------------------------ |  | ---------------------------------- |  | ------------------------------------- |  | ------------------------------------------------- |  | --------------------
|                                    
|NORTHERN
CALIFORNIA                 
|Wholly-owned:                        |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|San Joaquin County                   |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Lyon Villas, Tracy                   |  | 1999                   |  | 135                                        |  | 129                                  |  | 0                                  |  | 6                                     |  | 45                                                |  | $270,000  310,000  
|Lyon Estates, Tracy                  |  | 1997                   |  | 120                                        |  | 90                                   |  | 0                                  |  | 30                                    |  | 7                                                 |  | $291,000  327,000  
|Lyon Ironwood, Lathrop               |  | 2000                   |  | 116                                        |  | 116                                  |  | 0                                  |  | 0                                     |  | 35                                                |  | $209,000  263,000  
|Ironwood II, Lathrop                 |  | 2003                   |  | 88                                         |  | 0                                    |  | 7                                  |  | 88                                    |  | 0                                                 |  | $234,000  276,000  
|Lyon Estates at Stonebridge, Lathrop |  | 2001                   |  | 146                                        |  | 82                                   |  | 29                                 |  | 64                                    |  | 59                                                |  | $281,000  321,000  
|Contra Costa County                  |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Lyon Rhapsody, Brentwood             |  | 2001                   |  | 81                                         |  | 81                                   |  | 0                                  |  | 0                                     |  | 38                                                |  | $239,000  298,000  
|Olde Ivy, Brentwood                  |  | 2003                   |  | 77                                         |  | 0                                    |  | 0                                  |  | 77                                    |  | 0                                                 |  | $285,000  328,000  
|Heartland, Brentwood                 |  | 2003                   |  | 75                                         |  | 0                                    |  | 0                                  |  | 75                                    |  | 0                                                 |  | $288,000  328,000  
|Gables, Brentwood                    |  | 2003                   |  | 100                                        |  | 0                                    |  | 0                                  |  | 100                                   |  | 0                                                 |  | $298,000  378,000  
|The Bluffs, Hercules                 |  | 2003                   |  | 70                                         |  | 0                                    |  | 4                                  |  | 70                                    |  | 0                                                 |  | $576,000  641,000  
|The Shores, Hercules                 |  | 2003                   |  | 99                                         |  | 0                                    |  | 3                                  |  | 99                                    |  | 0                                                 |  | $531,000  591,000  
|Sacramento County                    |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Lyon Palazzo, Natomas                |  | 2001                   |  | 100                                        |  | 91                                   |  | 9                                  |  | 9                                     |  | 53                                                |  | $273,000  322,000  
|Santa Clara County                   |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|The Ranch at Silver Creek, San Jose  |  | 2003                   |  | 538                                        |  | 0                                    |  | 0                                  |  | 494                                   |  | 0                                                 |  |                     
|Stanislaus County                    |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Lyon Seasons, Modesto                |  | 2002                   |  | 71                                         |  | 45                                   |  | 9                                  |  | 26                                    |  | 45                                                |  | $277,000  336,000  
|Walker Ranch, Patterson              |  | 2003                   |  | 119                                        |  | 0                                    |  | 0                                  |  | 119                                   |  | 0                                                 |  | $285,000  345,000  
|                                     |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Total wholly-owned                   |  |                        |  | 1,935                                      |  | 634                                  |  | 61                                 |  | 1,257                                 |  | 282                                               |  |                     
|                                     |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Unconsolidated joint ventures:       |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Contra Costa County                  |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Lyon Ridge, Antioch                  |  | 1999                   |  | 127                                        |  | 127                                  |  | 0                                  |  | 0                                     |  | 1                                                 |  | $348,000  407,000  
|Lyon Tierra, San Ramon               |  | 2001                   |  | 46                                         |  | 46                                   |  | 0                                  |  | 0                                     |  | 15                                                |  | $463,000  501,000  
|Lyon Dorado, San Ramon               |  | 2001                   |  | 54                                         |  | 53                                   |  | 1                                  |  | 1                                     |  | 32                                                |  | $788,000  1,003,000
|Overlook, Hercules                   |  | 2003                   |  | 133                                        |  | 0                                    |  | 0                                  |  | 133                                   |  | 0                                                 |  | $465,000  525,000  
|Solano County                        |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Cascade/Paradise Valley, Fairfield   |  | 2003                   |  | 9                                          |  | 0                                    |  | 2                                  |  | 9                                     |  | 0                                                 |  | $586,000  626,000  
|Brook, Fairfield                     |  | 2001                   |  | 121                                        |  | 114                                  |  | 7                                  |  | 7                                     |  | 91                                                |  | $312,000  359,000  
|Falls, Fairfield                     |  | 2001                   |  | 102                                        |  | 102                                  |  | 0                                  |  | 0                                     |  | 67                                                |  | $321,000  409,000  
|El Dorado County                     |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Lyon Casina, El Dorado Hills         |  | 2001                   |  | 123                                        |  | 40                                   |  | 31                                 |  | 83                                    |  | 33                                                |  | $315,000  369,000  
|Lyon Prima, El Dorado Hills          |  | 2001                   |  | 137                                        |  | 39                                   |  | 11                                 |  | 98                                    |  | 34                                                |  | $366,000  433,000  
|Placer County                        |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Pinehurst at Morgan Creek            |  | 2003                   |  | 117                                        |  | 0                                    |  | 0                                  |  | 117                                   |  | 0                                                 |  | $476,000  578,000  
|Cypress at Morgan Creek              |  | 2003                   |  | 73                                         |  | 0                                    |  | 0                                  |  | 73                                    |  | 0                                                 |  | $441,000  511,000  
|                                     |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Total unconsolidated joint ventures  |  |                        |  | 1,042                                      |  | 521                                  |  | 52                                 |  | 521                                   |  | 273                                               |  |                     
|                                     |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|NORTHERN CALIFORNIA DIVISION TOTAL   |  |                        |  | 2,977                                      |  | 1,155                                |  | 113                                |  | 1,778                                 |  | 555                                               |  |                     
|                                     |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     



7



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##### Table of Contents

|Project (County) Product                     |  | Year of First Delivery |  | Estimated Number of Homes at Completion(1) |  | Units Closed as of December 31, 2002 |  | Backlog at December 31, 2002(2)(3) |  | Lots Owned as of December 31, 2002(4) |  | Homes Closed for the Year Ended December 31, 2002 |  | Sales Price Range(5)
|-------------------------------------------- |  | ---------------------- |  | ------------------------------------------ |  | ------------------------------------ |  | ---------------------------------- |  | ------------------------------------- |  | ------------------------------------------------- |  | --------------------
|                                            
|SAN DIEGO                                   
|Wholly-owned:                                |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Riverside County                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Horsethief Canyon Ranch Series 400, Corona |  | 1995                   |  | 554                                        |  | 553                                  |  | 0                                  |  | 1                                     |  | 97                                                |  | $240,000  307,000  
|Horsethief Canyon Ranch Series 500, Corona |  | 1995                   |  | 445                                        |  | 445                                  |  | 0                                  |  | 0                                     |  | 35                                                |  | $239,000  257,000  
|Vail Ranch, Temecula                         |  | 2000                   |  | 152                                        |  | 152                                  |  | 0                                  |  | 0                                     |  | 1                                                 |  | $196,000  213,000  
|Sycamore Ranch, Fallbrook                    |  | 1997                   |  | 195                                        |  | 158                                  |  | 14                                 |  | 37                                    |  | 41                                                |  | $474,000  645,000  
|Three Sisters, Corona                        |  | 2003                   |  | 274                                        |  | 0                                    |  | 0                                  |  | 96                                    |  | 0                                                 |  | $353,000  448,000  
|Willow Glen, Temecula                        |  | 2003                   |  | 74                                         |  | 0                                    |  | 0                                  |  | 74                                    |  | 0                                                 |  | $278,000  308,000  
|Tessera, Beaumont                            |  | 2003                   |  | 138                                        |  | 0                                    |  | 0                                  |  | 77                                    |  | 0                                                 |  | $180,000  205,000  
|Sedona, Murietta                             |  | 2003                   |  | 144                                        |  | 0                                    |  | 0                                  |  | 16                                    |  | 0                                                 |  | $301,000  386,000  
|San Diego County                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|The Groves, Escondido                        |  | 2001                   |  | 93                                         |  | 67                                   |  | 10                                 |  | 25                                    |  | 64                                                |  | $367,000  382,000  
|The Orchards, Escondido                      |  | 2002                   |  | 78                                         |  | 22                                   |  | 7                                  |  | 41                                    |  | 22                                                |  | $368,000  401,000  
|Vineyards, Escondido                         |  | 2003                   |  | 75                                         |  | 0                                    |  | 0                                  |  | 23                                    |  | 0                                                 |  | $440,000  495,000  
|Meadows, Escondido                           |  | 2003                   |  | 42                                         |  | 0                                    |  | 0                                  |  | 2                                     |  | 0                                                 |  | $378,000  428,000  
|Loma Real, San Marcos                        |  | 2000                   |  | 87                                         |  | 87                                   |  | 0                                  |  | 0                                     |  | 18                                                |  | $403,000  446,000  
|Los Reyes, San Marcos                        |  | 2000                   |  | 68                                         |  | 68                                   |  | 0                                  |  | 0                                     |  | 28                                                |  | $445,000  470,000  
|Sonora Ridge, Chula Vista                    |  | 2003                   |  | 172                                        |  | 0                                    |  | 0                                  |  | 20                                    |  | 0                                                 |  | $296,000  325,000  
|                                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Total wholly-owned                           |  |                        |  | 2,591                                      |  | 1,552                                |  | 31                                 |  | 412                                   |  | 306                                               |  |                     
|                                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Unconsolidated joint ventures:               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|San Diego County                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Mendocino Trails, Chula Vista                |  | 2001                   |  | 83                                         |  | 83                                   |  | 0                                  |  | 0                                     |  | 38                                                |  | $260,000  271,000  
|Providence, San Diego                        |  | 2001                   |  | 123                                        |  | 74                                   |  | 30                                 |  | 49                                    |  | 69                                                |  | $587,000  627,000  
|Tanglewood, San Diego                        |  | 2002                   |  | 161                                        |  | 29                                   |  | 29                                 |  | 132                                   |  | 29                                                |  | $359,000  384,000  
|Summerwood, San Diego                        |  | 2002                   |  | 95                                         |  | 27                                   |  | 14                                 |  | 68                                    |  | 27                                                |  | $395,000  427,000  
|                                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Total unconsolidated joint ventures.         |  |                        |  | 462                                        |  | 213                                  |  | 73                                 |  | 249                                   |  | 163                                               |  |                     
|                                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|SAN DIEGO DIVISION TOTAL                     |  |                        |  | 3,053                                      |  | 1,765                                |  | 104                                |  | 661                                   |  | 469                                               |  |                     
|                                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|                                            
|ARIZONA                                     
|Wholly-owned:                                |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Maricopa County                              |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Sage Creek  Encanto, Avondale               |  | 2000                   |  | 176                                        |  | 176                                  |  | 0                                  |  | 0                                     |  | 13                                                |  | $110,000  123,000  
|Sage Creek  Arcadia, Avondale               |  | 2000                   |  | 167                                        |  | 166                                  |  | 1                                  |  | 1                                     |  | 63                                                |  | $137,000  160,000  
|Sage Creek  Solano, Avondale                |  | 2000                   |  | 82                                         |  | 82                                   |  | 0                                  |  | 0                                     |  | 23                                                |  | $170,000  191,000  
|Mesquite Grove  Parada, Chandler            |  | 2001                   |  | 112                                        |  | 38                                   |  | 44                                 |  | 74                                    |  | 36                                                |  | $185,000  229,000  
|Mesquite Grove  Estates, Chandler           |  | 2001                   |  | 93                                         |  | 32                                   |  | 28                                 |  | 61                                    |  | 30                                                |  | $288,000  324,000  
|Power Ranch, Gilbert                         |  | 2001                   |  | 103                                        |  | 51                                   |  | 19                                 |  | 52                                    |  | 48                                                |  | $177,000  235,000  
|Tramonto, Phoenix                            |  | 2001                   |  | 76                                         |  | 32                                   |  | 21                                 |  | 44                                    |  | 30                                                |  | $190,000  252,000  
|Country Place, Tolleson                      |  | 2001                   |  | 115                                        |  | 29                                   |  | 23                                 |  | 45                                    |  | 27                                                |  | $117,000  139,000  
|Gateway Crossing, Gilbert                    |  | 2003                   |  | 236                                        |  | 0                                    |  | 1                                  |  | 4                                     |  | 0                                                 |  | $126,000  162,000  
|Mountaingate, Surprise                       |  | 2004                   |  | 682                                        |  | 0                                    |  | 0                                  |  | 682                                   |  | 0                                                 |  | $143,000  289,000  
|                                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|ARIZONA DIVISION TOTAL                       |  |                        |  | 1,842                                      |  | 606                                  |  | 137                                |  | 963                                   |  | 270                                               |  |                     
|                                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     



8



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##### Table of Contents

|Project (County) Product                  |  | Year of First Delivery |  | Estimated Number of Homes at Completion(1) |  | Units Closed as of December 31, 2002 |  | Backlog at December 31, 2002(2)(3) |  | Lots Owned as of December 31, 2002(4) |  | Homes Closed for the Year Ended December 31, 2002 |  | Sales Price Range(5)
|----------------------------------------- |  | ---------------------- |  | ------------------------------------------ |  | ------------------------------------ |  | ---------------------------------- |  | ------------------------------------- |  | ------------------------------------------------- |  | --------------------
|                                         
|NEVADA                                   
|Wholly-owned:                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Clark County                              |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Montecito Tesoro, Las Vegas               |  | 2000                   |  | 121                                        |  | 121                                  |  | 0                                  |  | 0                                     |  | 1                                                 |  | $164,000  181,000  
|Montecito Classico, Las Vegas             |  | 2000                   |  | 100                                        |  | 100                                  |  | 0                                  |  | 0                                     |  | 28                                                |  | $192,000  227,000  
|Glenleigh Gardens at Summerlin, Las Vegas |  | 2000                   |  | 96                                         |  | 96                                   |  | 0                                  |  | 0                                     |  | 22                                                |  | $246,000  276,000  
|Springfield at Summerlin, Las Vegas       |  | 2001                   |  | 85                                         |  | 85                                   |  | 0                                  |  | 0                                     |  | 41                                                |  | $208,000  228,000  
|Topaz Ridge at Summerlin, Las Vegas       |  | 2002                   |  | 89                                         |  | 39                                   |  | 19                                 |  | 17                                    |  | 39                                                |  | $537,000  595,000  
|Stallion Mountain, Las Vegas              |  | 2001                   |  | 116                                        |  | 116                                  |  | 0                                  |  | 0                                     |  | 60                                                |  | $157,000  179,000  
|Fairfield at Summerlin, Las Vegas         |  | 2001                   |  | 89                                         |  | 89                                   |  | 0                                  |  | 0                                     |  | 80                                                |  | $287,000  310,000  
|Annendale, North Las Vegas                |  | 2001                   |  | 194                                        |  | 86                                   |  | 10                                 |  | 108                                   |  | 82                                                |  | $164,000  188,000  
|Santalina at Summerlin, Las Vegas         |  | 2002                   |  | 74                                         |  | 1                                    |  | 33                                 |  | 73                                    |  | 1                                                 |  | $245,000  272,000  
|Encanto at Summerlin, Las Vegas           |  | 2003                   |  | 79                                         |  | 0                                    |  | 25                                 |  | 79                                    |  | 0                                                 |  | $319,000  347,000  
|Calimesa, North Las Vegas                 |  | 2003                   |  | 90                                         |  | 0                                    |  | 7                                  |  | 90                                    |  | 0                                                 |  | $150,000  172,000  
|Iron Mountain, Las Vegas                  |  | 2003                   |  | 70                                         |  | 0                                    |  | 1                                  |  | 70                                    |  | 0                                                 |  | $315,000  372,000  
|Vista Verde, Las Vegas                    |  | 2003                   |  | 122                                        |  | 0                                    |  | 0                                  |  | 122                                   |  | 0                                                 |  | $229,000  272,000  
|Miraleste, Las Vegas                      |  | 2003                   |  | 122                                        |  | 0                                    |  | 0                                  |  | 122                                   |  | 0                                                 |  | $309,000  341,000  
|The Classics, North Las Vegas             |  | 2003                   |  | 150                                        |  | 0                                    |  | 0                                  |  | 150                                   |  | 0                                                 |  | $158,000  181,000  
|The Springs, North Las Vegas              |  | 2003                   |  | 209                                        |  | 0                                    |  | 0                                  |  | 209                                   |  | 0                                                 |  | $145,000  171,000  
|The Estates, North Las Vegas              |  | 2003                   |  | 130                                        |  | 0                                    |  | 0                                  |  | 130                                   |  | 0                                                 |  | $175,000  198,000  
|The Cottages, North Las Vegas             |  | 2003                   |  | 364                                        |  | 0                                    |  | 0                                  |  | 364                                   |  | 0                                                 |  | $132,000  149,000  
|                                          |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|NEVADA DIVISION TOTAL                     |  |                        |  | 2,300                                      |  | 733                                  |  | 95                                 |  | 1,534                                 |  | 354                                               |  |                     
|                                          |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|GRAND TOTALS:                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Wholly-owned                              |  |                        |  | 10,040                                     |  | 4,268                                |  | 432                                |  | 4,671                                 |  | 1,740                                             |  |                     
|Unconsolidated joint ventures             |  |                        |  | 2,889                                      |  | 1,450                                |  | 195                                |  | 1,439                                 |  | 782                                               |  |                     
|                                          |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|                                          |  |                        |  | 12,929                                     |  | 5,718                                |  | 627                                |  | 6,110                                 |  | 2,522                                             |  |                     
|                                          |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     



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

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

|(3) |  | Of the total homes subject to pending sales contracts as of December 31, 2002, 512 represent homes completed or under construction and 115 represent homes not yet
under construction.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Lots owned as of December 31, 2002 include lots in backlog at December 31, 2002.
|--- |  | --------------------------------------------------------------------------------

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



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.



9



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



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



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



The Companys homes are typically sold before or during
construction through sales contracts which are usually accompanied by a small cash deposit. Such sales contracts are usually subject to certain contingencies such as the buyers ability to qualify for financing. The cancellation rate of buyers
who contracted to buy a home but did not close escrow at the Companys projects was approximately 19% during 2002. 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 inventory of completed and unsold homes was 28 homes as of December 31, 2002.



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



In connection with the limited warranty covering construction
defects, the Company obtained a three-year insurance policy in November 2001. 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.



10



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##### Table of Contents



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, such as landslides or
earthquakes, or circumstances 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  Duxford Financial, Inc.



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



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



Information Systems and Controls



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



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



11



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##### Table of Contents

projects in California are especially susceptible to restrictive government regulations and environmental laws. However, environmental laws
have not, to date, had a material adverse impact on the Companys operations.



Duxford Financial, Inc. 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.



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



The Companys executive officers and division 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, 2002, the Company employed
539 full-time and 31 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, sales and marketing activities.



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



Available Information



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



12



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##### Table of Contents



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 is the sole beneficiary. The Company leases or owns properties
for its division offices and Duxford Financial, Inc., but none of these properties is material to the operation of the Companys business. For information about properties owned by the Company for use in its homebuilding activities, see Item 1.



Item 3.Legal Proceedings



The Company is involved in various legal proceedings, most of which relate to routine litigation and some of which are covered by insurance. In the opinion of the Companys management, none of the
uninsured claims 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



No matters were submitted to the Companys stockholders during the fourth quarter of 2002.



13



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##### Table of Contents



PART II



Item 5.Market for the Registrants Common Equity and Related Stockholder Matters



The following table sets forth the high and low sales prices for the Common Stock of the Company as reported on the New York Stock
Exchange (stock ticker symbol: WLS) for the periods indicated.



|               |  | High    |  | Low    
|-------------- |  | ------- |  | -------
|2001           |  |         |  |        
|First Quarter  |  | 11.5000 |  | 8.6250 
|Second Quarter |  | 13.7900 |  | 9.2000 
|Third Quarter  |  | 15.0000 |  | 9.5000 
|Fourth Quarter |  | 15.5000 |  | 10.9500
|              
|2002           |  |         |  |        
|First Quarter  |  | 23.7500 |  | 14.3300
|Second Quarter |  | 29.8700 |  | 18.3000
|Third Quarter  |  | 25.9500 |  | 18.6200
|Fourth Quarter |  | 27.0500 |  | 20.8500



As of
February 14, 2003, the closing price for the Companys Common Stock as reported on the NYSE was $22.15.



As of February 14, 2003, there were approximately 1,576 beneficial owners of the Companys Common Stock.



The Companys Board of Directors has authorized a program
to repurchase up to 20% of the Companys outstanding shares as announced on September 20, 2001. No shares had been repurchased under this program during the period ended December 31, 2001. For the year ended December 31, 2002, the Company
repurchased 1,018,400 shares of its outstanding common shares for $19,570,000.



The Company has not paid any cash dividends on its Common Stock during the last three fiscal years and expects that for the foreseeable future it will follow a policy of retaining earnings in order to
help finance its business. Payment of dividends is within the discretion of the Companys Board of Directors and will depend upon the earnings, capital requirements, general economic conditions and operating and financial condition of the
Company, among other factors. In addition, the effect of the Companys principal financing agreements currently prohibits the payment of dividends by the Company. See Managements Discussion and Analysis of Financial Condition and
Results of Operations  Financial Condition and Liquidity and Note 5 of Notes to Consolidated Financial Statements.



During 2002, certain officers and directors exercised options to purchase 102,504 shares of the Companys common stock at a price of
$8.6875 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan, 3,334 shares of the Companys common stock at a price of $13.00 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan, 13,912 shares
of the Companys common stock at a price $5.00 per share in accordance with the Companys 1991 Stock Option Plan, as amended, and 7,998 shares of the Companys common stock at a price of $14.375 per share in accordance with the
Companys 1991 Stock Option plan, as amended.



During 2001, certain officers exercised options to purchase 49,176 shares of the Companys common stock at a price of $8.6875 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan.



See Items 11 and 12 for information regarding securities
authorized for issuance under equity compensation plans.



14



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##### Table of Contents



Item 6.Selected Financial Data



The following table sets forth certain of the Companys historical financial data. The selected historical consolidated financial
data as of December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000 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, 2000, 1999 and 1998 and for the years ended December 31, 1999 and 1998 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, |         
|------------------------------------------------------------------------ |  | ----------------------------------------- | --------
|                                                                         |  | 2002                                      |         
|                                                                         |  | (dollars in thousands)                    |         
|Statement of Income Data:                                                |  |                                           |         
|Operating revenue                                                        |  |                                           |         
|Home sales                                                               |  | $                                         | 593,762 
|Lots, land and other sales                                               |  |                                           | 8,648   
|Management fees                                                          |  |                                           | 10,892  
|                                                                         |  |                                           |         
|                                                                         |  |                                           | 613,302 
|                                                                         |  |                                           |         
|Operating costs                                                          |  |                                           |         
|Cost of saleshomes                                                      |  |                                           | (504,330
|Cost of saleslots, land and other                                       |  |                                           | (9,404  
|Sales and marketing                                                      |  |                                           | (22,862 
|General and administrative                                               |  |                                           | (39,366 
|Amortization of goodwill(2)                                              |  |                                           |        
|                                                                         |  |                                           |         
|                                                                         |  |                                           | (575,962
|                                                                         |  |                                           |         
|Equity in income of unconsolidated joint ventures                        |  |                                           | 27,748  
|                                                                         |  |                                           |         
|Operating income                                                         |  |                                           | 65,088  
|Interest expense, net of amounts capitalized                             |  |                                           |        
|Financial advisory expenses                                              |  |                                           |        
|Other income, net                                                        |  |                                           | 2,693   
|                                                                         |  |                                           |         
|Income before provision for income taxes and extraordinary item          |  |                                           | 67,781  
|Provision for income taxes                                               |  |                                           | (18,270 
|                                                                         |  |                                           |         
|Income before extraordinary item                                         |  |                                           | 49,511  
|Extraordinary itemgain from retirement of debt, net of applicable
taxes |  |                                           |        
|                                                                         |  |                                           |         
|Net income                                                               |  | $                                         | 49,511  
|                                                                         |  |                                           |         
|Basic earnings per common share:                                         |  |                                           |         
|Before extraordinary item                                                |  | $                                         | 4.85    
|Extraordinary item                                                       |  |                                           |        
|                                                                         |  |                                           |         
|After extraordinary item                                                 |  | $                                         | 4.85    
|                                                                         |  |                                           |         
|Diluted earnings per common share:                                       |  |                                           |         
|Before extraordinary item                                                |  | $                                         | 4.73    
|Extraordinary item                                                       |  |                                           |        
|                                                                         |  |                                           |         
|After extraordinary item                                                 |  | $                                         | 4.73    
|                                                                         |  |                                           |         
|Balance Sheet Data:                                                      |  |                                           |         
|Cash and cash equivalents                                                |  | $                                         | 16,694  
|Real estate inventories                                                  |  |                                           | 491,952 
|Investments in and advances to unconsolidated joint ventures             |  |                                           | 65,404  
|Total assets                                                             |  |                                           | 617,581 
|Total debt                                                               |  |                                           | 266,065 
|Minority interest                                                        |  |                                           | 80,647  
|Stockholders equity                                                     |  |                                           | 181,676 
|                                                                        
|Other Financial Data (unaudited):                                        |  |                                           |         
|EBITDA(3)                                                                |  | $                                         | 94,118  
|Cash flow provided by (used in) operating activities(3)                  |  |                                           | 16,191  
|Ratio of EBITDA to interest incurred(4)                                  |  |                                           | 3.51x   
|Ratio of debt to EBITDA                                                  |  |                                           | 2.83x   
|Ratio of earnings to fixed charges(5)                                    |  |                                           | 3.46x   
|                                                                        
|Operating Data (including unconsolidated joint ventures)
(unaudited):    |  |                                           |         
|Number of net new home orders                                            |  |                                           | 2,607   
|Number of homes closed                                                   |  |                                           | 2,522   
|Average sales price of homes closed                                      |  | $                                         | 379     
|Backlog at end of period, number of homes(6)                             |  |                                           | 627     
|Backlog at end of period, aggregate sales value(6)                       |  | $                                         | 259,123 



15



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##### Table of Contents

---

|(1) |  | On November 5, 1999, the Company acquired substantially all of the assets and assumed substantially all of the related liabilities of a homebuilding company owned by
General William Lyon, Chairman of the Board, and a trust for the benefit of his son, William H. Lyon, a director. The total purchase price consisted of approximately $42.6 million in cash and the assumption of approximately $101.1 million of
liabilities. The acquisition has been accounted for as a purchase and, accordingly, the purchase price has been allocated based on the fair value of the assets acquired and liabilities assumed.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | The amount paid for business acquisitions over the net fair value of assets acquired and liabilities assumed is reflected as goodwill and, until January 1, 2002, was
being amortized on a straight-line basis over seven years. Accumulated amortization was $2,793,000 as of December 31, 2001. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (Statement No. 142), effective for fiscal years beginning after December 15, 2001. Under the new rule, goodwill is no longer amortized but is subject to impairment tests in accordance with
Statement No. 142. The Company performed its first required annual impairment test of goodwill as of January 1, 2002 and determined that goodwill was not impaired. As of December 31, 2002, there have been no indicators of impairment related to
its goodwill. If Statement No. 142 had been adopted effective January 1, 1998, the pro forma impact of the nonamortization of goodwill on the results for the subsequent periods would have been as follows (in thousands except per share
data):
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                        |  | Year Ended December 31,
|--------------------------------------- |  | -----------------------
|                                        |  | 2002                   
|                                        |  | (dollars in thousands) 
|Net income, as reported                 |  | $                      
|Amortization of goodwill, net of tax    |  |                        
|                                        |  |                        
|Net income, as adjusted                 |  | $                      
|                                        |  |                        
|Earnings per common share, as adjusted: |  |                        
|Basic                                   |  | $                      
|                                        |  |                        
|Diluted                                 |  | $                      
|                                        |  |                        



|(3) |  | EBITDA means net income plus (i) provision for income taxes, (ii) interest expense, (iii) amortization of capitalized interest included in cost of sales,
(iv) depreciation and amortization and (v) cash distributions of income from unconsolidated joint ventures less equity in income of unconsolidated joint ventures. EBITDA is a widely utilized financial indicator of a companys ability to
service and/or incur debt; however, other companies may calculate EBITDA differently. EBITDA should not be considered as an alternative for net income, cash flows from operating activities and other consolidated income or cash flow statement data
prepared in accordance with accounting principles generally accepted in the United States or as a measure of profitability or liquidity. A reconciliation of net income to EBITDA is provided as follows:
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                |  | Year Ended December 31, |        
|--------------------------------------------------------------- |  | ----------------------- | -------
|                                                                |  | 2002                    |        
|                                                                |  | (dollars in thousands)  |        
|Net income                                                      |  | $                       | 49,511 
|Provision for income taxes                                      |  |                         | 18,270 
|Interest expense:                                               |  |                         |        
|Interest incurred                                               |  |                         | 26,783 
|Interest capitalized                                            |  |                         | (26,783
|Amortization of capitalized interest included in cost of sales  |  |                         | 28,109 
|Depreciation and amortization                                   |  |                         | 1,355  
|Cash distributions of income from unconsolidated joint ventures |  |                         | 24,621 
|Equity in income of unconsolidated joint ventures               |  |                         | (27,748
|                                                                |  |                         |        
|EBITDA                                                          |  | $                       | 94,118 
|                                                                |  |                         |        





16



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##### Table of Contents



A
reconciliation of net cash provided by (used in) operating activities to EBITDA is provided as follows:



|                                                                |  | Year Ended December 31, |        
|--------------------------------------------------------------- |  | ----------------------- | -------
|                                                                |  | 2002                    |        
|                                                                |  |                         |        
|                                                                |  | (dollars in thousands)  |        
|Net cash provided by (used in) operating activities             |  | $                       | 16,191 
|Interest expense:                                               |  |                         |        
|Interest incurred                                               |  |                         | 26,783 
|Interest capitalized                                            |  |                         | (26,783
|Amortization of capitalized interest included in cost of sales  |  |                         | 28,109 
|Cash distributions of income from unconsolidated joint ventures |  |                         | 24,621 
|Extraordinary gain on repurchase of 121/2% Senior Notes         |  |                         |       
|Net changes in operating assets and liabilities:                |  |                         |        
|Receivables                                                     |  |                         | 3,767  
|Real estate inventories                                         |  |                         | 23,126 
|Deferred loan costs                                             |  |                         | (1,490 
|Goodwill                                                        |  |                         |       
|Other assets                                                    |  |                         | 2,681  
|Accounts payable                                                |  |                         | (8,467 
|Accrued expenses                                                |  |                         | 5,580  
|                                                                |  |                         |        
|EBITDA                                                          |  | $                       | 94,118 
|                                                                |  |                         |        



|(4) |  | Interest incurred is the amount of interest paid and the net amount accrued (whether expensed or capitalized) during such period excluding amortization of
capitalized interest included in cost of sales.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | Ratio of earnings to fixed charges is calculated by dividing earnings, as defined, by fixed charges, as defined. For this purpose, earnings means income
before provision for income taxes and extraordinary item plus (i) fixed charges reduced by the amount of interest capitalized, (ii) amortization of capitalized interest included in cost of sales and (iii) cash distributions of income from
unconsolidated joint ventures reduced by equity in income of unconsolidated joint ventures. For this purpose, fixed charges means interest incurred, whether expensed or capitalized.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | 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, 2002, 512 represent homes under
construction and 115 represent homes not yet under construction. Backlog as of all dates is unaudited.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



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 56,000 homes. The Company believes that it is one of the largest homebuilders in California in terms of both
sales and homes delivered on a combined basis in 2002. The Company conducts its homebuilding operations through five geographic divisions: Southern California, San Diego, Northern California, Arizona and Nevada. The Company believes that it is well
positioned for future growth in all of its markets. For the year ended December 31, 2002, on a combined basis with its unconsolidated subsidiaries, the Company had revenues from home sales of $956.5 million and delivered 2,522 homes. For the same
period, consolidated EBITDA, which includes cash distributions of income from unconsolidated joint ventures, was $94.1 million. See Note 3 of Selected Financial Data.



The Company has historically entered into homebuilding joint ventures from time to time to better enable it
to reduce its capital investment and risk in the highly capital intensive California markets. As of December 31, 2002, the Company and certain of its subsidiaries are general partners or members in 16 active joint ventures involved in the
development and sale of residential projects. These joint ventures are 50% or less owned by the



17



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##### Table of Contents

Company and not controlled by the Company and, accordingly, the financial statements of such joint ventures are not consolidated with the
Companys financial statements. The Companys investments in unconsolidated joint ventures are accounted for using the equity method. 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. See Note 4 of Notes to Consolidated Financial Statements for condensed combined financial
information for these joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by these joint ventures will be funded by the Companys joint venture partners or from the proceeds of
construction financing obtained by the joint ventures. A recently adopted accounting interpretation could require the consolidation of assets, liabilities and operations of certain of the Companys joint venture and land banking arrangements.
See Impact of New Account Pronouncements.



Results
of Operations



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



|                                                      |  | As of and for the year endedDecember 31, 2002 |         
|----------------------------------------------------- |  | --------------------------------------------- | --------
|                                                      |  | Company        Wholly-owned                   |         
|Selected Financial Information (dollars in thousands) |  |                                               |         
|Homes closed                                          |  |                                               | 1,740   
|                                                      |  |                                               |         
|Home sales revenue                                    |  | $                                             | 593,762 
|Cost of sales                                         |  |                                               | (504,330
|                                                      |  |                                               |         
|Gross margin                                          |  | $                                             | 89,432  
|                                                      |  |                                               |         
|Gross margin percentage                               |  |                                               | 15.1    
|                                                      |  |                                               |         
|Number of homes closed                                |  |                                               |         
|California                                            |  |                                               | 1,116   
|Arizona                                               |  |                                               | 270     
|Nevada                                                |  |                                               | 354     
|                                                      |  |                                               |         
|Total                                                 |  |                                               | 1,740   
|                                                      |  |                                               |         
|Average sales price                                   |  |                                               |         
|California                                            |  | $                                             | 387,900 
|Arizona                                               |  |                                               | 212,800 
|Nevada                                                |  |                                               | 292,200 
|                                                      |  |                                               |         
|Total                                                 |  | $                                             | 341,200 
|                                                      |  |                                               |         
|Number of net new home orders                         |  |                                               |         
|California                                            |  |                                               | 1,117   
|Arizona                                               |  |                                               | 289     
|Nevada                                                |  |                                               | 321     
|                                                      |  |                                               |         
|Total                                                 |  |                                               | 1,727   
|                                                      |  |                                               |         
|Average number of sales locations during period       |  |                                               |         
|California                                            |  |                                               | 15      
|Arizona                                               |  |                                               | 6       
|Nevada                                                |  |                                               | 4       
|                                                      |  |                                               |         
|Total                                                 |  |                                               | 25      
|                                                      |  |                                               |         



18



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##### Table of Contents

|                                                                                             |  | As of and for the year endedDecember 31, 2002
|-------------------------------------------------------------------------------------------- |  | ---------------------------------------------
|                                                                                             |  | Company        Wholly-owned                  
|Backlog of homes sold but not closed at end of period                                        |  |                                              
|California                                                                                   |  |                                              
|Arizona                                                                                      |  |                                              
|Nevada                                                                                       |  |                                              
|                                                                                             |  |                                              
|Total                                                                                        |  |                                              
|                                                                                             |  |                                              
|Dollar amount of backlog of homes sold but not closed at end ofperiod (dollars in
thousands) |  |                                              
|California                                                                                   |  | $                                            
|Arizona                                                                                      |  |                                              
|Nevada                                                                                       |  |                                              
|                                                                                             |  |                                              
|Total                                                                                        |  | $                                            
|                                                                                             |  |                                              
|Lots controlled at end of year                                                               |  |                                              
|Owned lots                                                                                   |  |                                              
|California                                                                                   |  |                                              
|Arizona                                                                                      |  |                                              
|Nevada                                                                                       |  |                                              
|                                                                                             |  |                                              
|Total                                                                                        |  |                                              
|                                                                                             |  |                                              
|Optioned lots(1)                                                                             |  |                                              
|California                                                                                   |  |                                              
|Arizona                                                                                      |  |                                              
|Nevada                                                                                       |  |                                              
|                                                                                             |  |                                              
|Total                                                                                        |  |                                              
|                                                                                             |  |                                              
|Total lots controlled                                                                        |  |                                              
|California                                                                                   |  |                                              
|Arizona                                                                                      |  |                                              
|Nevada                                                                                       |  |                                              
|                                                                                             |  |                                              
|Total                                                                                        |  |                                              
|                                                                                             |  |                                              



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##### Table of Contents

|                                                      |  | As of and for the year endedDecember 31, 2001 |         
|----------------------------------------------------- |  | --------------------------------------------- | --------
|                                                      |  | Company        Wholly-owned                   |         
|Selected Financial Information (dollars in thousands) |  |                                               |         
|Homes closed                                          |  |                                               | 1,861   
|                                                      |  |                                               |         
|Home sales revenue                                    |  | $                                             | 452,002 
|Cost of sales                                         |  |                                               | (382,608
|                                                      |  |                                               |         
|Gross margin                                          |  | $                                             | 69,394  
|                                                      |  |                                               |         
|Gross margin percentage                               |  |                                               | 15.4    
|                                                      |  |                                               |         
|Number of homes closed                                |  |                                               |         
|California                                            |  |                                               | 1,087   
|Arizona                                               |  |                                               | 298     
|Nevada                                                |  |                                               | 476     
|                                                      |  |                                               |         
|Total                                                 |  |                                               | 1,861   
|                                                      |  |                                               |         
|Average sales price                                   |  |                                               |         
|California                                            |  | $                                             | 281,300 
|Arizona                                               |  |                                               | 150,200 
|Nevada                                                |  |                                               | 213,100 
|                                                      |  |                                               |         
|Total                                                 |  | $                                             | 242,900 
|                                                      |  |                                               |         
|Number of net new home orders                         |  |                                               |         
|California                                            |  |                                               | 1,080   
|Arizona                                               |  |                                               | 336     
|Nevada                                                |  |                                               | 507     
|                                                      |  |                                               |         
|Total                                                 |  |                                               | 1,923   
|                                                      |  |                                               |         
|Average number of sales locations during period       |  |                                               |         
|California                                            |  |                                               | 15      
|Arizona                                               |  |                                               | 6       
|Nevada                                                |  |                                               | 6       
|                                                      |  |                                               |         
|Total                                                 |  |                                               | 27      
|                                                      |  |                                               |         



20



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##### Table of Contents

|                                                                                             |  | As of and for the year endedDecember 31, 2001
|-------------------------------------------------------------------------------------------- |  | ---------------------------------------------
|                                                                                             |  | Company        Wholly-owned                  
|Backlog of homes sold but not closed at end of period                                        |  |                                              
|California                                                                                   |  |                                              
|Arizona                                                                                      |  |                                              
|Nevada                                                                                       |  |                                              
|                                                                                             |  |                                              
|Total                                                                                        |  |                                              
|                                                                                             |  |                                              
|Dollar amount of backlog of homes sold but not closed at endof period (dollars in
thousands) |  |                                              
|California                                                                                   |  | $                                            
|Arizona                                                                                      |  |                                              
|Nevada                                                                                       |  |                                              
|                                                                                             |  |                                              
|Total                                                                                        |  | $                                            
|                                                                                             |  |                                              
|Lots controlled at end of year                                                               |  |                                              
|Owned lots                                                                                   |  |                                              
|California                                                                                   |  |                                              
|Arizona                                                                                      |  |                                              
|Nevada                                                                                       |  |                                              
|                                                                                             |  |                                              
|Total                                                                                        |  |                                              
|                                                                                             |  |                                              
|Optioned lots(1)                                                                             |  |                                              
|California                                                                                   |  |                                              
|Arizona                                                                                      |  |                                              
|Nevada                                                                                       |  |                                              
|                                                                                             |  |                                              
|Total                                                                                        |  |                                              
|                                                                                             |  |                                              
|Total lots controlled                                                                        |  |                                              
|California                                                                                   |  |                                              
|Arizona                                                                                      |  |                                              
|Nevada                                                                                       |  |                                              
|                                                                                             |  |                                              
|Total                                                                                        |  |                                              
|                                                                                             |  |                                              



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|                                                      |  | As of and for the year ended December 31, 2000 |         
|----------------------------------------------------- |  | ---------------------------------------------- | --------
|                                                      |  | Company Wholly-owned                           |         
|Selected Financial Information (dollars in thousands) |  |                                                |         
|Homes closed                                          |  |                                                | 1,757   
|                                                      |  |                                                |         
|Home sales revenue                                    |  | $                                              | 403,850 
|Cost of sales                                         |  |                                                | (335,891
|                                                      |  |                                                |         
|Gross margin                                          |  | $                                              | 67,959  
|                                                      |  |                                                |         
|Gross margin percentage                               |  |                                                | 16.8    
|                                                      |  |                                                |         
|Number of homes closed                                |  |                                                |         
|California                                            |  |                                                | 1,183   
|Arizona                                               |  |                                                | 189     
|Nevada                                                |  |                                                | 349     
|New Mexico(2)                                         |  |                                                | 36      
|                                                      |  |                                                |         
|Total                                                 |  |                                                | 1,757   
|                                                      |  |                                                |         
|Average sales price                                   |  |                                                |         
|California                                            |  | $                                              | 259,300 
|Arizona                                               |  |                                                | 139,200 
|Nevada                                                |  |                                                | 189,500 
|New Mexico(2)                                         |  |                                                | 130,800 
|                                                      |  |                                                |         
|Total                                                 |  | $                                              | 229,900 
|                                                      |  |                                                |         
|Number of net new home orders                         |  |                                                |         
|California                                            |  |                                                | 1,103   
|Arizona                                               |  |                                                | 252     
|Nevada                                                |  |                                                | 321     
|New Mexico(2)                                         |  |                                                | 21      
|                                                      |  |                                                |         
|Total                                                 |  |                                                | 1,697   
|                                                      |  |                                                |         
|Average number of sales locations during period       |  |                                                |         
|California                                            |  |                                                | 18      
|Arizona                                               |  |                                                | 5       
|Nevada                                                |  |                                                | 6       
|New Mexico(2)                                         |  |                                                | 1       
|                                                      |  |                                                |         
|Total                                                 |  |                                                | 30      
|                                                      |  |                                                |         



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##### Table of Contents

|                                                                                              |  | As of and for the year ended December 31, 2000
|--------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|                                                                                              |  | Company Wholly-owned                          
|Backlog of homes sold but not closed at end of period                                         |  |                                               
|California                                                                                    |  |                                               
|Arizona                                                                                       |  |                                               
|Nevada                                                                                        |  |                                               
|                                                                                              |  |                                               
|Total                                                                                         |  |                                               
|                                                                                              |  |                                               
|Dollar amount of backlog of homes sold but not closed at end of period (dollars in
thousands) |  |                                               
|California                                                                                    |  | $                                             
|Arizona                                                                                       |  |                                               
|Nevada                                                                                        |  |                                               
|                                                                                              |  |                                               
|Total                                                                                         |  | $                                             
|                                                                                              |  |                                               
|Lots controlled at end of year                                                                |  |                                               
|Owned lots                                                                                    |  |                                               
|California                                                                                    |  |                                               
|Arizona                                                                                       |  |                                               
|Nevada                                                                                        |  |                                               
|                                                                                              |  |                                               
|Total                                                                                         |  |                                               
|                                                                                              |  |                                               
|Optioned lots(1)                                                                              |  |                                               
|California                                                                                    |  |                                               
|Arizona                                                                                       |  |                                               
|Nevada                                                                                        |  |                                               
|                                                                                              |  |                                               
|Total                                                                                         |  |                                               
|                                                                                              |  |                                               
|Total lots controlled                                                                         |  |                                               
|California                                                                                    |  |                                               
|Arizona                                                                                       |  |                                               
|Nevada                                                                                        |  |                                               
|                                                                                              |  |                                               
|Total                                                                                         |  |                                               
|                                                                                              |  |                                               

---

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

|(2) |  | The Company ceased its operations in New Mexico in mid-2000.
|--- |  | ------------------------------------------------------------



On a combined basis with the Companys unconsolidated subsidiaries, the number of net new home orders for the year ended December 31,
2002 increased 2.6% to 2,607 homes from 2,541 homes for the year ended December 31, 2001. The number of homes closed for the year ended December 31, 2002 decreased 1.7% to 2,522 homes from 2,566 homes for the year ended December 31, 2001. The
backlog of homes sold but not closed as of December 31, 2002 was 627 homes, up 15.7% from 542 homes as of December 31, 2001.



The number of net new home orders for the year ended December 31, 2001 on a combined basis decreased 2.4% to 2,541 homes from 2,603 homes
for the year ended December 31, 2000. The number of homes closed for the year ended December 31, 2001 decreased 3.8% to 2,566 homes from 2,666 homes for the year ended December 31, 2000. The backlog of homes sold but not closed as of December
31, 2001 was 542 homes, down 4% from 567 homes as of December 31, 2000.



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, 2002 was $259.1 million, up 46.8% from
$176.5 million as of December 31, 2001. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Companys projects was approximately 19% during 2002 and 24% during 2001. The inventory of completed and unsold
homes was 28 homes as of December 31, 2002.



The
Company believes that the increase in the number of net new home orders and the decrease in the cancellation rate during 2002, as described above, are indications of an improving economy in 2002 after the economic slow-down in the latter half of
2001. In addition, in most of the markets in which the Company operates, the demand for housing exceeds the current supply of housing. The decline in net new home orders and



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closings for 2001 as compared with 2000 was primarily the result of (1) a weakening economy whose short-term outlook had become more
uncertain following the unprecedented and tragic events of September 11, 2001 and (2) a reduction in the average number of active sales locations from 43 in 2000 to 40 in 2001. At December 31, 2001, the Company had 43 sales locations as
compared to 42 sales locations at December 31, 2000. At December 31, 2002, the Company had 36 sales locations.



Comparison of Years Ended December 31, 2002 and 2001.Operating revenue for the year ended December 31, 2002
was $613.3 million, an increase of $145.1 million (31.0%), from operating revenue of $468.2 million for the year ended December 31, 2001. Revenue from sales of homes increased $141.8 million (31.4%) to $593.8 million in 2002 from $452.0 million
in 2001. This increase was due primarily to an increase in the average sales prices of wholly-owned homes to $341,200 in 2002 from $242,900 in 2001, offset by a decrease in the number of wholly-owned homes closed to 1,740 in 2002 from 1,861 in 2001.
Management fee income increased by $1.8 million to $10.9 million in 2002 from $9.1 million in 2001 as a result of an increase in the number of homes closed in unconsolidated joint ventures to 782 in 2002 from 705 in 2001. Equity in income of
unconsolidated joint ventures amounting to $27.7 million was recognized in 2002, compared to $22.4 million in 2001 as a result of the increase in net income of the unconsolidated joint ventures to $56.7 million in 2002 from $47.9 million in 2001.
This increase in net income was due to a related increase in the number of homes closed in unconsolidated joint ventures to 782 in 2002 from 705 in 2001 and an increase in the average sales price of homes sold by unconsolidated joint ventures to
$463,800 in 2002 from $448,400 in 2001.



Total operating income increased to $65.1 million in 2002 from $46.2 million in 2001. The excess of revenue from sales of homes over the related cost of sales (gross margin) increased by $20.0 million to $89.4 million in 2002
from $69.4 million in 2001. This increase was primarily due to an increase in the average sales prices to $341,200 in 2002 from $242,900 in 2001 (a 40.5% increase), offset by a decrease in the number of wholly-owned homes closed to 1,740 in 2002
from 1,861 in 2001 (a 6.5% decrease). Gross margin percentages decreased by 0.3% to 15.1% in 2002 from 15.4% in 2001. Sales and marketing expenses increased by $4.8 million (26.5%) to $22.9 million in 2002 from $18.1 million in 2001 primarily
due to increased marketing fees paid to developers of master-planned communities and sales commissions as a result of increased revenue from sales of homes. General and administrative expenses increased by $2.2 million to $39.4 million in 2002
from $37.2 million in 2001, primarily as a result of increased salaries and related benefits and additional employee bonuses based on improved operating results of the Company.



Total interest incurred during 2002 increased $4.9 million to $26.8 million from $21.9 million in 2001 as a
result of an increase in the average amount of outstanding debt, offset by decreases in interest rates. There was no net interest expense recognized in 2002 compared to $0.2 million recognized in 2001 as a result of an increase in the amount of real
estate inventories available for capitalization of interest in 2002.



Other income (expense), net decreased to $2.7 million in 2002 from $7.5 million in 2001 primarily as a result of initial start-up losses realized by a golf course operation at one of the Companys projects and decreases
in other miscellaneous income, offset by increases in mortgage company operations.



As of December 31, 2000, the Company had substantial net operating loss carryforwards for Federal tax purposes which were utilized to reduce taxable income during the year ended December 31, 2001. As a
result of the reduction in the valuation allowance associated with such utilized net operating loss carryforwards, the Companys overall effective tax rate for the year ended December 31, 2001 was approximately 10.9%. The elimination during
2002 of the remaining valuation allowances for deferred tax assets reduces the Companys estimated overall effective tax rate for the year ending December 31, 2002 from 39.3% to 27.0%. At December 31, 2002, the Company had net operating
loss carryforwards for federal tax purposes of approximately  $5.2 million, which expire in 2009. In addition, unused recognized built-in losses in the amount of $23.9 million are available to offset future income and expire between 2009 and
2011. The utilization of these losses is limited to $3.2 million of taxable income per year; however, any portion of such permitted amount of the loss utilization that is not used in any year may be carried forward to increase permitted utilization
in future years through 2011.



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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.



Although
the Companys certificate of incorporation includes transfer restrictions intended to help reduce the risk of an ownership change, transactions could have occurred that would severely limit the Companys ability to have used the tax
benefits associated with the net operating loss carryforwards. The Company learned that one stockholder unknowingly violated the transfer restrictions. The stockholder divested itself of the requisite number of shares in February and March, 2002 so
that it was no longer out of compliance with the Companys certificate of incorporation. Pursuant to the certificate of incorporation, the transfer restrictions terminated on November 11, 2002.



Neither the amount of the net operating loss carryforwards nor
the amount of limitation on such carryforwards claimed by the Company 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 net operating loss carryforwards.



As a result of the foregoing factors, net income increased to $49.5 million in the 2002 period from
$47.7 million in the 2001 period.



Comparison of Years Ended December 31, 2001 and 2000.    Operating revenue for the year ended December 31, 2001 was $468.2 million, an increase of $50.9 million (12.2%), from operating revenue of
$417.3 million for the year ended December 31, 2000. Revenue from sales of homes increased $48.1 million (11.9%) to $452.0 million in 2001 from $403.9 million in 2000. This increase was due primarily to an increase in the number of wholly-owned
homes closed to 1,861 in 2001 from 1,757 in 2000, together with an increase in the average sales prices of wholly-owned homes to $242,900 in 2001 from $229,900 in 2000. Management fee income decreased by $1.4 million to $9.1 million in 2001 from
$10.5 million in 2000 as a result of a decrease in the number of homes closed in unconsolidated joint ventures to 705 in 2001 from 909 in 2000. Equity in income of unconsolidated joint ventures amounting to $22.4 million was recognized in 2001,
compared to $24.4 million in 2000 as a result of the decrease in net income of the unconsolidated joint ventures to $47.9 million in 2001 from $49.5 million in 2000 due to a related decrease in the number of homes closed in unconsolidated joint
ventures to 705 in 2001 from 909 in 2000. The average sales price of homes sold by joint ventures has been higher than the average sales price of wholly-owned units.



Total operating income decreased from $49.4 million in 2000 to $46.2 million in 2001. The excess of revenue
from sales of homes over the related cost of sales (gross margin) increased by $1.4 million to $69.4 million in 2001 from $68.0 million in 2000. This increase was primarily due to an increase of 5.9% in the number of wholly-owned units closed
to 1,861 in 2001 from 1,757 in 2000, together with an increase in the average sales prices to $242,900 in 2001 from $229,900 in 2000 (a 5.7% increase). Gross margin percentages decreased by 1.4% to 15.4% in 2001 from 16.8% in 2000. Sales and
marketing expenses increased by $1.6 million (9.7%) to $18.1 million in 2001 from $16.5 million in 2000 primarily due to an increase in the number of wholly-owned homes closed to 1,861 in 2001 from 1,757 in 2000. General and administrative
expenses increased by $1.9 million to $37.2 million in 2001 from $35.3 million in 2000, primarily as a result of increased salaries and related benefits and additional employee bonuses based on improved operating results of the Company.



Total interest incurred during 2001 decreased
$4.1 million to $21.9 million from $26.0 million in 2000 as a result of decreases in interest rates, offset by an increase in the average amount of outstanding debt. Net interest expense decreased to $0.2 million in 2001 from $5.6 million in 2000 as
a result of an increase in the amount of real estate inventories available for capitalization of interest.



Other income (expense), net increased to $7.5 million in 2001 from $7.3 million in 2000 primarily as a result of increased income from the
Companys mortgage company and title reinsurance operations in 2001, offset by a gain on the sale of an office building in 2000.





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As a result of the retirement of certain debt, the Company recognized a net gain of $0.5
million during the year ended December 31, 2000, after giving effect to income taxes and amortization of related loan costs. No gain was recognized from retirement of debt during the year ended December 31, 2001.



The Company completed a capital restructuring and
quasi-reorganization which resulted in the adjustment of assets and liabilities to their estimated fair values effective January 1, 1994. For the year ended December 31, 2000 income tax benefits of $9.3 million related to temporary differences
resulting from the quasi-reorganization were excluded from the results of operations and not reflected as a reduction to the Companys provision for income taxes but credited directly to additional paid-in capital.



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 121/2% Senior Notes (the Senior Notes) and maintains the following major
credit facilities: secured revolving credit facilities (Revolving Credit Facilities) and an unsecured revolving line of credit with a commercial bank (Unsecured Revolving Line). The Company also finances certain projects and
land acquisitions with construction loans secured by real estate inventories, seller-provided financing and land banking transactions. The Company and certain of its subsidiaries filed a registration statement with the Securities and Exchange
Commission with respect to the registration of $200 million in aggregate principal amount of senior notes proposed to be issued by William Lyon Homes, Inc., a wholly owned subsidiary of the Company, and guaranteed by the Company and certain of its
other subsidiaries. As a result of market conditions and prevailing interest rates, the Company is continuing to evaluate whether or not to proceed with this note offering at this time. If these factors change, the Company may proceed with the
offering. However, there can be no assurance that it will do so and if it does that it will be on the same terms and conditions described in the registration statement currently on file with the Securities and Exchange Commission. The Company will
be required to refinance the outstanding 121/2% Senior Notes at their maturity on July 1, 2003. There can be no
assurance that the Company will be able to refinance this indebtedness or that the Company will be able to do so on terms and conditions favorable to the Company.



The ability of the Company to meet its obligations on its indebtedness will depend to a large degree on its
future performance, which in turn will be subject, in part, to factors beyond its control, such as prevailing economic conditions either nationally or in the 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.



121/2% Senior Notes



As of December 31, 2002, $70.3 million aggregate principal amount of the Companys 121/2% Senior Notes was outstanding. On May 1, 2001, the Company completed a consent solicitation with respect to the
121/2% Senior Notes and received consents from holders of $39.3 million of the then outstanding notes to extend
the maturity date from July 1, 2001 to July 1, 2003 and to make certain amendments to the note covenants. Although the Company initially intended to accept consents from no more than 50% of holders, the Company elected to accept additional consents,
as contemplated by the consent solicitation documents. The consenting holders received a consent fee of 4% of the principal balance. Subsequently, during May and June 2001, the Company also repurchased $31.4 million of the 121/2% Senior Notes from non-consenting holders.



In June 2001, General William Lyon, Chairman and Chief
Executive Officer of the Company, and a trust for which his son William H. Lyon is a beneficiary, purchased from the Company at par $30.0 million of the 121/2%



26



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##### Table of Contents

Senior Notes. William H. Lyon is also an employee and a Director of the Company. Effective in July 2001, William H. McFarland, another member
of the Companys Board of Directors, purchased from the Company at par $1.0 million of the 121/2% Senior
Notes. In parity with holders consenting during the consent solicitation, these Directors received a consent fee of 4% of the principal balance and consented to the amendments effected by the Companys consent solicitation statement dated
February 28, 2001.



In July 2001, the
Company repaid all of the remaining 121/2% Senior Notes which matured on July 1, 2001 amounting to $5.9 million.



In April, May and November 2000, the
Company purchased $22.8 million principal amount of its outstanding 121/2% Senior Notes at a cost of $22.1
million. The net gain resulting from the purchase was $0.5 million after giving effect to income taxes and amortization of related loan costs. Such gain is reflected as an extraordinary item in the Companys results of operations for the
year ended December 31, 2000.



The 121/2% Senior Notes due July 1, 2003 are obligations of William Lyon Homes, a Delaware corporation (Delaware
Lyon), and are unconditionally guaranteed on a senior basis by William Lyon Homes, Inc., a California corporation and a wholly-owned subsidiary of Delaware Lyon (California Lyon). However, California Lyon has granted liens on
substantially all of its assets as security for its obligations under the Revolving Credit Facilities and other loans. Because the guarantee by California Lyon is not secured, holders of the Senior Notes are effectively junior to borrowings under
the Revolving Credit Facilities with respect to such assets. Interest on the Senior Notes is payable on January 1 and July 1 of each year.



The 121/2% Senior Notes are senior obligations of Delaware Lyon and rank pari passu in right of payment to all existing and future unsecured indebtedness of Delaware Lyon, and senior in right of payment to all future indebtedness of
the Company which by its terms is subordinated to the 121/2% Senior Notes.



Upon certain changes of control as described in the Indenture,
Delaware Lyon must offer to repurchase the 121/2% Senior Notes at a price equal to 101% of the principal amount
plus accrued and unpaid interest, if any, to the date of repurchase.



The Indenture governing the 121/2% Senior Notes restricts
Delaware Lyon and certain of its subsidiaries with respect to, among other things: (i) the payment of dividends on and redemptions of capital stock, (ii) the incurrence of indebtedness or the issuance of preferred stock, (iii) the creation of
certain liens, (iv) consolidations or mergers with or transfers of all or substantially all of its assets and (v) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions.



As of December 31, 2002, the outstanding
121/2% Senior Notes with a face value of $70.3 million were valued at approximately the face value, in the
opinion of the Companys management.



Revolving Credit Facilities



As of December 31, 2002, the Company has three revolving credit facilities which have an aggregate maximum loan commitment of $225.0 million and mature at various dates. A $100.0 million revolving line of credit matures in September
2006, a $75.0 million bank revolving line of credit matures in June 2003 and a $50.0 million bank revolving line of credit initially matures in September 2004, after which the amounts available for borrowing begin to reduce. Effective in
January 2003, the $100.0 million revolving line of credit was increased to $150.0 million, which increased the Companys aggregate maximum loan commitment to $275.0 million. Each facility is secured by first deeds of trust on real estate for
the specific projects funded by each respective facility and pledges of net sale proceeds and related property. Borrowings under the facilities are limited by the availability of sufficient real estate collateral, which is determined constantly
throughout the facility period. The composition of the collateral borrowing base is limited to certain parameters in the facility agreement and is based upon the lesser of the direct costs of the real estate collateral (such as land, lots under
development,



27



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##### Table of Contents

developed lots or homes) or a percentage of the appraised value of the collateral, which varies depending upon the stage of construction.
Repayment of advances is upon the earliest of the close of escrow of individual lots and homes within the collateral pool, the maturity date of individual lots and homes within the collateral pool or the facility maturity date. 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, 2002, $118.1 million was outstanding under
these credit facilities, with a weighted-average interest rate of 4.331%, and the undrawn availability was $34.8 million as limited by the borrowing base formulas. 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 $75.0 million bank line of credit. The Company is required to comply with a number of covenants under these
revolving credit facilities. See Note 5 of Notes to Consolidated Financial Statements for additional information relating to these covenants.



Unsecured Revolving Line



At December 31, 2002, the Company had an unsecured revolving line of credit with a commercial bank in the amount of $10.0 million. The
Unsecured Revolving Line bears interest at prime plus 1% and matures in June 2003. The Unsecured Revolving Line includes financial covenants which may limit the amount which may be borrowed thereunder. As of December 31, 2002, $5.5 million was
outstanding under the Unsecured Revolving Line.



Construction Notes Payable



At December 31, 2002, the Company had construction notes payable amounting to $25.2 million related to various real estate projects. The construction notes are due as homes close or at various dates on or before June 11, 2004
and bear interest at rates of prime plus 0.25% to 14%, with a weighted-average rate of 5.206% at December 31, 2002. See Note 5 of Notes to Consolidated Financial Statements.



Seller Financing



Another source of financing available to the Company is seller-provided financing for land acquired by the
Company. At December 31, 2002, the Company had $28.9 million of notes payable outstanding related to land acquisitions for which seller financing was provided. The seller financing notes are due at various dates through July 1, 2005 and bear
interest at rates ranging from prime plus 2.0% to 12.5%, with a weighted-average interest rate of 8.896% at December 31, 2002.



Revolving Mortgage Warehouse Credit Facility



The Company has a $20.0 million revolving mortgage warehouse credit facility with a bank to fund its mortgage
origination operations, $15.0 million of which is committed (lender obligated to lend if stated conditions are satisfied) and $5.0 million of which is not committed (lender advances are optional even if stated conditions are otherwise satisfied).
Mortgage loans are generally held for a short period of time and are typically sold to investors within 7 to 15 days following funding. Borrowings are secured by the related mortgage loans held for sale. At December 31, 2002 the outstanding balance
was $18.1 million. The facility, which has a current maturity date of May 31, 2003, also contains financial covenants requiring the borrowers to maintain a combined tangible net worth, as defined, of at least $1.5 million, a combined net worth, as
defined, meeting or exceeding the greater of $1.5 million and 5% of combined total liabilities, as defined, and liquidity, as defined, meeting or exceeding $1.0 million. This facility is non-recourse and is not guaranteed by the Company.



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, minimizing the use of funds from the Companys revolving credit



28



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##### Table of Contents

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 equal to 20% or less of the total purchase price. Additionally, the Company may be subject to other penalties if lots are not acquired. The
Company is under no obligation to purchase the balance of the lots, but would forfeit its remaining deposit 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. The deposits and penalties related to such land banking projects have been recorded in the accompanying balance sheet. The financial statements of these entities are not consolidated with the Companys
consolidated financial statements. A recently adopted accounting interpretation could require the consolidation of the assets, liabilities and operations of certain of the Companys joint venture and land banking arrangements. See Impact
of New Accounting Pronouncements. 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. Summary information with respect to the Companys land banking arrangements is as follows as of December 31, 2002 (dollars in
thousands):



|Total number of land banking projects                      |  |   | 7      
|---------------------------------------------------------- |  | - | -------
|                                                           |  |   |        
|Total number of lots                                       |  |   | 1,264  
|                                                           |  |   |        
|Total purchase price                                       |  | $ | 111,814
|                                                           |  |   |        
|Balance of lots still under option and not purchased:      |  |   |        
|Number of lots                                             |  |   | 1,147  
|                                                           |  |   |        
|Purchase price                                             |  | $ | 104,687
|                                                           |  |   |        
|Forfeited deposits and penalties if lots are not purchased |  | $ | 23,587 
|                                                           |  |   |        



Joint Venture Financing



As of December 31, 2002, the Company and certain of its subsidiaries were general partners or members in 16 active joint ventures involved in the development and sale of residential projects. These joint ventures are 50% or less
owned by the Company and not controlled by the Company and, accordingly, the financial statements of such joint ventures are not consolidated with the Companys financial statements. The Companys investments in unconsolidated joint
ventures are accounted for using the equity method. A recently adopted accounting interpretation could require the consolidation of the assets, liabilities and operations of certain of the Companys joint venture and land banking arrangements.
See Impact of New Accounting Pronouncements. 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 4 of Notes to Consolidated Financial Statements for condensed combined financial and other information for these 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, 2002, the Companys investment in and advances to these joint ventures was $65.4 million and the venture
partners investment in such joint ventures was $91.3 million. Eleven of the joint ventures are in the form of limited partnerships of which the Company or one of its subsidiaries are the general partner. As of December 31, 2002 these joint
ventures had obtained financing from construction lenders which amounted to $90.1 million of outstanding indebtedness. While historically all liabilities of these partnerships



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have been satisfied out of the assets of such partnerships and while the Company believes that this will continue in the future, the Company
as general partner, is potentially responsible for all liabilities and indebtedness of these partnerships. In addition, Delaware Lyon has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships.
Delaware Lyon has also provided completion guarantees and repayment guarantees for some of the limited partnerships under their credit facilities. The repayment guarantees only become effective upon repayment of the outstanding 121/2% Senior Notes.



During the year ended December 31, 2002, one of the Companys existing unconsolidated joint ventures (Existing Venture)
was restructured such that the Company is required to purchase the 538 lots owned by the Existing Venture on a specified takedown basis through October 15, 2003 at a purchase price equal to the future cost of such lots including a 20% preferred
return on invested capital to the outside partner of the Existing Venture (estimated to be $178.6 million, including an estimated preferred return of $36.9 million). During the year ended December 31, 2002, the first 242 lots were
purchased from the Existing Venture for $64.5 million, which includes a $12.5 million preferred return to the outside partner of the Existing Venture. The 242 lots were purchased by a newly formed joint venture (New Venture) between
the Company and an outside partner. The Company is required to purchase the 242 lots owned by the New Venture on a specified takedown basis through May 15, 2004 at a purchase price equal to $74.2 million plus a 131/2% preferred return on invested capital to the outside partner of the New Venture. Because the Company is
required to purchase the lots owned by both the Existing Venture and the New Venture, and the Company now controls both ventures, the financial statements of both ventures have been consolidated with the Companys financial statements as of
December 31, 2002, including real estate inventories of $101.8 million and minority interest in consolidated joint ventures of $80.6 million. During the year ended December 31, 2002, an additional 44 lots were purchased from the Existing Venture for
$19.8 million, which includes a $4.0 million preferred return to the outside partner of the Existing Venture. The 44 lots were purchased through a land banking arrangement. The intercompany sale and related profit from the 242 lots and the 44 lots
have been eliminated in consolidation.



In
January 2003, California Lyon and two unaffiliated parties formed a limited liability company (Development LLC) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the
Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. The development process is anticipated to be completed by mid 2004 at which time California Lyon will have the obligation under certain specific conditions to
purchase approximately one half in value of the lots. It is anticipated that homebuilding activities and first deliveries will begin in 2005. California Lyon has an indirect, minority interest in the Development LLC, which is the borrower under a
secured line of credit. Advances under the line of credit are to be used to pay acquisition and development costs and expenses. The maximum commitment amount is $35 million, which is limited by specified agreed debt-to-value ratios. The line of
credit is secured by a deed of trust on the real property and improvements thereon owned by the Development LLC, as well as pledges of all net sale proceeds, related contracts and other ancillary property. Subject to specified terms and conditions,
California Lyon and the other indirect and direct members of the Development LLC, including certain affiliates and parents of such other members, each (i) have guaranteed on an unsecured basis to the bank the repayment of the Development LLCs
indebtedness under the line of credit, completion of certain infrastructure improvements to the land, payment of necessary loan remargining obligations, and the Development LLCs performance under its environmental indemnity and covenants, and
(ii) have agreed to take all actions and pay all amounts to assure that the Development LLC is in compliance with financial covenants. California Lyon has posted a letter of credit equal to approximately $5 million to secure such obligations as well
as the Development LLCs obligations to the bank under the line of credit. California Lyon and the other indirect and direct members of the Development LLC, including certain affiliates and parents of such other members, have entered into a
Reimbursement and Indemnity Agreement to allocate any liability arising from their guaranty obligations to the bank, including the posting and pledge to the bank of the letters of credit by the parties. Delaware Lyon has entered into a joinder
agreement to be jointly and severally liable for California Lyons obligations under the Reimbursement and Indemnity Agreement. As a result of these agreements and guarantees, Delaware Lyon and California Lyon may be liable in specified
circumstances for the full amount of the obligations guaranteed to the bank.





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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, 2002 and 2001



Net cash provided by (used in) operating activities changed from a use of $2.3 million in 2001 to a source of $16.2 million in 2002. The
change was primarily a result of an increase in operating income as a result of increased operating revenues in 2002.



Net cash provided by (used in) investing activities changed from a use of $4.1 million in 2001 to a source of $11.1 million in 2002
primarily as a result of an increase in net distributions from unconsolidated joint ventures in 2002.



Net cash (used in) provided by financing activities changed from a source of $11.4 million in 2001 to a use of $30.3 million in 2002
primarily as a result of purchases of common stock in 2002.



Cash Flows  Comparison of Years Ended December 31, 2001 and 2000



Net cash (used in) provided by operating activities changed from a source of $9.3 million in 2000 to a use of $2.3 million in 2001. The
change was primarily a result of increased expenditures in real estate inventories for 2001.



Net cash (used in) provided by investing activities changed from a source of $19.2 million in 2000 to a use of $4.1 million in 2001 primarily as a result of an increase in notes receivable originations
associated with the mortgage company warehouse credit facility and a decrease in net distributions from unconsolidated joint ventures in 2001.



Net cash provided by (used in) financing activities changed from a use of $16.0 million in 2000 to a source of $11.4 million primarily as
a result of increased net borrowings from notes payable and a decrease in the net repurchase of 121/2% Senior
Notes in 2001.



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



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accounting policies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to
be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the following accounting policies are among the most important to a portrayal of the
Companys financial condition and results of operations and require among the most difficult, subjective or complex judgments:



Real Estate Inventories and Cost of Sales



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



Impairment of Real Estate Inventories



In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement No. 144). This
pronouncement superseded Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement No. 121) and was required to be adopted on
January 1, 2002. Statement No. 144 retained the fundamental provisions of Statement No. 121 as it relates to assets to be held and used and assets to be sold. 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 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.





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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.



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 9 of the Notes to Consolidated Financial Statements for a description of the Companys transactions
with related parties.



Impact of New Accounting Pronouncements



In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement No. 142), effective for fiscal years beginning after December 15, 2001. Under the new rule, goodwill is no
longer amortized but is subject to impairment tests in accordance with Statement No. 142. The Company performed its first required annual impairment test of goodwill as of January 1, 2002 and determined that goodwill was not impaired. As of December
31, 2002, there have been no indicators of impairment related to the Companys goodwill.



In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(Statement No. 144). This pronouncement supersedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement No. 121)
and a portion of APB Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (APB No.
30), and was required to be adopted on January 1, 2002. Statement No. 144 retains the fundamental provisions of Statement No. 121 as it relates to assets to be held and used and assets to be sold, but adds provisions for assets to be disposed
of other than by sale. It also changes the accounting for the disposal of a segment under APB No. 30 by requiring the operations of any assets with their own identifiable cash flows that are disposed of or held for sale to be removed from operating
income and reported as discontinued operations. Treating such assets as discontinued operations would also require the reclassification of the operations of any such assets for any prior periods presented. The Companys adoption of Statement
No. 144 has not had a material impact on its financial condition or the results of its operations.



In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, Recission of SFAS
Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections



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(Statement No. 145). Statement No. 145 prevents gains or losses on extinguishment of debt not meeting the criteria of APB 30 to
be treated as extraordinary. Statement No. 145 is effective for fiscal years beginning after March 15, 2002. Upon adoption of Statement No. 145, the Companys previously reported extraordinary items related to gain from retirement of debt
will be reclassified and not reported as extraordinary items.



In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(Interpretation No. 45). The disclosure requirements of Interpretation No. 45 are effective as of December 31, 2002. The initial recognition and measurement requirements of Interpretation No. 45 are effective on a prospective basis
to guarantees issued or modified after December 31, 2002. The Company is currently evaluating the impact of the required accounting treatment under Interpretation No. 45 for guarantees issued or modified after December 31, 2002. The Company has not
determined the anticipated impact of the application of Interpretation No. 45 to guarantees issued or modified after December 31, 2002. However, in the case of a guarantee issued as part of a transaction with multiple elements with an unrelated
party, Interpretation No. 45 generally requires the recording at inception of the guarantee of a liability equal to the guarantees estimated fair value. In the absence of observable transactions for identical or similar guarantees, estimated
fair value will likely be based on the expected present value which is the sum of the estimated probability-weighted range of contingent payments under the guarantee arrangement. The recording of a liability could have a corresponding effect on
various of the Companys financial ratios and other financial and operational indicators. See Notes 4, 5 and 10 of Notes to Consolidated Financial Statements for additional information related to the Companys guarantees.



In December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (Statement No. 148). Statement No. 148 amends Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (Statement No. 123) to provide three alternative methods of transition for Statement No. 123s fair value method of accounting for stock-based employee compensation
for companies that elect to adopt the provisions of Statement No. 123. Transition to the fair value accounting method of Statement No. 123 is not required by Statement No. 148. The Company has elected to use the intrinsic value method of accounting
for stock compensation in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and related interpretations. Statement No. 148 also amends the disclosure provisions of Statement No. 123 to
require disclosure in the summary of significant accounting policies of the effects of an entitys accounting policy with respect to stock-based compensation on reported net income and earnings per share in annual and interim financial
statements. The disclosure provisions of Statement No. 148 are required to be adopted by all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of Statement No. 123
or the intrinsic value method of APB No. 25. The disclosure provisions of Statement No. 148 have been adopted by the Company with appropriate disclosure included in Note 1 of Notes to Consolidated Financial Statements.



In January 2003, the Financial Accounting Standards Board
issued Interpretation No. 46, Consolidation of Variable Interest Entities (Interpretation No. 46), which applies immediately to arrangements created after January 31, 2003. Interpretation No. 46 applies to arrangements created
before February 1, 2003 beginning on July 1, 2003. The Company is currently evaluating whether the application of Interpretation No. 46 would require the consolidation of any of its joint venture or land banking arrangements existing at
December 31, 2002. The consolidation of the assets, liabilities and operations of any joint venture or land banking arrangements would have a corresponding effect on various of the Companys financial ratios and other financial and operational
indicators. Interpretation No. 46 may be applied by restating previously issued financial statements with a cumulative-effect adjustment as of the beginning of the first year restated. See Notes 4 and 10 of Notes to Consolidated Financial
Statements for additional information regarding joint venture and land banking arrangements.



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



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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 (including, but not limited to changes directly or indirectly related to the tragic events of September
11, 2001 and thereafter), a war or other hostilities involving the United States, whether an ownership change occurs which could, under certain circumstances, result in the further limitation of the Companys ability to utilize the tax benefits
associated with its net operating loss carryforward, changes in home mortgage interest rates, changes in generally accepted accounting principles or interpretations of those principles, changes in prices of homebuilding materials, labor shortages,
adverse weather conditions, the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements, changes in governmental laws and
regulations, whether the Company is able to refinance the outstanding balances of its debt obligation at their maturity, the timing of receipt of regulatory approvals and the opening of projects and the availability and cost of land for future
growth. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, those factors or conditions described under
Managements Discussion and Analysis of Financial Condition and Results of Operations. The Companys past performance or past or present economic conditions in the Companys housing markets are not indicative of future
performance or conditions. Investors are urged not to place undue reliance on forward-looking statements. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence
of anticipated or unanticipated events or changes to projections over time unless required by federal securities law.



Item 7A.Quantitative and Qualitative Disclosures About Market Risk



The Companys exposure to market risk for changes in interest rates relates to the Companys floating rate debt with a total
outstanding balance at December 31, 2002 of $167.3 million where the interest rate is variable based upon certain bank reference or prime rates. If interest rates were to increase by 10%, the estimated impact on the Companys consolidated
financial statements would be no reduction to income before provision for taxes based on amounts outstanding and rates in effect at December 31, 2002, but would increase capitalized interest by approximately $0.8 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 financial statements of the Significant Subsidiaries of William Lyon
Homes, together with the reports of the independent auditors, listed under Item 15, are submitted as a separate section of this report beginning on page 54 and are incorporated herein by reference.



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



None.



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PART III



Item 10.Directors and Executive Officers of Registrant



All directors hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified. The
principal officers of the Company are chosen annually by the board of directors and hold office until his or her successor is chosen and qualified or until his or her death, resignation or removal. The following table lists the Companys
directors and executive officers and provides their respective ages and current positions as of January 31, 2003. Biographical information for each director and executive officer is provided below.



|Name                          |  | Age |  | Position                                                        
|----------------------------- |  | --- |  | ----------------------------------------------------------------
|General William Lyon          |  | 79  |  | Chairman of the Board of Directors and Chief
Executive Officer  
|Wade H. Cable                 |  | 54  |  | Director, President and Chief Operating Officer                 
|General James E. Dalton(a)(b) |  | 72  |  | Director                                                        
|Richard E. Frankel            |  | 57  |  | Director                                                        
|William H. Lyon               |  | 29  |  | Director                                                        
|William H. McFarland(a)(b)    |  | 62  |  | Director                                                        
|Michael L. Meyer(a)(b)        |  | 64  |  | Director                                                        
|Raymond A. Watt(a)(b)         |  | 83  |  | Director                                                        
|Randolph W. Westerfield(a)(b) |  | 61  |  | Director                                                        
|Douglas F. Bauer              |  | 41  |  | Senior Vice President and Northern California Division President
|Mary J. Connelly              |  | 51  |  | Senior Vice President and Nevada Division President             
|W. Thomas Hickcox             |  | 50  |  | Senior Vice President and Arizona Division President            
|Thomas J. Mitchell            |  | 42  |  | Senior Vice President and Southern California Division President
|Larry I. Smith                |  | 48  |  | Senior Vice President and San Diego Division President          
|Michael D. Grubbs             |  | 44  |  | Senior Vice President and Chief Financial Officer               
|Richard S. Robinson           |  | 55  |  | Senior Vice President  Finance                                 
|Cynthia E. Hardgrave          |  | 54  |  | Vice President  Tax and Internal Audit                         
|W. Douglass Harris            |  | 59  |  | Vice President, Corporate Controller and Corporate Secretary    

---

|(a) |  | Member of the audit committee.
|--- |  | ------------------------------

|(b) |  | Member of the compensation 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 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.



Wade H. Cable has served since 1985 as a Director, President and Chief Executive Officer of the former The Presley Companies. Mr. Cable has served as the Company President and Chief
Operating Officer since November 1999. Prior to joining the Company, he worked for thirteen years with Pacific Enterprises as a senior executive in various of its real estate operations, including two years as an Executive Vice President of Pacific
Lighting Real Estate Group and four years as the President of Fredricks Development Company, a residential developer and homebuilder.



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General
James E. Dalton, USAF (Ret.), was elected in 1991 to the board of directors of the former The Presley Companies and has served in that capacity since November 1999. He serves as Chairman of the audit committee. General Dalton was the
President of Logicon R&D Associates, a subsidiary of Logicon Corporation (a defense contractor providing advanced technology systems and services), a position he held from 1985 until his retirement in December 1998. He also served as General
Manager of Logicons Defense Technology Group from 1995 until his retirement in December 1998. General Dalton currently acts as an independent consultant to several companies in the defense industry and is a director of Defense Group, Inc. and
Finance America, Inc.



Richard E.
Frankel has been associated with homebuilding entities for over 25 years, and joined the board of directors on January 25, 2000. From 1993 to 1997, he held key positions including Chief Financial Officer, Investment Division Manager, Vice
Chairman and President of the former William Lyon Homes, which sold substantially all of its assets to the Company in 1999. He currently serves as Chairman and Chief Executive Officer of Duxford Financial, Inc., a wholly-owned subsidiary of the
Company.



William H. Lyon, son of
Chairman William Lyon, worked full time with the former William Lyon Homes from November 1997 through November 1999, 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 participated in a training program designed to expose him to the many facets of real estate development, and currently he is Director of Corporate Development. Mr. Lyon received a dual B.S. in Industrial Engineering
and Product Design from Stanford University in 1997.



William H. McFarland was elected to the California Building Industry Foundation Hall of Fame, and has had a distinguished career in residential real estate and large-scale community development in California. He has
been a member of the board of directors since January 25, 2000. Mr. McFarland previously served in executive and director capacities of The Irvine Company, Irvine Community Development Company and Irvine Apartment Communities. Today, Mr. McFarland
is a private developer and investor in real estate projects in California, and serves on the boards of Opus West Corporation, Cornerstone Ventures, Inc. and e-dn.com.



Michael L. Meyer joined the board of directors on January 25, 2000, and currently is Chief
Executive Officer of Michael L. Meyer Company, a principal and/or advisor to real estate entities, an officer of Advantage 4, LLC, a real estate telecommunications company, and a principal of TransPac Partners LLC and Pacific Capital Investors
which are both involved in real estate in Japan. In 1998, Mr. Meyer retired as Managing Partner of the E&Y Kenneth Leventhal Real Estate Group of Ernst & Young LLP Orange County, California office. Mr. Meyer was elected to the
California Building Industry Foundation Hall of Fame and currently serves on the board of directors of City National Bank, City National Corporation and Cornerstone Ventures, Inc.



Raymond A. Watt was elected to the board of directors of the former The Presley Companies in
1997 and has served in that capacity since November 1999. Mr. Watt serves as Chairman of the Companys compensation committee. Mr. Watt is the founder and Chairman of the Board of Watt Group, Inc., a commercial and residential real estate
development and building company, positions he has held since 1960. Mr. Watt has been honored with election to the California Building Industry Foundation Hall of Fame, serves as a director of Watt Communities, Inc. and Linserath, Inc., both
real estate developers, and has served on the boards of several civic organizations.



Dr. Randolph W. Westerfield is Dean of the Marshall School of Business, University of Southern California and has been a member of the board of directors since January 25, 2000. He has
been a consultant to a number of large U.S. corporations. With expertise in the areas of corporate financial policy, investment management and analysis, mergers and acquisitions, and stock market price behavior, Dr. Westerfield is co-author of three
leading textbooks in corporate financial management. He currently serves on the board of directors of Health Management Associates.



Douglas F. Bauer, Senior Vice President and Northern California Division President, joined the Company in 1999 when it
acquired substantially all of the assets of the former William Lyon Homes, where Mr. Bauer had



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served as Vice President  Finance and Chief Financial Officer, and Northern California Division
President since his hire in January 1989. 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.



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



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



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



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



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



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 15 years experience in real estate tax and audit.



W. Douglass Harris, Vice President and Corporate Controller joined The Presley Companies in
June 1992 and has served 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 20 years.



Section 16(a) Beneficial Ownership Reporting Compliance



Based solely upon a review of reports received by the Company during or with respect to the year ended
December 31, 2002 pursuant to Rule 16a-3(e) of the Securities Exchange Act of 1934, all required reports on Form 3, Form 4 and Form 5 were timely filed by the Companys directors, officers and 10% stockholders.



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Item 11.Executive Compensation



COMPENSATION OF DIRECTORS



In 2002, outside directors received an annual retainer of $30,000 per year plus $1,000 for each board of directors meeting attended and
$1,000 per year per committee for service on committees of the board of directors, which they take in cash. The Company adopted the William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002, whereby 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. Currently, General Dalton is the only director who intends to defer all of his 2002 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 are to 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.



No options were
granted during 2002 to any director. On May 9, 2000, Messrs. Dalton, Frankel, McFarland, Meyer, Watt and Westerfield were each granted options to purchase 10,000 shares of common stock at a price of $8.6875 per share. These options vested or will
vest in the following installments: one third on May 9, 2001, one third on May 9, 2002 and one third on May 9, 2003. All of the options expire if unexercised on May 9, 2010. Mr. Cable was granted options to purchase 50,000 shares of common
stock. The option price, vesting schedule and expiration date of Mr. Cables options are the same as those granted to the other directors. The grant of options to Mr. Cable is also discussed in the section on Executive Compensation.
No options were granted to General William Lyon or William H. Lyon.



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EXECUTIVE COMPENSATION



Summary Compensation Table.



The following table summarizes the annual
and long-term compensation during 2002 of the Companys Chief Executive Officer and the four additional most highly compensated executive officers whose annual salaries and bonuses exceeded $100,000 in total during the fiscal year ended
December 31, 2002 (collectively, the Named Officers).



|                                                                                       |  |              |  | Annual Compensation |                       | Long-Term Compensation                                                        |   |                                                                                 
|-------------------------------------------------------------------------------------- |  | ------------ |  | ------------------- | --------------------- | ----------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------
|                                                                                       |  |              |  |                     | Awards                |                                                                               |  
|Name and Principal Position                                                            |  | Year         |  | Salary($)(1)        |                       | Bonus Paid in   Specified Year But Earned in
Earlier Years ($)(2),(3),(4),(5) |   | Bonus Earned During Specified Year But Payable in Future Years($)(3),(4),(5),(6)
|General William Lyon(8) Chairman of the Board and Chief Executive Officer              |  | 200220012000 |  | $                   | 495,000495,000495,000 |                                                                               | $ | 1,985,4081,440,0230                                                             
|Wade H. Cable Director, President and Chief Operating Officer                          |  | 200220012000 |  |                     | 424,330424,330424,330 |                                                                               |   | 2,294,1581,823,773617,500                                                       
|Thomas J. Mitchell(8) Senior Vice President and Southern California Division President |  | 200220012000 |  |                     | 206,000206,000200,000 |                                                                               |   | 647,259385,875 0                                                                
|Douglas F. Bauer(8) Senior Vice President and Northern California Division President   |  | 200220012000 |  |                     | 206,000206,000200,000 |                                                                               |   | 484,970477,338 0                                                                
|Mary J. Connelly Senior Vice President and Nevada Division President                   |  | 200220012000 |  |                     | 200,000200,000175,366 |                                                                               |   | 461,627321,014172,131                                                           

---

|(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 plan. Does not include perquisites and other personal benefits, securities or property received by the executive unless the aggregate amount of such compensation is greater than 10 percent of the
total annual salary and bonus reported for the executive.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Represents amounts paid in 2002, 2001, or 2000, respectively, under the Companys then existing executive bonus plan or employment agreement with the
executive, but which were earned prior to the year of payment.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | The 2002 Cash Bonus Plan (the 2002 Plan) provides that the Chief Executive Officer (CEO), the Chief Operating Officer (COO) and
the Chief Financial Officer (CFO) are eligible to receive bonuses based upon specified percentages of pre-tax, pre-bonus income. Division presidents are eligible to receive bonuses based upon specified percentages of their respective
division pre-tax, pre-bonus income. All other participants are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income. Awards are paid out over two years, with
75% paid out following the determination of bonus awards, and 25% paid out one year later. The deferred amounts will be forfeited in the event of termination for any reason except retirement, death or disability.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | The 2001 Cash Bonus Plan (the 2001 Plan) provides that the CEO, COO and CFO are eligible to receive bonuses based upon specified percentages of pre-tax,
pre-bonus income. Bonus targets for division presidents are based upon division performance, as compared to the divisions 2001 Business Plan. For all other participants, the 2001 Plan stipulates annual setting of individual bonus targets,
expressed as a percent of each participants salary, with awards based on performance against goals pertaining to each participants operating area. All awards are prorated downward if the sum of all of our calculated awards exceeds 20% of
the Companys consolidated pre-tax income before bonuses. Awards are paid out over two years, with 75% paid out following the determination of bonus awards, and 25% paid out one year later. The deferred amounts will be forfeited in the event of
termination for any reason except retirement, death or disability.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | The 2000 Cash Bonus Plan (the 2000 Plan) provides that the CEO and COO are eligible to receive bonuses based upon specified percentages of pre-tax,
pre-bonus income. Bonus targets for division presidents are based upon division performance, as compared to the divisions 2000 Business Plan. For all other participants, the 2000 Plan stipulates annual setting of individual bonus targets,
expressed as a percent of each participants salary, with awards based on performance against goals pertaining to each participants operating area. All awards are prorated downward if the sum of all of the calculated awards exceeds 20% of
the Companys consolidated pre-tax income before bonuses. Awards are paid out over two years, with 75% paid out following the determination of bonus awards, and 25% paid out one year later. The deferred amounts will be forfeited in the event of
termination for any reason except retirement, death or disability.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(6) |  | 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 executive deferred compensation plan.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|(8) |  | General William Lyon and Mssrs. Bauer and Mitchell served as executive officers from November 11, 1999 until the end of 1999, but did not earn salaries from the
Company. They did earn salaries from the former William Lyon Homes. During 2000, General William Lyon and Mssrs. Bauer and Mitchell were paid bonuses of $530,956, $248,745 and $387,947, respectively, which were earned in prior years from the former
William Lyon Homes. During 2001, General William Lyon and Mr. Mitchell were paid bonuses of $75,851 and $73,298, respectively, which were earned in prior years from the former William Lyon Homes.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys board of directors has approved a cash
bonus plan for all of its full-time, salaried employees, including the CEO, COO, CFO, division presidents, executives, managers, field construction staff, and certain other employees. Under the terms of this plan, the CEO, COO and CFO are eligible
to receive bonuses based upon specified percentages of the Companys pretax, pre-bonus income. Division presidents are eligible to receive bonuses based upon specified percentages of their respective division pre-tax, pre-bonus income. All
other participants 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, CFO, division presidents, executives and managers, awards are paid out over two years, with
75% paid out following the determination of bonus awards, and 25% paid out one year later. The deferred amounts will be forfeited in the event of termination for any reason except retirement, death or disability.



Effective on February 11, 2002, the Company implemented a
deferred compensation plan that allows certain officers and employees to defer a portion of total income (base salary and bonuses). The deferral amount can be up to 20% of total income with a minimum of $10,000 annually.



Options/SAR Grants in Fiscal Year Ended December 31, 2002



No options were granted during 2002 to any director or Named
Officer.



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



The purpose of the Stock Incentive Plan is to attract and
retain the best available personnel, to provide additional incentive to key employees, officers and directors, and to promote the success of the Companys business. One million shares of common stock are reserved for issuance under the Stock
Incentive Plan, subject to adjustments related to changes in capitalization.



Both options intended to qualify as incentive stock options and nonqualified options may be granted under the Stock Incentive Plan. Nonqualified stock options may be granted to employees, consultants
and directors. Incentive stock options may be granted only to employees. Options may be coupled with a stock appreciation right. Grants or sales of common stock also may be made to employees, consultants or directors upon terms and conditions
determined by the Stock Incentive Plans administrator.



The Stock Incentive Plan will continue in effect for a term of ten years, unless terminated earlier as provided for in the Stock Incentive Plan. The term of each option will be stated in the applicable option agreement, provided,
however, that in no event may the term be more than ten years from the date of grant.



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Effective on
May 9, 2000, the Company issued options under the Stock Incentive Plan to purchase a total of 627,500 shares of common stock at $8.6875 per share. During the year ended December 31, 2001, the Company issued additional options under the Stock
Incentive Plan to purchase 32,500 shares of common stock at an average price of $11.50 per share. During the year ended December 31, 2002, options were exercised to purchase 102,504 shares and 3,334 shares of common stock at a price of $8.6875
and $13.000, respectively. During the year ended 2001, options were exercised to purchase 49,176 shares of common stock at a price of $8.6875 per share in accordance with the Stock Incentive Plan. As of December 31, 2002, 56,666 options have been
forfeited and 448,320 options remain unexercised. The unexercised options are as follows: 419,154 options priced at $8.6875, 12,500 options priced at $9.1000, and 16,666 options priced at $13.0000. All unexercised options expire on May 9, 2010.



During the year ended December 31, 2002, options
were exercised under the 1991 Stock Option Plan to purchase 13,912 shares and 7,998 shares of common stock at a price of $5.0000 and $14.3750, respectively. At December 31, 2002 there were no outstanding options to purchase common stock under the
1991 Stock Option Plan.



AGGREGATED OPTION EXERCISES AND
FISCAL YEAR-END OPTION VALUE TABLE



The
following table sets forth the information noted for all exercises of stock options during the fiscal year ended December 31, 2002 by each of the Named Officers and the fiscal year end value of unexercised options.



|                                  |  | Shares Acquired On Exercise(#)(1) |  | Value Realized($)(2) |           | Number of Securities Underlying Unexercised Options/SARS At Fiscal Year-End(#)(1) |          | Value of Unexercised In-The-Money Options/SARS At
Fiscal Year-End($)(1),(2)
|--------------------------------- |  | --------------------------------- |  | -------------------- | --------- | --------------------------------------------------------------------------------- | -------- | ---------------------------------------------------------------------------
|                                  |  |                                   |  | Exercisable          |           | Unexercisable                                                                     |          | Exercisable                                                                
|General William Lyon              |  |                                  |  |                      |          |                                                                                   |         |                                                                            
|Wade H. Cable 1991 Plan 2000 Plan |  | 13,912                           |  | $                    | 212,854  |                                                                                   | 0 33,335 |                                                                            
|Thomas J. Mitchell                |  |                                  |  |                      |          |                                                                                   | 16,668   |                                                                            
|Douglas F. Bauer                  |  | 8,333                             |  | $                    | 148,098   |                                                                                   | 0        |                                                                            
|Mary J. Connelly                  |  |                                  |  |                      |          |                                                                                   | 8,333    |                                                                            

---

|(1) |  | Exercised, exercisable and unexercisable options for each of the Named Officers include options granted on May 9, 2000 under the Stock Incentive Plan. The options
vest as follows: one-third on May 9, 2001, one-third on May 9, 2002 and one-third on May 9, 2003. The exercise price of these options is $8.6875. The value of unexercised in-the-money options is calculated by determining the difference between
the closing price of the Companys common stock on the New York Stock Exchange ($21.83 per share) at December 31, 2002 and the exercise price of the options.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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, Wade Cable,
Thomas Mitchell, Douglas Bauer and Mary Connelly provide for an annual salary effective January 1, 2003 of $600,000, $500,000, $225,000, $225,000 and $225,000 respectively. Each employment agreement also provides for a monthly automobile allowance
of $400.



The Company has entered into
indemnification agreements with all of its directors and the Named Officers, among others, to provide them with the maximum indemnification allowed under the Companys bylaws 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 extent such indemnification is permitted by the laws of Delaware.





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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION



The members of the Companys compensation committee are
General James E. Dalton, William H. McFarland, Michael L. Meyer, Raymond A. Watt and Randolph W. Westerfield. 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.



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 the Companys common
stock beneficially owned as of January 31, 2003. 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
Companys directors, (c) each executive officer named in the Summary Compensation Table, and (d) all of the Companys directors and executive officers as a group.



|                                                                                     |  | As of January 31, 2003    |     
|------------------------------------------------------------------------------------ |  | ------------------------- | ----
|                                                                                     |  | Shares Beneficially Owned |     
|General William Lyon(3)                                                              |  | 3,707,573                 | (4) 
|The William Harwell Lyon Trust(6)                                                    |  | 1,749,259                 |     
|William H. Lyon(3)                                                                   |  | 0                         | (7) 
|Wade H. Cable(3)                                                                     |  | 0                         |     
|Wade H. Cable & Susan M. Cable, Trustees of the Cable Family Trust, Est.
7-11-88(3)  |  | 247,705                   | (8) 
|Richard E. Frankel(3)                                                                |  | 0                         |     
|General James E. Dalton(3)                                                           |  | 0                         |     
|William H. McFarland(3)                                                              |  | 0                         |     
|William H. & Rose-Marie McFarland, Trustees (U/T/A dated February 13,
1998)(3)       |  | 3,334                     |     
|Michael L. Meyer(3)                                                                  |  | 0                         |     
|Michael L. Meyer, Trustee of the Michael L. Meyer Living Trust, Est. July 4,
1989(3) |  | 20,000                    |     
|Raymond A. Watt(3)                                                                   |  | 0                         |     
|R.A. Watt 1994 Family Trust(3)                                                       |  | 6,667                     |     
|Randolph W. Westerfield(3)                                                           |  | 3,333                     |     
|Thomas J. Mitchell(3)                                                                |  | 0                         |     
|Douglas F. Bauer(3)                                                                  |  | 0                         |     
|Mary J. Connelly(3)                                                                  |  | 0                         |     
|Bricoleur Capital Management LLC(10)                                                 |  | 1,733,940                 |     
|FMR Corp.(11)                                                                        |  | 672,000                   |     
|All directors and executive officers as a group (18 persons)                         |  | 5,490,366                 | (12)

---

|* |  | Less than 1%
|- |  | ------------

|(1) |  | Reflects the number of shares that could be purchased by exercise of options exercisable at January 31, 2003 or within 60 days thereafter under the William Lyon
Homes 2000 Stock Incentive Plan.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Shares of common stock subject to options that are currently exercisable or exercisable within 60 days are deemed to be outstanding and beneficially owned by the
person holding such options for the purpose of computing the percentage ownership of such person, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Stockholder is at the following mailing address: c/o William Lyon Homes, 4490 Von Karman Avenue, Newport Beach, CA 92660.
|--- |  | -------------------------------------------------------------------------------------------------------------------------



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|(4) |  | Includes 247,705 shares held by the Cable Family Trust. General William Lyon has the power to direct the vote of all of the shares beneficially owned by the Cable
Family Trust pursuant to a voting agreement among William Lyon, Wade H. Cable and Susan M. Cable, Trustees of the Cable Family Trust and Wade H. Cable, individually, dated as of May 31, 2002 (Voting Agreement).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | Includes 33,335 shares issuable upon exercise of outstanding options and deemed beneficially owned by Wade H. Cable. General William Lyon has the power to direct the
vote of all of the shares beneficially owned by Wade H. Cable pursuant to the Voting Agreement.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | Stockholder is at the following mailing address: c/o Richard Sherman, Esq., Irell & Manella LLP, 840 Newport Center Drive, Suite 400, Newport Beach, CA
92660.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) |  | Does not include 1,749,259 shares of common stock held in The William Harwell Lyon Trust 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) |  | Does not include 1,203 shares directly owned by children of Mr. Cable, as to which shares Mr. Cable disclaims beneficial ownership.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------



|(9) |  | Includes 6,667 shares of common stock purchasable by Frankel Associates, L.P. upon the exercise of options exercisable at January 31, 2003 or within 60 days
thereafter. Richard Frankel assigned the options the Company granted to him to Frankel Associates, L.P., a family limited partnership. Mr. Frankel is the President of the general partner of Frankel Associates, L.P.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(10) |  | Stockholder is at the following mailing address: 12230 El Camino Real, Suite 100, San Diego, CA 92130. According to Item 6 of the Schedule 13G filed by stockholder
for the year 2002 and dated February 13, 2003, as an investment adviser for certain accounts in which the reported shares are held, stockholder has been granted the authority to dispose of and vote those shares. Stockholders holdings are based
upon on the holdings disclosed in the Schedule 13G and any other information made available to the Company Stockholder has advised the Company that the shares are held in multiple funds and that no single fund is a beneficial owner of more than 5%
of the Companys common stock.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(11) |  | Based solely on the Schedule 13G filed on February 13, 2002, stockholder is at the following mailing address: 82 Devonshire Street, Boston, MA 02109. According to
Item 6 of such Schedule 13G, various persons have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of the Companys shares. The interest of one fund, Fidelity Low Priced Stock Fund,
amounted to 507,5000 shares on December 31, 2002.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(12) |  | Includes 1,749,259 shares held by The William Harwell Lyon Trust 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 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, and the Company has no information as to
whether any shares shown in this table are subject to California community property law.



The following table sets forth information as of December 31, 2002 with respect to compensation plans under which the Companys common stock is authorized for issuance.



|Plan Category                                             |  | Number of securities to be issued upon exercise of outstanding options, warrants and
rights(a) |  | Weighted-average exercise price of outstanding options, warrants and
rights(b) |        | Number of securities remaining available for future issuance under equity compensation
plans (excluding securities reflected in column(a))(c)
|--------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------ | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved bysecurity holders     |  | 448,320                                                                                        |  | $                                                                              | 8.8593 |                                                                                                                                              
|Equity compensation plans not approved bysecurity holders |  | 0                                                                                              |  |                                                                                | N/A    |                                                                                                                                              
|                                                          |  |                                                                                                |  |                                                                                |        |                                                                                                                                              
|Total                                                     |  | 448,320                                                                                        |  | $                                                                              | 8.8593 |                                                                                                                                              
|                                                          |  |                                                                                                |  |                                                                                |        |                                                                                                                                              



No
compensation plan under which the Companys common stock is authorized for issuance was adopted without the approval of the Companys stockholders.



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Item 13.Certain Relationships and Related Transactions



121⁄2% Senior Notes Purchased by General William Lyon, a Trust for which William H. Lyon is the Sole Beneficiary, and William H.
McFarland.



On May 1, 2001, the Company
completed a consent solicitation with respect to the 121⁄2% Senior Notes and received consents from holders of $39,279,000 of the then outstanding notes to extend the maturity date from July 1, 2001 to July 1, 2003 and to make certain
amendments to the note covenants. Although the Company initially intended to accept consents from no more than 50% of holders, the Company elected to accept additional consents, as contemplated by the consent solicitation documents. The consenting
holders received a fee of 4% of the principal balance. Subsequently, during May and June 2001, the Company also repurchased $31,444,000 of the 121⁄2% Senior Notes from non-consenting holders.



In June 2001, General William Lyon, Chairman and Chief
Executive Officer, and a trust for which his son William H. Lyon, a director, is the sole beneficiary, purchased from the Company at par $30,000,000 of the 121⁄2% Senior Notes. William H. McFarland, another member of the Companys Board of
Directors, purchased from the Company at par $1,000,000 of the 121⁄2% Senior Notes. In parity with holders consenting during the consent solicitation, these directors received a consent fee of 4% of the principal balance and consented to the
amendments effected by the consent solicitation statement dated February 28, 2001.



As of December 31, 2002, $70,279,000 aggregate principal amount of the 121/2% Senior Notes was outstanding.



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

William H. Lyon.



The Company purchased real estate projects
for a total purchase price of $8,468,000 during the year ended December 31, 2000, from entities controlled by General William Lyon and William H. Lyon. In addition, one-half of the net profits in excess of six to eight percent from the development
are to be paid to the seller. During the year ended December 31, 2002, $1,770,000 was paid to the seller in accordance with this agreement.



On October 26, 2000, the Companys board of directors (with General William Lyon and William H. Lyon abstaining) approved the
purchase of 579 lots for a total purchase price of $12,581,000 from an entity controlled by General William Lyon and William H. Lyon. The terms of the purchase agreement provide for an initial option payment of $1,000,000 and a rolling option
takedown of the lots. Phase takedowns of approximately 20 lots each are anticipated to occur at two to three month intervals for each of several product types through September 2004. In addition, one- half of the net profits in excess of six percent
from the development are to be paid to the seller. During the years ended December 31, 2002 and 2001, the Company purchased 183 lots and 143 lots, respectively, under this agreement for a total purchase price of $4,150,000 and $2,777,000,
respectively. In addition, during the year ended December 31, 2002, payments in the amount of $1,614,000 were made for one - half of the net profits in excess of six percent from the development. This land acquisition qualifies 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 has determined that the land acquisition is on terms
that are no less favorable to the Company than those that would have been obtained in a comparable transaction by us with an unrelated person. The Company has 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 has been approved by a majority of the disinterested members of the Companys Board of Directors of the Company. Further, the Company has delivered to the Trustee under the Indenture a determination of value by a
real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.



On July 9, 2002, the Companys Board of Directors (with General William Lyon and William H. Lyon abstaining) approved the purchase of
144 lots, through a land banking arrangement, for a total purchase price of



45



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##### Table of Contents

$16,660,000 from an entity that purchased the lots from General William Lyon. The terms of the purchase agreement provide for an initial
deposit of $3,300,000 (paid on July 23, 2002) and monthly option payments of 11.5% on the sellers outstanding investment. Such option payments entitle the Company to phase takedowns of approximately 14 lots each, which are anticipated to
occur at one to two month intervals through December 2003. As of December 31, 2002, 16 lots have been purchased under this agreement for a purchase price of $1,851,000. Had the Company purchased the property directly, the acquisition would qualify
as an affiliate transaction under the Indenture. Even though the Companys agreement is not with General William Lyon, the Company has chosen to treat it as an affiliate transaction. Pursuant to the terms of the Indenture, the Company has
determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company has delivered to the Trustee under
the Indenture a resolution of the Board of Directors of the Company set forth in an Officers Certificate certifying that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a
comparable transaction by the Company with an unrelated person and the land acquisition has been approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company has delivered to the Trustee under
the Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.



Purchase of Land from Unconsolidated Joint Venture.



The Company purchased land for a total purchase price of $17,079,000, $5,371,000 and $7,128,000 during the
years ended December 31, 2002, 2001 and 2000, respectively, from one of the Companys unconsolidated joint ventures.



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



For the years ended December 31, 2002 and 2001, the Company incurred reimbursable on-site labor costs of
$178,000 and $175,000, respectively, for providing customer service to real estate projects developed by entities controlled by General William Lyon and William H. Lyon, of which $72,000 was due to us at December 31, 2002. In addition, the Company
earned fees of $99,000 and $108,000, respectively, for tax and accounting services performed for entities controlled by General William Lyon and William H. Lyon during the years ended December 31, 2002 and 2001.



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



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



For the years
ended December 31, 2002, 2001, and 2000, the Company incurred charges of $729,000, $729,000, and $717,000, respectively, 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
Owned by an Affiliate of William Lyon.



During the years ended December 31, 2002 and 2001, the Company incurred charges of $177,000 and $201,000, respectively, related to the charter and use of aircraft owned by an affiliate of General William Lyon.



Certain Family Relationships.



William H. Lyon 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. William H. Lyon is one of the Companys directors and an employee.



46



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##### Table of Contents



Mortgage Loans.



In 2002, the Company offered home mortgage
loans to its employees and directors through its mortgage company subsidiary, 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.



Home Purchase.



The Company offers a 2% discount on new homes sold to its
employees. In 2002, one of the Companys executive officers, Larry Smith, and another employee purchased a new home from the Company for $327,048.



Item 14.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 Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended). Based on that
evaluation, which was completed within 90 days of the filing date of this Form 10-K, the Companys principal executive officer and principal financial officer, concluded that the Companys disclosure controls and procedures were effective.
There have been no significant changes in the Companys internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.



PART IV



Item 15.Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K



(a)(1)  Financial Statements



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



|                                                |  | Page
|----------------------------------------------- |  | ----
|William Lyon Homes                              |  |     
|Report of Independent Auditors                  |  | 55  
|Consolidated Balance Sheets                     |  | 56  
|Consolidated Statements of Income               |  | 57  
|Consolidated Statements of Stockholders Equity |  | 58  
|Consolidated Statements of Cash Flows           |  | 59  
|Notes to Consolidated Financial Statements      |  | 60  
|                                               
|Significant Subsidiaries of William Lyon Homes  |  |     
|Report of Independent Auditors                  |  | 88  
|Combined Balance Sheets                         |  | 89  
|Combined Statements of Income                   |  | 90  
|Combined Statements of Members Capital         |  | 91  
|Combined Statements of Cash Flows               |  | 92  
|Notes to Combined Financial Statements          |  | 93  



(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.



47



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##### Table of Contents



(3)  Listing of Exhibits:



|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1(1)         |  | Certificate of Ownership and Merger                                                                                                                                                                                                                                                                                                                                                                                                                            
|              
|3.1(2)         |  | Certificate of Incorporation of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                   
|              
|3.3(2)         |  | Bylaws of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              
|4.1(2)         |  | Specimen certificate of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                          
|              
|4.2(3)         |  | Indenture dated June 29, 1994, between American Bank & Trust Company, as Trustee, and The Presley Companies and
Presley Homes.                                                                                                                                                                                                                                                                                                                                 
|              
|4.3(9)         |  | Form of First Supplemental Indenture dated as of July 1, 2001 amending and supplementing the Indenture dated as of
June 29, 1994 by and among William Lyon Homes f/k/a The Presley Companies, a Delaware corporation (as Company), William Lyon Homes, Inc. f/k/a Presley Homes, f/k/a The Presley Companies, a California corporation (as Guarantor) and Firstar Bank, N.A.
as successor-in-interest to American National Bank and Trust Company (as Trustee).
|              
|10.1(5)        |  | Form of Indemnity Agreement, between the Company and the Directors and Officers of the Company.                                                                                                                                                                                                                                                                                                                                                                
|              
|10.2(2)        |  | Purchase Agreement and Escrow Instructions dated October 7, 1999 among The Presley Companies, Presley Homes, William
Lyon Homes, Inc., William Lyon and William H. Lyon.                                                                                                                                                                                                                                                                                       
|              
|10.3(5)        |  | 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.                                                                                                                                                                                                                                                     
|              
|10.4(5)        |  | Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc.,
a California corporation dated and effective November 5, 1999.                                                                                                                                                                                                                                                                          
|              
|10.5(6)        |  | Loan Agreement dated as of September 25, 2000 between William Lyon Homes, Inc., a California corporation, the
Borrower, and Residential Funding Corporation, a Delaware corporation, Lender.                                                                                                                                                                                                                                                               
|              
|10.6           |  | First Amendment to Loan Agreement, dated as of July 13, 2001, between William Lyon Homes, Inc., a California
corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.                                                                                                                                                                                                                                                  
|              
|10.7           |  | Second Amendment to Loan Agreement and to Other Loan Documents, dated as of March 28, 2002, between William Lyon
Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.                                                                                                                                                                                                                    
|              
|10.8           |  | Third Amendment to Loan Agreement and to Other Loan Documents, dated as of January 10, 2003, between William Lyon
Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.                                                                                                                                                                                                                   
|              
|10.9           |  | Fourth Amendment to Loan Agreement, dated as of January 23, 2003, between William Lyon Homes, Inc., a California
corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.                                                                                                                                                                                                                                              
|              
|10.10(6)       |  | 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).                                                                                                                                                                                              
|              
|10.11(10)      |  | 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.                                                                                                  



48



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##### Table of Contents

|Exhibit Number |      |  | Description                                                                                                                                                                                                                                                                                                                                                       
|-------------- | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12          |      |  | 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.   
|              
|10.13          |      |  | 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.
|              
|10.14          |      |  | 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.    
|              
|10.15          | (6)  |  | 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          | (13) |  | 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          |      |  | 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          | (6)  |  | 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.                                                                                                                                                                  
|              
|10.19          | (7)  |  | William Lyon Homes 2000 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                     
|              
|10.20          | (8)  |  | Form of Stock Option Agreements.                                                                                                                                                                                                                                                                                                                                  
|              
|10.21          | (8)  |  | William Lyon Homes, Inc. 2000 Cash Bonus Plan.                                                                                                                                                                                                                                                                                                                    
|              
|10.22          | (8)  |  | Standard Industrial/Commercial Single-Tenant Lease  Net Between William Lyon Homes, Inc. and a trust of which
William H. Lyon is the sole beneficiary.                                                                                                                                                                                                           
|              
|10.23          | (9)  |  | Business Loan Agreement dated as of March 8, 2001 between William Lyon Homes, Inc. (Borrower) and First
Bank and Trust (Lender).                                                                                                                                                                                                                              
|              
|10.24          | (10) |  | Mortgage Warehouse Loan and Security Agreement dated as of June 28, 2002, by and between Duxford Financial, Inc.,
and/or Bayport Mortgage, L.P., a California Corporation (Borrower) and First Tennessee Bank (Bank).                                                                                                                                         
|              
|10.25          | (11) |  | William Lyon Homes Executive Deferred Compensation Plan effective as of February 11,
2002.                                                                                                                                                                                                                                                                        
|              
|10.26          | (12) |  | William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11,
2002.                                                                                                                                                                                                                                                                
|              
|10.27          |      |  | The Presley Companies Non-Qualified Retirement Plan for Outside Directors.                                                                                                                                                                                                                                                                                        
|              
|12.1           |      |  | Statement of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                  
|              
|21.1           |      |  | List of Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                              
|              
|23.1           |      |  | Consent of Independent Auditors.                                                                                                                                                                                                                                                                                                                                  
|              
|99.1           |      |  | 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.                                                                                                                                                                                                                 



49



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##### Table of Contents

|Exhibit Number |  | Description                                                                                                                                      
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|99.2           |  | 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 Companys Current Report on Form 8-K filed January 5, 2000 and incorporated herein by this reference.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------



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



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



|(4) |  | Previously filed in connection with the Companys Registration Statement on Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and incorporated
herein by this reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | 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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | 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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-8 (SEC Registration No. 333-50232) and incorporated herein by this
reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|(9) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001 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, 2001 and incorporated herein by this
reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(11) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-8 (SEC Registration No. 333-82448) dated February 8, 2002 and incorporated
herein by this reference.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(12) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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



(b)  Reports on Form 8-K



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



50



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##### Table of Contents



SIGNATURES



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



WILLIAM LYON HOMESBy:

/s/    MICHAEL D. GRUBBSMichael 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.



|Signature                                       |  | Title                                                                                      |  | Date               
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | -------------------
|                                               
|/s/    WILLIAM
LYONWilliam
Lyon                 |  | Chairman of the Board, Chief Executive Officer and Director (Principal Executive
Officer)  |  | February 18, 2003  
|                                               
|/s/    WADE H.
CABLEWade
H. Cable               |  | Director, President and Chief Operating Officer                                            |  | February 18, 2003  
|                                               
|/s/    JAMES E.
DALTONJames
E. Dalton           |  | Director                                                                                   |  | February 18, 2003  
|                                               
|/s/    RICHARD E.
FRANKELRichard E.
Frankel     |  | Director                                                                                   |  | February 18, 2003  
|                                               
|/s/    WILLIAM H.
LYONWilliam
H. Lyon           |  | Director                                                                                   |  | February 18, 2003  
|                                               
|/s/    WILLIAM H.
MCFARLANDWilliam H. McFarland |  | Director                                                                                   |  | February 18, 2003  
|                                               
|/s/    MICHAEL L.
MEYERMichael L. Meyer         |  | Director                                                                                   |  | February 18, 2003  
|                                               
|/s/    RAY A.
WATTRay A.
Watt                   |  | Director                                                                                   |  | February 18, 2003  
|                                               
|Randolph W. Westerfield                         |  | Director                                                                                   |  | February     , 2003
|                                               
|/s/    MICHAEL D.
GRUBBSMichael D.
Grubbs       |  | Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial
Officer) |  | February 18, 2003  
|                                               
|/s/    W. DOUGLASS
HARRISW. Douglass
Harris     |  | Vice President and Corporate Controller (Principal Accounting Officer)                     |  | February 18, 2003  



51



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##### Table of Contents

CERTIFICATIONS



I, William Lyon, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of William Lyon Homes;
| | -- |  | ----------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;



b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date);
and



c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrants internal controls; and



| | 6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: February 18, 2003



|   
|---
|By:
|   



52



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##### Table of Contents

CERTIFICATIONS



I, Michael D. Grubbs, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of William Lyon Homes;
| | -- |  | ----------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;



b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date);
and



c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrants internal controls; and



| | 6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: February 18, 2003



|   
|---
|By:
|   



53



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##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



|                                                |  | Page
|----------------------------------------------- |  | ----
|                                               
|William Lyon Homes                              |  |     
|                                               
|Report of Independent Auditors                  |  | 55  
|Consolidated Balance Sheets                     |  | 56  
|Consolidated Statements of Income               |  | 57  
|Consolidated Statements of Stockholders Equity |  | 58  
|Consolidated Statements of Cash Flows           |  | 59  
|Notes to Consolidated Financial Statements      |  | 60  
|                                               
|Significant Subsidiaries of William Lyon Homes  |  |     
|Report of Independent Auditors                  |  | 88  
|Combined Balance Sheets                         |  | 89  
|Combined Statements of Income                   |  | 90  
|Combined Statements of Members Capital         |  | 91  
|Combined Statements of Cash Flows               |  | 92  
|Notes to Combined Financial Statements          |  | 93  



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.



54



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##### Table of Contents

REPORT OF INDEPENDENT AUDITORS



To the Board of Directors and Stockholders

William Lyon Homes



We have audited the accompanying consolidated balance sheets of William Lyon Homes as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.



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



In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of William Lyon Homes at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.



/S/    ERNST & YOUNG LLP



Irvine, California

February 10, 2003



55



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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,
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------
|                                                                                                                                                                        |  | 2002        
|ASSETS                                                                                                                                                                 
|Cash and cash equivalents                                                                                                                                               |  | $           
|Receivables  Note 2                                                                                                                                                    |  |             
|Real estate inventories  Note 3                                                                                                                                        |  |             
|Investments in and advances to unconsolidated joint ventures  Note
4                                                                                                   |  |             
|Property and equipment, less accumulated depreciation of $5,435 and $4,309 at
December 31, 2002 and 2001, respectively                                                  |  |             
|Deferred loan costs                                                                                                                                                     |  |             
|Goodwill  Note 1                                                                                                                                                       |  |             
|Other assets                                                                                                                                                            |  |             
|                                                                                                                                                                        |  |             
|                                                                                                                                                                        |  | $           
|                                                                                                                                                                        |  |             
|                                                                                                                                                                       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                   
|Accounts payable                                                                                                                                                        |  | $           
|Accrued expenses                                                                                                                                                        |  |             
|Notes payable  Note 5                                                                                                                                                  |  |             
|121 / 2 % Senior Notes due July 1, 2003  Note 5                                                                                                                        |  |             
|                                                                                                                                                                        |  |             
|                                                                                                                                                                        |  |             
|                                                                                                                                                                        |  |             
|Minority interest in consolidated joint ventures  Note 4                                                                                                               |  |             
|                                                                                                                                                                        |  |             
|Commitments and contingencies  Note 10                                                                                                                                 |  |             
|                                                                                                                                                                       
|Stockholders equity  Note 7                                                                                                                                           |  |             
|Common stock, par value $.01 per share; 30,000,000 shares authorized;9,728,747 and
10,619,399 shares issued and outstanding at December 31, 2002 and 2001, respectively |  |             
|Additional paid-in capital                                                                                                                                              |  |             
|Retained earnings                                                                                                                                                       |  |             
|                                                                                                                                                                        |  |             
|                                                                                                                                                                        |  |             
|                                                                                                                                                                        |  |             
|                                                                                                                                                                        |  | $           
|                                                                                                                                                                        |  |             



See
accompanying notes.



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WILLIAM LYON HOMES



CONSOLIDATED STATEMENTS OF INCOME

(in thousands except per common share amounts)



|                                                                                                     |  | Year Ended December 31, |         
|---------------------------------------------------------------------------------------------------- |  | ----------------------- | --------
|                                                                                                     |  | 2002                    |         
|Operating revenue                                                                                    |  |                         |         
|Home sales                                                                                           |  | $                       | 593,762 
|Lots, land and other sales                                                                           |  |                         | 8,648   
|Management fees  Note 1                                                                             |  |                         | 10,892  
|                                                                                                     |  |                         |         
|                                                                                                     |  |                         | 613,302 
|                                                                                                     |  |                         |         
|Operating costs                                                                                      |  |                         |         
|Cost of sales  homes                                                                                |  |                         | (504,330
|Cost of sales  lots, land and other                                                                 |  |                         | (9,404  
|Sales and marketing                                                                                  |  |                         | (22,862 
|General and administrative                                                                           |  |                         | (39,366 
|Amortization of goodwill  Note 1                                                                    |  |                         |        
|                                                                                                     |  |                         |         
|                                                                                                     |  |                         | (575,962
|                                                                                                     |  |                         |         
|Equity in income of unconsolidated joint ventures  Note 4                                           |  |                         | 27,748  
|                                                                                                     |  |                         |         
|Operating income                                                                                     |  |                         | 65,088  
|Interest expense, net of amounts capitalized  Note 5                                                |  |                         |        
|Other income (expense), net  Note 8                                                                 |  |                         | 2,693   
|                                                                                                     |  |                         |         
|Income before income taxes and extraordinary item                                                    |  |                         | 67,781  
|                                                                                                    
|Provision for income taxes  Notes 4 and 10                                                          |  |                         |         
|Income taxes  benefit credited to paid-in capital                                                   |  |                         |        
|Income taxes  net of benefit                                                                        |  |                         | (18,270 
|                                                                                                     |  |                         |         
|Income before extraordinary item                                                                     |  |                         | 49,511  
|Extraordinary item  gain from retirement of debt, net of applicable income taxes
 Notes 1, 7 and 8 |  |                         |        
|                                                                                                     |  |                         |         
|Net income                                                                                           |  | $                       | 49,511  
|                                                                                                     |  |                         |         
|Basic earnings per common share:  Note 1                                                            |  |                         |         
|Before extraordinary item                                                                            |  | $                       | 4.85    
|Extraordinary item                                                                                   |  |                         |        
|                                                                                                     |  |                         |         
|After extraordinary item                                                                             |  | $                       | 4.85    
|                                                                                                     |  |                         |         
|Diluted earnings per common share:  Note 1                                                          |  |                         |         
|Before extraordinary item                                                                            |  | $                       | 4.73    
|Extraordinary item                                                                                   |  |                         |        
|                                                                                                     |  |                         |         
|After extraordinary item                                                                             |  | $                       | 4.73    
|                                                                                                     |  |                         |         



See
accompanying notes.



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WILLIAM LYON HOMES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)



|                                                                                                              |  | Common Stock |   |  | Additional Paid-In Capital |     |   | Retained Earnings (Accumulated Deficit) |   |         |   | 
|------------------------------------------------------------------------------------------------------------- |  | ------------ | - |  | -------------------------- | --- | - | --------------------------------------- | - | ------- | - | 
|                                                                                                              |  | Shares       |   |  | Amount                     |     |   |                                         |   | Total   |  
|                                                                                                             
|BalanceDecember 31, 1999                                                                                     |  | 10,439       |   |  | $                          | 104 |   |                                         | $ | 116,667 |   | 
|Issuance of common stock upon exercise of stock optionsNote 6                                                |  | 131          |   |  |                            | 2   |   |                                         |   | 654     |   | 
|Net income for the year                                                                                       |  |              |   |  |                            |    |   |                                         |   |        |   | 
|Income tax benefits related to temporary differences existing prior to the
quasi-reorganizationNotes 1 and 7 |  |             |   |  |                            |    |   |                                         |   | 9,287   |   | 
|                                                                                                              |  |              |   |  |                            |     |   |                                         |   |         |   | 
|                                                                                                             
|BalanceDecember 31, 2000                                                                                     |  | 10,570       |   |  |                            | 106 |   |                                         |   | 126,608 |   | 
|Issuance of common stock upon exercise of stock optionsNote 6                                                |  | 49           |   |  |                            |    |   |                                         |   | 427     |   | 
|Net income for the year                                                                                       |  |             |   |  |                            |    |   |                                         |   |        |   | 
|                                                                                                              |  |              |   |  |                            |     |   |                                         |   |         |   | 
|                                                                                                             
|BalanceDecember 31, 2001                                                                                     |  | 10,619       |   |  |                            | 106 |   |                                         |   | 127,035 |   | 
|Issuance of common stock upon exercise of stock optionsNote 6                                                |  | 128          |   |  |                            | 1   |   |                                         |   | 1,117   |   | 
|Purchase and retirement of common stockNote 6                                                                |  | (1,018       | ) |  |                            | (10 | ) |                                         |   | (19,560 | ) | 
|Net income for the year                                                                                       |  |             |   |  |                            |    |   |                                         |   |        |   | 
|                                                                                                              |  |              |   |  |                            |     |   |                                         |   |         |   | 
|                                                                                                             
|BalanceDecember 31, 2002                                                                                     |  | 9,729        |   |  | $                          | 97  |   |                                         | $ | 108,592 |   | 
|                                                                                                              |  |              |   |  |                            |     |   |                                         |   |         |   | 



See
accompanying notes.



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WILLIAM LYON HOMES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                            |  | Year Ended December 31, |         
|------------------------------------------------------------------------------------------- |  | ----------------------- | --------
|                                                                                            |  | 2002                    |         
|Operating activities                                                                        |  |                         |         
|Net income                                                                                  |  | $                       | 49,511  
|Adjustments to reconcile net income to net cash provided by (used in) operating
activities: |  |                         |         
|Depreciation and amortization                                                               |  |                         | 1,355   
|Equity in income of unconsolidated joint ventures                                           |  |                         | (27,748 
|Extraordinary gain on repurchase of 121 / 2 % Senior Notes                                  |  |                         |        
|Provision for income taxes                                                                  |  |                         | 18,270  
|Net changes in operating assets and liabilities:                                            |  |                         |         
|Receivables                                                                                 |  |                         | (3,767  
|Real estate inventories                                                                     |  |                         | (23,126 
|Deferred loan costs                                                                         |  |                         | 1,490   
|Other assets                                                                                |  |                         | (2,681  
|Accounts payable                                                                            |  |                         | 8,467   
|Accrued expenses                                                                            |  |                         | (5,580  
|                                                                                            |  |                         |         
|Net cash provided by (used in) operating activities                                         |  |                         | 16,191  
|                                                                                            |  |                         |         
|Investing activities                                                                        |  |                         |         
|Investment in and advances to unconsolidated joint ventures                                 |  |                         | (26,475 
|Distributions from unconsolidated joint ventures                                            |  |                         | 43,074  
|Mortgage notes receivable originations/issuances                                            |  |                         | (333,029
|Mortgage notes receivable sales/repayments                                                  |  |                         | 328,821 
|Purchases of property and equipment                                                         |  |                         | (1,315  
|                                                                                            |  |                         |         
|Net cash provided by (used in) investing activities                                         |  |                         | 11,076  
|                                                                                            |  |                         |         
|Financing activities                                                                        |  |                         |         
|Proceeds from borrowings on notes payable                                                   |  |                         | 913,599 
|Principal payments on notes payable                                                         |  |                         | (920,029
|Repurchase of 121 / 2 % Senior Notes                                                        |  |                         |        
|Reissuance of 121 / 2 % Senior Notes                                                        |  |                         |        
|Common stock issued for exercised options                                                   |  |                         | 1,118   
|Common stock purchased                                                                      |  |                         | (19,570 
|Minority interest distributions, net                                                        |  |                         | (5,442  
|                                                                                            |  |                         |         
|Net cash (used in) provided by financing activities                                         |  |                         | (30,324 
|                                                                                            |  |                         |         
|Net (decrease) increase in cash and cash equivalents                                        |  |                         | (3,057  
|Cash and cash equivalentsbeginning of year                                                 |  |                         | 19,751  
|                                                                                            |  |                         |         
|Cash and cash equivalentsend of year                                                       |  | $                       | 16,694  
|                                                                                            |  |                         |         
|Supplemental disclosures of cash flow and non-cash activities                               |  |                         |         
|Cash paid during the period for interest, net of amounts capitalized                        |  | $                       |        
|                                                                                            |  |                         |         
|Issuance of notes payable for land acquisitions                                             |  | $                       | 51,025  
|                                                                                            |  |                         |         
|Investment in joint venture in connection with contribution of land to joint
venture        |  | $                       | 2,000   
|                                                                                            |  |                         |         
|Debt assumed by joint venture in connection with contribution of land to joint
venture      |  | $                       |        
|                                                                                            |  |                         |         



See
accompanying notes.



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##### Table of Contents



WILLIAM LYON
HOMES



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



Note 1  Summary of Significant
Accounting Policies



Operations



William Lyon Homes, a Delaware corporation
and subsidiaries (the Company) are primarily engaged in designing, constructing and selling single family detached and attached homes in California, Arizona and Nevada.



Basis of Presentation



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



Segment Information



The Company designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets. For internal reporting purposes, the Company is organized into five
geographic home building regions and its mortgage origination operation. Because each of the Companys geographic home building regions has similar economic characteristics, housing products and class of prospective buyers, the geographic home
building regions have been aggregated into a single home building segment. The Companys mortgage origination operations did not meet the materiality thresholds which would require disclosure for the years ended December 31, 2002, 2001 and
2000, and accordingly, are not separately reported.



The Company evaluates performance and allocates resources primarily based on the operating income of individual home building projects. Operating income is defined by the Company as operating revenue less operating costs plus equity
in income of unconsolidated joint ventures. Accordingly, operating income excludes certain expenses included in the determination of net income. Operating income from home building operations totaled $65.1 million, $46.2 million and $49.4 million
for the years ended December 31, 2002, 2001 and 2000, respectively.



All revenues are from external customers. There were no customers that contributed 10% or more of the Companys total revenues during 2002, 2001 or 2000.



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 for warranty costs relating to the Companys limited
warranty plans is included in cost of sales at the time the sale of a home is recorded. The Company generally reserves one percent of the sales price of its homes against



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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 year ended December 31 are as follows (in thousands):



|                                      |  | December 31, |       
|------------------------------------- |  | ------------ | ------
|                                      |  | 2002         |       
|                                      |  |              |       
|Warranty liability, beginning of year |  | $            | 2,598 
|Warranty provision during year        |  |              | 5,167 
|Warranty settlements during year      |  |              | (3,478
|                                      |  |              |       
|Warranty liability, end of year       |  | $            | 4,287 
|                                      |  |              |       



Interest
incurred under the Revolving Credit Facilities, the 121/2% Senior Notes and other notes payable, as more fully
discussed in Note 5, 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.



In August 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement No. 144). This pronouncement superseded Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement No. 121) and was required to be adopted on January 1, 2002. Statement No. 144 retained the fundamental provisions of
Statement No. 121 as it relates to assets to be held and used and assets to be sold. 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. When an impairment loss is required for assets to be held and used by the Company, the related assets are adjusted to their estimated
fair value.



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



Property and Equipment



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



Deferred Loan Costs



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





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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Goodwill



The amount paid for business acquisitions over the net fair value of assets acquired and liabilities assumed
is reflected as goodwill and, until January 1, 2002 was being amortized on a straight-line basis over seven years. Accumulated amortization was $2,793,000 as of December 31, 2001. In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement No. 142), effective for fiscal years beginning after December 15, 2001. Under the new rule, goodwill is no longer
amortized but is subject to impairment tests in accordance with Statement No. 142. The Company performed its first required annual impairment test of goodwill as of January 1, 2002 and determined that goodwill was not impaired. As of December 31,
2002, there have been no indicators of impairment related to the Companys goodwill. If Statement No. 142 had been adopted effective January 1, 2000, the pro forma impact of the nonamortization of goodwill on the results for the subsequent
periods would have been as follows (in thousands except per common share data):



|                                        |  | Year Ended December 31,
|--------------------------------------- |  | -----------------------
|                                        |  | 2001                   
|Net income, as reported                 |  | $47,678                
|Amortization of goodwill, net of tax    |  | 1,106                  
|                                        |  |                        
|Net income, as adjusted                 |  | $48,784                
|                                        |  |                        
|Earnings per common share, as adjusted: |  |                        
|Basic                                   |  | $4.61                  
|                                        |  |                        
|Diluted                                 |  | $4.54                  
|                                        |  |                        



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. The Company accounts for sale-leaseback transactions in accordance with the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 98, Accounting for Leases(Statement No. 98).



During the year ended December 31, 2001, the Company completed the sale and related leaseback of 56 model homes for a sales price of $16,216,000, of which $13,938,000 was paid in cash and $2,278,000 of which was paid in
the form of a partial recourse note receivable. The sale was accounted for on the cost recovery method in accordance with Statement No. 66 and Statement No. 98, and as such deferred profits of $2,385,000 were recorded resulting in gross profits from
the sale of $531,000. As of December 31, 2002, the partial recourse note receivable of $1,379,000 and related deferred profits of $1,486,000 are reflected in receivables and accrued expenses, respectively. The Company pays rent on the related lease
and earns income on the partial recourse note receivable at LIBOR plus 4.750% (6.13% at December 31, 2002).



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



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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



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, 2002.



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



Cash and Cash Equivalents



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



Management Fees



Management fees represent fees earned in the current period from unconsolidated joint ventures in accordance with joint venture and/or operating agreements.



Basic and Diluted Earnings Per Common Share



Earnings per share amounts for all periods presented conform
to Financial Accounting Standards Board Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic and diluted earnings per common share for the year ended December 31, 2002 are based on 10,203,497 and 10,474,868 shares of
common stock outstanding, respectively. Basic and diluted earnings per common share for the year ended December 31, 2001 are based on 10,583,564 and 10,739,540 shares of common stock outstanding, respectively. Basic and diluted earnings per common
share for the year ended December 31, 2000 are based on 10,499,917 and 10,503,572 shares of common stock outstanding, respectively.



Stock-Based Compensation



At December 31, 2002, the Company had stock plans, which are described more fully in Note 6. The Company accounts for those plans under
the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and related interpretations. No stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and
earnings per common share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement
No. 123) to stock-based employee plans (in thousands, except per common share amounts):



|                                                                                                                                            |  | Year Ended December 31 |       
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------
|                                                                                                                                            |  | 2002                   |       
|Net income, as reported                                                                                                                     |  | $                      | 49,511
|Deduct: Total stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects |  |                        | (937  
|                                                                                                                                            |  |                        |       
|Net income, as adjusted                                                                                                                     |  | $                      | 48,574
|                                                                                                                                            |  |                        |       
|Earnings per common share:                                                                                                                  |  |                        |       
|Basicas reported                                                                                                                           |  |                        | $4.85 
|                                                                                                                                            |  |                        |       
|Basicas adjusted                                                                                                                           |  |                        | $4.76 
|                                                                                                                                            |  |                        |       
|Dilutedas reported                                                                                                                         |  |                        | $4.73 
|                                                                                                                                            |  |                        |       
|Dilutedas adjusted                                                                                                                         |  |                        | $4.64 
|                                                                                                                                            |  |                        |       



Use
of Estimates



The preparation of the
Companys financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December
31, 2002 and 2001 and revenues and expenses for each of the three years in the period ended December 31, 2002. Accordingly, actual results could differ from those estimates in the near-term.



Impact of New Accounting Pronouncements



In April 2002, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 145, Recission of SFAS Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections (Statement No. 145). Statement No. 145 prevents gains or losses
on extinguishment of debt not meeting the criteria of APB 30 to be treated as extraordinary. Statement No. 145 is effective for fiscal years beginning after March 15, 2002. Upon adoption of Statement No. 145, the Companys previously
reported extraordinary items related to gain from retirement of debt will be reclassified and not reported as extraordinary items.



In December 2002, the Financial Accounting Standards Board issued Statement of Financial Account Standards No. 148, Accounting for
Stock-Based CompensationTransition and Disclosure (Statement No. 148). Statement No. 148 amends Statement No. 123 to provide three alternative methods of transition for Statement No. 123s fair value method of accounting
for stock-based employee compensation for companies that elect to adopt the provisions of Statement No. 123. Transition to the fair value accounting method of Statement No. 123 is not required by Statement No. 148. The Company has elected to use the
intrinsic value method of accounting for stock compensation in accordance with APB No. 25 and related interpretations. Statement No. 148 also amends the disclosure provisions of Statement No. 123 to require disclosure in the summary of significant
accounting policies of the effects of an entitys accounting policy with respect to stock-based



64



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



compensation on reported net income and earnings per share in annual and interim financial statements. The disclosure provisions of Statement
No. 148 are required to be adopted by all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of Statement No. 123 or the intrinsic value method of APB No. 25. The
disclosure provisions of Statement No. 148 have been adopted by the Company with appropriate disclosure included in Note 1 above.



In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(Interpretation No. 45). The disclosure requirements of Interpretation No. 45 are effective as of December 31, 2002. The initial recognition
and measurement requirements of Interpretation No. 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002. The Company is currently evaluating the impact of the required accounting treatment under
Interpretation No. 45 for guarantees issued or modified after December 31, 2002. The Company has not determined the anticipated impact of the application of Interpretation No. 45 to guarantees issued or modified after December 31, 2002. However, in
the case of a guarantee issued as part of a transaction with multiple elements with an unrelated party, it generally requires the recording at inception of the guarantee of a liability equal to the guarantees estimated fair value. In the
absence of observable transactions for identical or similar guarantees, estimated fair value will likely be based on the expected present value which is the sum of the estimated probability-weighted range of contingent payments under the guarantee
arrangement. The recording of a liability could have a corresponding effect on various of the Companys financial ratios and other financial and operational indicators. See Notes 4, 5 and 10 for additional information related to the
Companys guarantees.



In January 2003, the
Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (Interpretation No. 46), which applies immediately to arrangements created after January 31, 2003. Interpretation No.
46 applies to arrangements created before February 1, 2003 beginning on July 1, 2003. The Company is currently evaluating whether the application of Interpretation No. 46 would require the consolidation of any of the Companys joint venture or
land banking arrangements existing at December 31, 2002. The consolidation of the assets, liabilities and operations of any of the Companys joint venture or land banking arrangements would have a corresponding effect on various of the
Companys financial ratios and other financial and operational indicators of the Company. Interpretation No 46 may be applied by restating previously issued financial statements with a cumulative-effect adjustment as of the beginning of the
first year restated. See Notes 4 and 10 for additional information regarding the Companys joint venture and land banking arrangements.



Reclassifications



Certain balances in the December 31, 2001 consolidated balance sheet have been reclassified in order to conform to current year
presentation.



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





Note 2Receivables



Receivables consist of the following (in
thousands):



|                                                                                                                               |  | December 31,
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------
|                                                                                                                               |  | 2002        
|Notes receivable:                                                                                                              |  |             
|First trust deed mortgage notes receivable, pledged as collateral for revolving mortgage
warehouse credit facility             |  | $           
|Notes receivable from sale and related leaseback of 56 model homes which is accounted
for on the cost recovery method (Note 1) |  |             
|Other notes receivable                                                                                                         |  |             
|                                                                                                                               |  |             
|                                                                                                                               |  |             
|Receivables from affiliates for management fees, cost reimbursements and
other                                                 |  |             
|Other receivablesprimarily escrow proceeds                                                                                    |  |             
|                                                                                                                               |  |             
|                                                                                                                               |  | $           
|                                                                                                                               |  |             



Note 3Real
Estate Inventories



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



|                    |  | December 31, 2002                          
|------------------- |  | -------------------------------------------
|Division            |  | Deposits, Land and Construction in Progress
|Southern California |  | $                                          
|San Diego           |  |                                            
|Northern California |  |                                            
|Arizona             |  |                                            
|Nevada              |  |                                            
|Other               |  |                                            
|                    |  |                                            
|                    |  | $                                          
|                    |  |                                            
|                   
|                    |  | December 31, 2001                          
|Division            |  | Deposits, Land and Construction In Progress
|Southern California |  | $                                          
|San Diego           |  |                                            
|Northern California |  |                                            
|Arizona             |  |                                            
|Nevada              |  |                                            
|Other               |  |                                            
|                    |  |                                            
|                    |  | $                                          
|                    |  |                                            





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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 4Investments in and Advances to Unconsolidated Joint Ventures



The Company and certain of its subsidiaries are general
partners or members in 16 active joint ventures involved in the development and sale of residential projects. Such joint ventures are 50% or less owned by the Company and not controlled by the Company and, accordingly, the financial statements of
such joint ventures are not consolidated with the Companys financial statements. The Companys investments in unconsolidated joint ventures are accounted for using the equity method. Condensed combined financial information of these joint
ventures as of December 31, 2002 and 2001 is summarized as follows:



CONDENSED COMBINED BALANCE SHEETS

(In thousands)



|                                 |  | December 31,
|-------------------------------- |  | ------------
|                                 |  | 2002        
|ASSETS                           |  |             
|Cash and cash equivalents        |  | $           
|Receivables                      |  |             
|Real estate inventories          |  |             
|                                 |  |             
|                                 |  | $           
|                                 |  |             
|LIABILITIES AND OWNERS CAPITAL  |  |             
|Accounts payable                 |  | $           
|Accrued expenses                 |  |             
|Notes payable                    |  |             
|Advances from William Lyon Homes |  |             
|                                 |  |             
|                                 |  |             
|                                 |  |             
|Owners Capital                  |  |             
|William Lyon Homes               |  |             
|Others                           |  |             
|                                 |  |             
|                                 |  |             
|                                 |  |             
|                                 |  | $           
|                                 |  |             



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED COMBINED STATEMENTS OF INCOME

(In thousands)



|                      |  | Year Ended December 31, |         
|--------------------- |  | ----------------------- | --------
|                      |  | 2002                    |         
|Operating revenue     |  |                         |         
|Home sales            |  | $                       | 362,697 
|Land sale             |  |                         | 17,079  
|                      |  |                         |         
|                      |  |                         | 379,776 
|Operating costs       |  |                         |         
|Cost of sales  homes |  |                         | (298,838
|Cost of sales  land  |  |                         | (13,542 
|Sales and marketing   |  |                         | (10,814 
|                      |  |                         |         
|Operating income      |  |                         | 56,582  
|Other income, net     |  |                         | 83      
|                      |  |                         |         
|Net income            |  | $                       | 56,665  
|                      |  |                         |         
|Allocation to owners  |  |                         |         
|William Lyon Homes    |  | $                       | 27,748  
|Others                |  |                         | 28,917  
|                      |  |                         |         
|                      |  | $                       | 56,665  
|                      |  |                         |         



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 $90,086,000 at December 31, 2002. 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. All of the joint ventures that have obtained such financing are in the form of limited partnerships of which the Company is the general partner. While historically
all liabilities of these partnerships have been satisfied out of the assets of such partnerships and while the Company believes that this will continue in the future, the Company, as general partner, is potentially responsible for all liabilities
and indebtedness of these partnerships. In addition, the Company has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships. The Company has also provided completion guarantees and repayment
guarantees for some of the limited partnerships under their credit facilities. The repayment guarantees total $22,312,000 as of December 31, 2002 and only become effective upon repayment of the outstanding 121/2% Senior Notes.



During the year ended December 31, 2002, one of the joint ventures in which the Company is a general partner completed a land sale to the
Company for $17,079,000 resulting in a profit of approximately $3,537,000, all of which was allocated to the Companys outside partner as preferred return in accordance with the joint venture agreement.



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





During the
year ended December 31, 2002, one of the Companys existing unconsolidated joint ventures (Existing Venture) was restructured such that the Company is required to purchase the 538 lots owned by the Existing Venture on a specified
takedown basis through October 15, 2003 at a purchase price equal to the future cost of such lots including a 20% preferred return on invested capital to the outside partner of the Existing Venture (estimated to be $178,578,000, including an
estimated preferred return of $36,911,000). During the year ended December 31, 2002, the first 242 lots were purchased from the Existing Venture for $64,468,000, which includes a $12,493,000 preferred return to the outside partner of the Existing
Venture. The 242 lots were purchased by a newly formed joint venture (New Venture) between the Company and an outside partner. The Company is required to purchase the 242 lots owned by the New Venture on a specified takedown basis
through May 15, 2004 at a purchase price equal to $74,210,000 plus a 131/2% preferred return on invested capital
to the outside partner of the New Venture. Because the Company is required to purchase the lots owned by both the Existing Venture and the New Venture, and the Company now controls both ventures, the financial statements of both ventures have been
consolidated with the Companys financial statements as of December 31, 2002, including real estate inventories of $101,849,000 and minority interest in consolidated joint ventures of $80,647,000. During the year ended December 31, 2002, an
additional 44 lots were purchased from the Existing Venture for $19,765,000, which includes a $3,953,000 preferred return to the outside partner of the Existing Venture. The 44 lots were purchased though a land banking arrangement (see Note 10 for
additional information regarding the Companys land banking arrangements). The intercompany sale and related profit from the 242 lots and the 44 lots have been eliminated in consolidation.



Note 5Notes Payable and 121/2% Senior Notes



Notes payable and 121/2% Senior Notes consist of the following (in thousands):



|                                                                                                                                              |  | December 31,
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------
|                                                                                                                                              |  | 2002        
|Notes payable:                                                                                                                                |  |             
|Revolving Credit Facilities                                                                                                                   |  | $           
|Construction notes payable                                                                                                                    |  |             
|Purchase money notes payableland acquisitions                                                                                                |  |             
|Collateralized mortgage obligations under revolving mortgage warehouse credit facility,
secured by first trust deed mortgage notes receivable |  |             
|Unsecured line of credit                                                                                                                      |  |             
|                                                                                                                                              |  |             
|                                                                                                                                              |  |             
|121/2% Senior Notes due July 1, 2003                                                                                                          |  |             
|                                                                                                                                              |  |             
|                                                                                                                                              |  | $           
|                                                                                                                                              |  |             



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



|                     |  | Year Ended December 31, |        
|-------------------- |  | ----------------------- | -------
|                     |  | 2002                    |        
|Interest incurred    |  | $                       | 26,783 
|Interest capitalized |  |                         | (26,783
|                     |  |                         |        
|Interest expense     |  | $                       |       
|                     |  |                         |        



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





Senior
Notes



As of December 31, 2002, the
Companys outstanding balance under its 121/2% Senior Notes was $70,279,000. On May 1, 2001, the Company
completed a consent solicitation with respect to the 121/2% Senior Notes and received consents from holders of
$39,279,000 of the then outstanding notes to extend the maturity date from July 1, 2001 to July 1, 2003 and to make certain amendments to the note covenants. Although the Company initially intended to accept consents from no more than 50% of
holders, the Company elected to accept additional consents, as contemplated by the consent solicitation documents. The consenting holders received a fee of 4% of the principal balance. Subsequently, during May and June 2001, the Company had also
repurchased $31,444,000 of the Senior Notes from non-consenting holders.



In June 2001, General William Lyon, Chairman and Chief Executive Officer of the Company, and a trust for which his son William Harwell Lyon is a beneficiary, purchased from the Company at par
$30,000,000 of the 121/2% Senior Notes. William H. McFarland, another member of the Companys Board of
Directors, purchased from the Company at par $1.0 million of the 121/2% Senior Notes. In parity with holders
consenting during the consent solicitation, these Directors received a consent fee of 4% of the principal balance and consented to the amendments effected by the Companys consent solicitation statement dated February 28, 2001.



In July 2001, the Company repaid
all of the remaining 121/2% Senior Notes which matured on July 1, 2001 amounting to $5,893,000.



In April, May and November 2000, the
Company purchased $22,799,000 principal amount of its outstanding 121/2% Senior Notes at a cost of $22,107,000.
The net gain resulting from the purchase was $496,000 after giving effect to income taxes of $26,000 and amortization of related loan costs of $128,000. Such gain is reflected as an extraordinary item in the Companys results of operations for
the year ended December 31, 2000.



The
121/2% Senior Notes due July 1, 2001 are obligations of William Lyon Homes, a Delaware corporation
(Delaware Lyon), and are unconditionally guaranteed on a senior basis by William Lyon Homes, Inc., a California corporation and a wholly-owned subsidiary of Delaware Lyon. However, William Lyon Homes, Inc. has granted liens on
substantially all of its assets as security for its obligations under the Revolving Credit Facilities and other loans. Because the William Lyon Homes, Inc. guarantee is not secured, holders of the 121/2% Senior Notes are effectively junior to borrowings under the Revolving Credit Facilities with respect to such assets. Delaware Lyon and its consolidated
subsidiaries are referred to collectively herein as the Company. Interest on the 121/2% Senior Notes
is payable on January 1 and July 1 of each year.



The 121/2% Senior Notes are senior obligations of Delaware Lyon and rank pari passuin right of payment to all existing and future unsecured indebtedness of Delaware Lyon, and senior in right of payment to all future indebtedness of the Company which by its terms is subordinated to the 121/2% Senior Notes.



Upon certain changes of control as described in the Indenture, Delaware Lyon must offer to repurchase 121/2% Senior Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the
date of repurchase.



The Indenture
governing the 121/2% Senior Notes restricts Delaware Lyon and certain of its subsidiaries with respect to, among
other things: (i) the payment of dividends on and redemptions of capital stock, (ii) the incurrence of indebtedness or the issuance of preferred stock, (iii) the creation of certain liens, (iv) consolidations or mergers with or transfer of all or
substantially all of its assets and (v) transactions with affiliates. These restrictions are subject to a number of important qualifications and exceptions.



As of December 31, 2002, the outstanding 121/2% Senior Notes with a face value of $70,279,000 have a fair value of approximately the face value, in the opinion of the Companys management.



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





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



CONSOLIDATING BALANCE SHEET



December 31, 2002

(in thousands)



|                                                             |  | Unconsolidated |         |                          |   |         |                           
|------------------------------------------------------------ |  | -------------- | ------- | ------------------------ | - | ------- | --------------------------
|                                                             |  | Delaware Lyon  |         | William Lyon Homes, Inc. |   |         | Non-Guarantor Subsidiaries
|                                                             |  |                |         |                          |   |         |                           
|ASSETS                                                       |  |                |         |                          |   |         |                           
|Cash and cash equivalents                                    |  | $              |        |                          | $ | 13,890  |                           
|Receivables                                                  |  |                |        |                          |   | 9,468   |                           
|Real estate inventories                                      |  |                |        |                          |   | 491,906 |                           
|Investments in and advances to unconsolidated joint ventures |  |                |        |                          |   | 65,209  |                           
|Property and equipment, net                                  |  |                |        |                          |   | 1,962   |                           
|Deferred loan costs                                          |  |                | 586     |                          |   | 755     |                           
|Goodwill                                                     |  |                |        |                          |   | 5,896   |                           
|Other assets                                                 |  |                |        |                          |   | 4,519   |                           
|Investments in subsidiaries                                  |  |                | 180,033 |                          |   | (1,222  | )                         
|Intercompany receivables                                     |  |                | 79,308  |                          |   | 7,972   |                           
|                                                             |  |                |         |                          |   |         |                           
|                                                             |  | $              | 259,927 |                          | $ | 600,355 |                           
|                                                             |  |                |         |                          |   |         |                           
|                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY                         |  |                |         |                          |   |         |                           
|Accounts payable                                             |  | $              |        |                          | $ | 34,311  |                           
|Accrued expenses                                             |  |                |        |                          |   | 52,736  |                           
|Notes payable                                                |  |                |        |                          |   | 177,647 |                           
|121 / 2 % Senior Notes                                       |  |                | 70,279  |                          |   |        |                           
|Intercompany payables                                        |  |                | 7,972   |                          |   | 79,308  |                           
|                                                             |  |                |         |                          |   |         |                           
|Total liabilities                                            |  |                | 78,251  |                          |   | 344,002 |                           
|Minority interest in consolidated joint ventures             |  |                |        |                          |   | 80,647  |                           
|Stockholders equity                                         |  |                | 181,676 |                          |   | 175,706 |                           
|                                                             |  |                |         |                          |   |         |                           
|                                                             |  | $              | 259,927 |                          | $ | 600,355 |                           
|                                                             |  |                |         |                          |   |         |                           



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING BALANCE SHEET



December 31, 2001

(in thousands)



|                                                             |  | Unconsolidated |         |                          |   |                            | 
|------------------------------------------------------------ |  | -------------- | ------- | ------------------------ | - | -------------------------- | 
|                                                             |  | Delaware Lyon  |         | William Lyon Homes, Inc. |   | Non-Guarantor Subsidiaries | 
|ASSETS                                                       |  |                |         |                          |   |                            | 
|Cash and cash equivalents                                    |  | $              |        |                          | $ | 17,270                     | 
|Receivables                                                  |  |                |        |                          |   | 9,736                      | 
|Real estate inventories                                      |  |                |        |                          |   | 299,932                    | 
|Investments in and advances to unconsolidated joint ventures |  |                |        |                          |   | 25,359                     | 
|Property and equipment, net                                  |  |                |        |                          |   | 1,944                      | 
|Deferred loan costs                                          |  |                | 1,993   |                          |   | 838                        | 
|Goodwill                                                     |  |                |        |                          |   | 5,896                      | 
|Other assets                                                 |  |                |        |                          |   | 2,691                      | 
|Investments in subsidiaries                                  |  |                | 147,567 |                          |   | 49,174                     | 
|Intercompany receivables                                     |  |                | 79,308  |                          |   | 7,972                      | 
|                                                             |  |                |         |                          |   |                            | 
|                                                             |  | $              | 228,868 |                          | $ | 420,812                    | 
|                                                             |  |                |         |                          |   |                            | 
|                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY                         |  |                |         |                          |   |                            | 
|Accounts payable                                             |  | $              |        |                          | $ | 19,114                     | 
|Accrued expenses                                             |  |                |        |                          |   | 38,956                     | 
|Notes payable                                                |  |                |        |                          |   | 139,168                    | 
|121 / 2 % Senior Notes                                       |  |                | 70,279  |                          |   |                           | 
|Intercompany payables                                        |  |                | 7,972   |                          |   | 79,308                     | 
|                                                             |  |                |         |                          |   |                            | 
|Total liabilities                                            |  |                | 78,251  |                          |   | 276,546                    | 
|                                                             |  |                |         |                          |   |                            | 
|Minority interest in consolidated joint ventures             |  |                |        |                          |   | 784                        | 
|Stockholders equity                                         |  |                | 150,617 |                          |   | 143,482                    | 
|                                                             |  |                |         |                          |   |                            | 
|                                                             |  | $              | 228,868 |                          | $ | 420,812                    | 
|                                                             |  |                |         |                          |   |                            | 



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





CONSOLIDATING STATEMENT OF INCOME



Year Ended December 31, 2002

(in thousands)



|                                                  |  | Unconsolidated |        |                          |   |          |                            |  |  
|------------------------------------------------- |  | -------------- | ------ | ------------------------ | - | -------- | -------------------------- |  | -
|                                                  |  | Delaware Lyon  |        | William Lyon Homes, Inc. |   |          | Non-Guarantor Subsidiaries |  |  
|Operating revenue                                 |  |                |        |                          |   |          |                            |  |  
|Sales                                             |  | $              |       |                          | $ | 536,178  |                            |  | $
|Management fees                                   |  |                |       |                          |   | 9,202    |                            |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|                                                  |  |                |       |                          |   | 545,380  |                            |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|Operating costs                                   |  |                |        |                          |   |          |                            |  |  
|Cost of sales                                     |  |                |       |                          |   | (454,291 | )                          |  |  
|Sales and marketing                               |  |                |       |                          |   | (19,796  | )                          |  |  
|General and administrative                        |  |                |       |                          |   | (39,016  | )                          |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|                                                  |  |                |       |                          |   | (513,103 | )                          |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|Equity in income of unconsolidated joint ventures |  |                |       |                          |   | 23,154   |                            |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|Income from subsidiaries                          |  |                | 49,511 |                          |   | 9,906    |                            |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|Operating income                                  |  |                | 49,511 |                          |   | 65,337   |                            |  |  
|Other income (expense), net                       |  |                |       |                          |   | (2,297   | )                          |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|Income before income taxes and extraordinary item |  |                | 49,511 |                          |   | 63,040   |                            |  |  
|Provision for income taxes                        |  |                |        |                          |   |          |                            |  |  
|Income taxes  net of benefit                     |  |                |       |                          |   | (18,270  | )                          |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|Net income                                        |  | $              | 49,511 |                          | $ | 44,770   |                            |  | $
|                                                  |  |                |        |                          |   |          |                            |  |  



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





CONSOLIDATING STATEMENT OF INCOME



Year Ended December 31, 2001

(in thousands)



|                                                  |  | Unconsolidated |        |                          |   |          |                            |  |  
|------------------------------------------------- |  | -------------- | ------ | ------------------------ | - | -------- | -------------------------- |  | -
|                                                  |  | Delaware Lyon  |        | William Lyon Homes, Inc. |   |          | Non-Guarantor Subsidiaries |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|Operating revenue                                 |  |                |        |                          |   |          |                            |  |  
|Sales                                             |  | $              |       |                          | $ | 413,763  |                            |  | $
|Management fees                                   |  |                |       |                          |   | 5,466    |                            |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|                                                  |  |                |       |                          |   | 419,229  |                            |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|Operating costs                                   |  |                |        |                          |   |          |                            |  |  
|Cost of sales                                     |  |                |       |                          |   | (346,928 | )                          |  |  
|Sales and marketing                               |  |                |       |                          |   | (15,959  | )                          |  |  
|General and administrative                        |  |                |       |                          |   | (36,872  | )                          |  |  
|Amortization of goodwill                          |  |                |       |                          |   | (1,242   | )                          |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|                                                  |  |                |       |                          |   | (401,001 | )                          |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|Equity in income of unconsolidated joint ventures |  |                |       |                          |   | 6,405    |                            |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|Income from subsidiaries                          |  |                | 47,678 |                          |   | 23,287   |                            |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|Operating income                                  |  |                | 47,678 |                          |   | 47,920   |                            |  |  
|Interest expense, net of amounts capitalized      |  |                |       |                          |   | (227     | )                          |  |  
|Other income (expense), net                       |  |                |       |                          |   | 2,369    |                            |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|Income before income taxes and extraordinary item |  |                | 47,678 |                          |   | 50,062   |                            |  |  
|Provision for income taxes                        |  |                |        |                          |   |          |                            |  |  
|Income taxesnet of benefit                       |  |                |       |                          |   | (5,847   | )                          |  |  
|                                                  |  |                |        |                          |   |          |                            |  |  
|Net income                                        |  | $              | 47,678 |                          | $ | 44,215   |                            |  | $
|                                                  |  |                |        |                          |   |          |                            |  |  



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





CONSOLIDATING STATEMENT OF INCOME



Year Ended December 31, 2000

(in thousands)



|                                                                               |  | Unconsolidated |        |                          |   |          |                            |  |  
|------------------------------------------------------------------------------ |  | -------------- | ------ | ------------------------ | - | -------- | -------------------------- |  | -
|                                                                               |  | Delaware Lyon  |        | William Lyon Homes, Inc. |   |          | Non-Guarantor Subsidiaries |  |  
|                                                                               |  |                |        |                          |   |          |                            |  |  
|Operating revenue                                                              |  |                |        |                          |   |          |                            |  |  
|Sales                                                                          |  | $              |       |                          | $ | 368,237  |                            |  | $
|Management fees                                                                |  |                |       |                          |   | 1,906    |                            |  |  
|                                                                               |  |                |        |                          |   |          |                            |  |  
|                                                                               |  |                |       |                          |   | 370,143  |                            |  |  
|                                                                               |  |                |        |                          |   |          |                            |  |  
|Operating costs                                                                |  |                |        |                          |   |          |                            |  |  
|Cost of sales                                                                  |  |                |       |                          |   | (305,016 | )                          |  |  
|Sales and marketing                                                            |  |                |       |                          |   | (14,618  | )                          |  |  
|General and administrative                                                     |  |                |       |                          |   | (35,107  | )                          |  |  
|Amortization of goodwill                                                       |  |                |       |                          |   | (1,244   | )                          |  |  
|                                                                               |  |                |        |                          |   |          |                            |  |  
|                                                                               |  |                |       |                          |   | (355,985 | )                          |  |  
|                                                                               |  |                |        |                          |   |          |                            |  |  
|Equity in income of unconsolidated joint ventures                              |  |                |       |                          |   | 3,251    |                            |  |  
|                                                                               |  |                |        |                          |   |          |                            |  |  
|Income from subsidiaries                                                       |  |                | 38,772 |                          |   | 32,826   |                            |  |  
|                                                                               |  |                |        |                          |   |          |                            |  |  
|Operating income                                                               |  |                | 38,772 |                          |   | 50,235   |                            |  |  
|Interest expense, net of amounts capitalized                                   |  |                |       |                          |   | (5,302   | )                          |  |  
|Other income (expense), net                                                    |  |                |       |                          |   | 4,434    |                            |  |  
|                                                                               |  |                |        |                          |   |          |                            |  |  
|Income before income taxes and extraordinary item                              |  |                | 38,772 |                          |   | 49,367   |                            |  |  
|Provision for income taxes                                                     |  |                |        |                          |   |          |                            |  |  
|Income taxesbenefit credited to paid-in capital                               |  |                |       |                          |   | (9,287   | )                          |  |  
|Income taxesnet of benefit                                                    |  |                |       |                          |   | (3,070   | )                          |  |  
|                                                                               |  |                |        |                          |   |          |                            |  |  
|Income before extraordinary item                                               |  |                | 38,772 |                          |   | 37,010   |                            |  |  
|Extraordinary itemgain from retirement of debt net of applicable income
taxes |  |                | 496    |                          |   |         |                            |  |  
|                                                                               |  |                |        |                          |   |          |                            |  |  
|Net income                                                                     |  | $              | 39,268 |                          | $ | 37,010   |                            |  | $
|                                                                               |  |                |        |                          |   |          |                            |  |  



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





CONSOLIDATING STATEMENT OF CASH FLOWS



Year Ended December 31, 2002

(in thousands)



|                                                                                  |  | Unconsolidated |         |   |                          |   |          |                                | 
|--------------------------------------------------------------------------------- |  | -------------- | ------- | - | ------------------------ | - | -------- | ------------------------------ | 
|                                                                                  |  | Delaware Lyon  |         |   | William Lyon Homes, Inc. |   |          | Non-Guarantor
    Subsidiaries | 
|                                                                                  |  |                |         |   |                          |   |          |                                | 
|Operating activities:                                                             |  |                |         |   |                          |   |          |                                | 
|Net income                                                                        |  | $              | 49,511  |   |                          | $ | 44,770   |                                | 
|Adjustments to reconcile net income to net cash provided by operating
activities: |  |                |         |   |                          |   |          |                                | 
|Depreciation and amortization                                                     |  |                |        |   |                          |   | 1,235    |                                | 
|Equity in income of unconsolidated joint ventures                                 |  |                |        |   |                          |   | (23,154  | )                              | 
|Income from subsidiaries                                                          |  |                | (49,511 | ) |                          |   | (9,906   | )                              | 
|Provision for income taxes                                                        |  |                |        |   |                          |   | 18,270   |                                | 
|Net changes in operating assets and liabilities:                                  |  |                |         |   |                          |   |          |                                | 
|Receivables                                                                       |  |                |        |   |                          |   | (8,142   | )                              | 
|Intercompany receivables/payables                                                 |  |                | (1,407  | ) |                          |   | 1,407    |                                | 
|Real estate inventories                                                           |  |                |        |   |                          |   | (30,483  | )                              | 
|Deferred loan costs                                                               |  |                | 1,407   |   |                          |   | 83       |                                | 
|Other assets                                                                      |  |                |        |   |                          |   | (1,828   | )                              | 
|Accounts payable                                                                  |  |                |        |   |                          |   | 8,129    |                                | 
|Accrued expenses                                                                  |  |                |        |   |                          |   | (5,404   | )                              | 
|                                                                                  |  |                |         |   |                          |   |          |                                | 
|Net cash provided by operating activities                                         |  |                |        |   |                          |   | (5,023   | )                              | 
|                                                                                  |  |                |         |   |                          |   |          |                                | 
|Investing activities:                                                             |  |                |         |   |                          |   |          |                                | 
|Net change in investments in and advances to unconsolidated joint
ventures        |  |                |        |   |                          |   | (29,194  | )                              | 
|Net change in mortgage notes receivable                                           |  |                |        |   |                          |   | 2,945    |                                | 
|Purchases of property and equipment                                               |  |                |        |   |                          |   | (1,253   | )                              | 
|Investment in subsidiaries                                                        |  |                |        |   |                          |   | 60,302   |                                | 
|Advances to affiliates                                                            |  |                | 18,452  |   |                          |   |         |                                | 
|                                                                                  |  |                |         |   |                          |   |          |                                | 
|Net cash provided by investing activities                                         |  |                | 18,452  |   |                          |   | 32,800   |                                | 
|                                                                                  |  |                |         |   |                          |   |          |                                | 
|Financing activities:                                                             |  |                |         |   |                          |   |          |                                | 
|Proceeds from borrowings on notes payable                                         |  |                |        |   |                          |   | 580,585  |                                | 
|Principal payments on notes payable                                               |  |                |        |   |                          |   | (593,131 | )                              | 
|Distributions to/contributions from shareholders                                  |  |                |        |   |                          |   | (12,546  | )                              | 
|Common stock issued for exercised options                                         |  |                | 1,118   |   |                          |   |         |                                | 
|Common stock purchased                                                            |  |                | (19,570 | ) |                          |   |         |                                | 
|Minority interest distributions, net                                              |  |                |        |   |                          |   | (4,658   | )                              | 
|Advances from affiliates                                                          |  |                |        |   |                          |   | (1,407   | )                              | 
|                                                                                  |  |                |         |   |                          |   |          |                                | 
|Net cash used in financing activities                                             |  |                | (18,452 | ) |                          |   | (31,157  | )                              | 
|                                                                                  |  |                |         |   |                          |   |          |                                | 
|Net decrease in cash and cash equivalents                                         |  |                |        |   |                          |   | (3,380   | )                              | 
|Cash and cash equivalents at beginning of year                                    |  |                |        |   |                          |   | 17,270   |                                | 
|                                                                                  |  |                |         |   |                          |   |          |                                | 
|Cash and cash equivalents at end of year                                          |  | $              |        |   |                          | $ | 13,890   |                                | 
|                                                                                  |  |                |         |   |                          |   |          |                                | 



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF CASH FLOWS



Year Ended December 31, 2001

(in thousands)



|                                                                              |  | Unconsolidated |         |   |                          |   |          |                                | 
|----------------------------------------------------------------------------- |  | -------------- | ------- | - | ------------------------ | - | -------- | ------------------------------ | 
|                                                                              |  | Delaware Lyon  |         |   | William Lyon Homes, Inc. |   |          | Non-Guarantor
    Subsidiaries | 
|                                                                              |  |                |         |   |                          |   |          |                                | 
|Operating activities:                                                         |  |                |         |   |                          |   |          |                                | 
|Net income                                                                    |  | $              | 47,678  |   |                          | $ | 44,215   |                                | 
|Adjustments to reconcile net income to net cash used in operating
activities: |  |                |         |   |                          |   |          |                                | 
|Depreciation and amortization                                                 |  |                |        |   |                          |   | 2,399    |                                | 
|Equity in income of unconsolidated joint ventures                             |  |                |        |   |                          |   | (6,405   | )                              | 
|Income from subsidiaries                                                      |  |                | (47,678 | ) |                          |   | (23,287  | )                              | 
|Provision for income taxes                                                    |  |                |        |   |                          |   | 5,847    |                                | 
|Net changes in operating assets and liabilities:                              |  |                |         |   |                          |   |          |                                | 
|Receivables                                                                   |  |                |        |   |                          |   | (2,195   | )                              | 
|Intercompany receivables/payables                                             |  |                | 1,812   |   |                          |   | (1,812   | )                              | 
|Real estate inventories                                                       |  |                |        |   |                          |   | (24,279  | )                              | 
|Deferred loan costs                                                           |  |                | (1,812  | ) |                          |   | (265     | )                              | 
|Other assets                                                                  |  |                |        |   |                          |   | (129     | )                              | 
|Accounts payable                                                              |  |                |        |   |                          |   | (6,401   | )                              | 
|Accrued expenses                                                              |  |                |        |   |                          |   | 590      |                                | 
|                                                                              |  |                |         |   |                          |   |          |                                | 
|Net cash used in operating activities                                         |  |                |        |   |                          |   | (11,722  | )                              | 
|                                                                              |  |                |         |   |                          |   |          |                                | 
|Investing activities:                                                         |  |                |         |   |                          |   |          |                                | 
|Net change in investments in and advances to unconsolidated joint
ventures    |  |                |        |   |                          |   | (846     | )                              | 
|Net change in mortgage notes receivable                                       |  |                |        |   |                          |   |         |                                | 
|Purchases of property and equipment                                           |  |                |        |   |                          |   | (537     | )                              | 
|Investment in subsidiaries                                                    |  |                |        |   |                          |   | 8,775    |                                | 
|Advances to affiliates                                                        |  |                | 6,495   |   |                          |   |         |                                | 
|                                                                              |  |                |         |   |                          |   |          |                                | 
|Net cash used in investing activities                                         |  |                | 6,495   |   |                          |   | 7,392    |                                | 
|                                                                              |  |                |         |   |                          |   |          |                                | 
|Financing activities:                                                         |  |                |         |   |                          |   |          |                                | 
|Proceeds from borrowings on notes payable                                     |  |                |        |   |                          |   | 468,144  |                                | 
|Principal payments on notes payable                                           |  |                |        |   |                          |   | (455,072 | )                              | 
|Repurchase of 121 / 2 % Senior Notes                                          |  |                | (51,637 | ) |                          |   |         |                                | 
|Reissuance of 121 / 2 % Senior Notes                                          |  |                | 44,715  |   |                          |   |         |                                | 
|Distributions to/contributions from shareholders                              |  |                |        |   |                          |   | 3,608    |                                | 
|Common stock issued for exercised options                                     |  |                | 427     |   |                          |   |         |                                | 
|Advances from affiliates                                                      |  |                |        |   |                          |   | (7,826   | )                              | 
|                                                                              |  |                |         |   |                          |   |          |                                | 
|Net cash provided by financing activities                                     |  |                | (6,495  | ) |                          |   | 8,854    |                                | 
|                                                                              |  |                |         |   |                          |   |          |                                | 
|Net increase in cash and cash equivalents                                     |  |                |        |   |                          |   | 4,524    |                                | 
|Cash and cash equivalents at beginning of year                                |  |                |        |   |                          |   | 12,746   |                                | 
|                                                                              |  |                |         |   |                          |   |          |                                | 
|Cash and cash equivalents at end of year                                      |  | $              |        |   |                          | $ | 17,270   |                                | 
|                                                                              |  |                |         |   |                          |   |          |                                | 



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF CASH FLOWS



Year Ended December 31, 2000

(in thousands)



|                                                                              |  | Unconsolidated |         |   |                          |   |          |                            | 
|----------------------------------------------------------------------------- |  | -------------- | ------- | - | ------------------------ | - | -------- | -------------------------- | 
|                                                                              |  | Delaware Lyon  |         |   | William Lyon Homes, Inc. |   |          | Non-Guarantor Subsidiaries | 
|Operating activities:                                                         |  |                |         |   |                          |   |          |                            | 
|Net income                                                                    |  | $              | 39,268  |   |                          | $ | 37,010   |                            | 
|Adjustments to reconcile net income to net cash used in operating
activities: |  |                |         |   |                          |   |          |                            | 
|Depreciation and amortization                                                 |  |                |        |   |                          |   | 2,412    |                            | 
|Equity in income of unconsolidated joint ventures                             |  |                |        |   |                          |   | (3,251   | )                          | 
|Income from subsidiaries                                                      |  |                | (38,772 | ) |                          |   | (32,826  | )                          | 
|Extraordinary gain on repurchase of Senior Notes                              |  |                | (561    | ) |                          |   |         |                            | 
|Provision for income taxes                                                    |  |                |        |   |                          |   | 12,383   |                            | 
|Net changes in operating assets and liabilities:                              |  |                |         |   |                          |   |          |                            | 
|Receivables                                                                   |  |                |        |   |                          |   | (1,391   | )                          | 
|Intercompany receivables/payables                                             |  |                | (327    | ) |                          |   | 327      |                            | 
|Real estate inventories                                                       |  |                |        |   |                          |   | (34,872  | )                          | 
|Deferred loan costs                                                           |  |                | 392     |   |                          |   | 449      |                            | 
|Other assets                                                                  |  |                |        |   |                          |   | (321     | )                          | 
|Accounts payable                                                              |  |                |        |   |                          |   | 10,300   |                            | 
|Accrued expenses                                                              |  |                |        |   |                          |   | (994     | )                          | 
|                                                                              |  |                |         |   |                          |   |          |                            | 
|Net cash provided by operating activities                                     |  |                |        |   |                          |   | (10,774  | )                          | 
|                                                                              |  |                |         |   |                          |   |          |                            | 
|Investing activities:                                                         |  |                |         |   |                          |   |          |                            | 
|Net change in investments in and advances to unconsolidated joint
ventures    |  |                |        |   |                          |   | 5,221    |                            | 
|Net change in mortgage notes receivable                                       |  |                |        |   |                          |   | 642      |                            | 
|Purchases of property and equipment                                           |  |                |        |   |                          |   | (1,617   | )                          | 
|Investment in subsidiaries                                                    |  |                |        |   |                          |   | 37,983   |                            | 
|Advances to affiliates                                                        |  |                | 21,451  |   |                          |   |         |                            | 
|                                                                              |  |                |         |   |                          |   |          |                            | 
|Net cash provided by investing activities                                     |  |                | 21,451  |   |                          |   | 42,229   |                            | 
|                                                                              |  |                |         |   |                          |   |          |                            | 
|Financing activities:                                                         |  |                |         |   |                          |   |          |                            | 
|Proceeds from borrowings on notes payable                                     |  |                |        |   |                          |   | 350,673  |                            | 
|Principal payments on notes payable                                           |  |                |        |   |                          |   | (349,265 | )                          | 
|Repurchase of 121 / 2 % Senior Notes                                          |  |                | (22,107 | ) |                          |   |         |                            | 
|Distributions to/contributions from shareholders                              |  |                |        |   |                          |   | 646      |                            | 
|Common stock issued for exercised options                                     |  |                | 656     |   |                          |   |         |                            | 
|Advances from affiliates                                                      |  |                |        |   |                          |   | (22,107  | )                          | 
|                                                                              |  |                |         |   |                          |   |          |                            | 
|Net cash used in financing activities                                         |  |                | (21,451 | ) |                          |   | (20,053  | )                          | 
|                                                                              |  |                |         |   |                          |   |          |                            | 
|Net increase in cash and cash equivalents                                     |  |                |        |   |                          |   | 11,402   |                            | 
|Cash and cash equivalents at beginning of year                                |  |                |        |   |                          |   | 1,344    |                            | 
|                                                                              |  |                |         |   |                          |   |          |                            | 
|Cash and cash equivalents at end of year                                      |  | $              |        |   |                          | $ | 12,746   |                            | 
|                                                                              |  |                |         |   |                          |   |          |                            | 



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Revolving Credit Facilities



As of December 31, 2002, the Company has three revolving
credit facilities which have an aggregate maximum loan commitment of $225,000,000 and mature at various dates. A $100,000,000 revolving line of credit matures in September 2006, a $75,000,000 bank revolving line of credit matures in June 2003 and a
$50,000,000 bank revolving line of credit initially matures in September 2004, after which the amounts available for borrowing begin to reduce. Effective in January 2003, the $100,000,000 revolving line of credit was increased to
$150,000,000, which increased the Companys maximum loan commitment to $275,000,000. Each facility is secured by first deeds of trust on real estate for the specific projects funded by each respective facility and pledges of net sale proceeds
and related property. Borrowings under the facilities are limited by the availability of sufficient real estate collateral, which is determined constantly throughout the facility period. The composition of the collateral borrowing base is limited to
certain parameters in the facility agreement and is based upon the lesser of the direct costs of the real estate collateral (such as land, lots under development, developed lots or homes) or a percentage of the appraised value of the collateral,
which varies depending upon the stage of construction. Repayment of advances is upon the earliest of the close of escrow of individual lots and homes within the collateral pool, the maturity date of individual lots and homes within the collateral
pool or the facility maturity date. 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, 2002, $118,068,000 was outstanding under these credit facilities, with a weighted-average interest rate of 4.331%, and the undrawn availability was $34,843,000 as limited by the Companys borrowing base calculation. The Company has
provided an unsecured environmental indemnity in favor of the lender under the $75,000,000 bank line of credit.



Under the revolving credit facilities, the Company is required to comply with a number of covenants, the most restrictive of which require
the Company to maintain: (i) a tangible net worth, as defined of $120,000,000 adjusted upwards quarterly by 50% of the Companys net income after March 31, 2002; (ii) a ratio of total liabilities to tangible net worth, each as defined, of less
than 3.25 to 1.0; and (iii) minimum liquidity, as defined of at least $10,000,000. 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 facility balance is subject to these obligations as of December 31, 2002.



Unsecured Revolving Line



As of December 31, 2002, the Company had an unsecured revolving Line of Credit with a commercial bank in the amount of $10,000,000. The
Unsecured Revolving Line bears interest at prime plus 1% and matures in June 2003. The Unsecured Revolving Line includes financial covenants which may limit the amount which may be borrowed thereunder. As of December 31, 2002, $5,500,000 was
outstanding under the Unsecured Revolving Line.



Construction Notes Payable



At December 31, 2002, the Company had construction notes payable amounting to $25,218,000 related to various real estate projects. The notes are due as units close or at various dates on or before June 11, 2004 and



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



bear interest at rates of prime plus 0.25% to 14%, with a weighted-average rate of 5.206% at December 31, 2002. As of December 31, 2002,
$10,935,000 of the construction notes payable were subject to the loan-to-value or loan-to-cost ratio maintenance obligations described above.



Seller Financing



Another source of financing available to the Company is seller-provided financing for land acquired by the Company. At December 31, 2002,
the Company had $28,861,000 of notes payable outstanding related to land acquisitions for which seller financing was provided. The notes are due at various dates through July 1, 2005 and bear interest at rates ranging from prime plus 2.0% to 12.5%,
with a weighted-average interest rate of 8.896% at December 31, 2002.



Revolving Mortgage Warehouse Credit Facility



The Company has a $20,000,000 revolving mortgage warehouse credit facility with a bank to fund its mortgage origination operations, $15,000,000 of which is committed (lender obligated to lend if stated
conditions are satisfied) and $5,000,000 of which is not committed (lender advances are optional even if stated conditions are otherwise satisfied). Mortgage loans are generally held for a short period of time and are typically sold to investors
within 7 to 15 days following funding. Borrowings are secured by the related mortgage loans held for sale. At December 31, 2002 the outstanding balance was $18,139,000. The facility, which has a current maturity date of May 31, 2003, also contains a
financial covenant requiring the mortgage company subsidiary to maintain a combined tangible net worth, as defined, of at least $1,500,000, a combined net worth, as defined, meeting or exceeding the greater of $1,500,000 and 5% of combined total
liabilities, as defined, and liquidity, as defined, meeting or exceeding $1,000,000. This facility is non-recourse and is not guaranteed by the Company.



Prime Interest Rates



The prime interest rates at December 31, 2002 and 2001 were 4.25% and 4.75%, respectively. The weighted-average prime interest rates for
each of the three years ended December 31, 2002, 2001 and 2000 were 4.67%, 6.91% and 9.23%, respectively.



Note 6Stockholders Equity



Stock Repurchase



On September 20, 2001, the Company announced that the Companys Board of Directors had authorized a program to repurchase up to 20% of the Companys outstanding common shares. Under the plan, the stock will be
purchased in the open market or privately negotiated transactions from time to time in compliance with Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements and other factors. The timing and
amounts of any purchases will be as determined by the Companys management from time to time or may be suspended at any time or from time to time without prior notice, depending on market conditions and other factors they deem relevant. The
repurchased shares may be held as treasury stock and used for general corporate purchases or cancelled. As of December 31, 2002, 1,018,400 shares had been purchased and retired under this program in the amount of $19,570,000.



Stock Option Plans



Effective on May 9, 2000, the Companys Board of
Directors approved the William Lyon Homes 2000 Stock Incentive Plan (the Plan) and authorized an initial 1,000,000 shares of common stock to be reserved for issuance under the Plan. Under the Plan, options may be granted from time to
time to key employees, officers, directors, consultants and advisors of the Company. The Plan is administered by the Stock Option Committee of



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



the Board of Directors (the Committee). The Committee is generally empowered to interpret the Plan, prescribe rules and
regulations relating thereto, determine the terms of the option agreements, amend them with the consent of the optionee, determine the employees to whom options are to be granted, and determine the number of shares subject to each option and the
exercise price thereof. The per share exercise price for options will not be less than 100% of the fair market value of a share of common stock on the date the option is granted. The options will be exercisable for a term determined by the
Committee, not to exceed ten years from the date of grant, and vest as follows: one year from date of grant331/3%; two years from date of grant331/3%; and three years from date of grant331/3%.



Effective on May 9, 2000, the Company issued options under the William Lyon Homes 2000 Stock Incentive Plan to purchase a total of 627,500
shares of common stock at $8.6875 per share. During the year ended December 31, 2001, the Company issued additional options under the William Lyon Homes 2000 Stock Incentive Plan to purchase 32,500 shares of common stock at an average price of
$11.50 per share. During the years ended December 31, 2002 and 2001, certain officers and directors exercised options to purchase 102,504 and 49,176 shares, respectively, of the Companys common stock at a price of $8.6875 per share in
accordance with the William Lyon Homes 2000 Stock Incentive Plan. During the year ended December 31, 2002, an officer exercised options to purchase 3,334 shares of the Companys common stock at a price of $13.00 per share in accordance with the
William Lyon Homes 2000 Stock Incentive Plan. As of December 31, 2002, 56,666 options have been forfeited and 448,320 options remain unexercised. The unexercised options are as follows: 419,154 options priced at $8.6875, 12,500 options priced
at $9.1000, and 16,666 options priced at $13.0000. All unexercised options expire on May 9, 2010.



During the years ended December 31, 2002 and 2000, certain officers exercised options to purchase 13,912 and 131,088 shares, respectively,
of the Companys common stock at a price of $5.00 per share in accordance with the Companys 1991 Stock Option Plan, as amended. During the year ended December 31, 2002, certain officers exercised options to purchase 7,998 shares of the
Companys common stock at a price of $14.375 per share in accordance with the Companys 1991 Stock Option Plan, as amended. As of December 31, 2002, there were no outstanding options to purchase common stock under the Companys 1991
Stock Option Plan.



Pursuant to the provisions of
Statement No. 123, issued in October 1995, the Company has elected to continue applying the methodology prescribed by APB No. 25 and related interpretations to account for outstanding stock options. Accordingly, no compensation cost has been
recognized in the financial statements related to stock options awarded to officers, directors and employees under the Plan. As required by Statement No. 123, for disclosure purposes only, the Company has measured the amount of compensation cost
which would have been recognized related to stock options had the fair value of the options at the date of grant been used for accounting purposes which is summarized in Note 1. The Company estimated the fair value of the stock options issued in
2000 at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 4.83%; a dividend yield of 0.00%; a volatility factor for the market price of the Companys common
stock of 0.645; and a weighted average expected life of seven years for the stock options. The Company estimated the fair value of the stock options issued in 2001 at the date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest rate of 5.00%; a dividend yield of 0.00%; a volatility factor for the market price of the Companys common stock of 0.618; and a weighted average expected life of seven years for the stock
options.



Incentive Compensation Plan



The Companys Board of Directors has
approved a Cash Bonus Plan for all of the Companys full-time, salaried employees, including the Chief Executive Officer (CEO), Chief Operating Officer (COO), Chief Financial Officer (CFO), Division
Presidents, Executives, Managers, Field Construction Staff, and certain



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other employees. Under the terms of this plan, the CEO, the COO, and the CFO are eligible to receive bonuses based upon specified percentages
of the Companys pre-tax, pre-bonus income. Division Presidents are eligible to receive bonuses based upon specified percentages of their respective division pre-tax, pre-bonus income. All other participants are eligible to receive bonuses
based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income. Awards are recorded in the period earned, but are paid out over two years, with 75% paid out following the determination of bonus
awards, and 25% paid out one year later. The deferred amount will be forfeited in the event of termination for any reason except retirement, death or disability.



Executive Deferred Compensation Plan



Effective on February 11, 2002, the Company implemented a deferred compensation plan which allows certain
officers and employees to defer a portion of total income (base salary and bonuses). The deferral amount can be up to 20% of total income with a minimum of $10,000 annually. The Company must accrue the deferred compensation liability but cannot
deduct such amounts for income tax purposes until actually paid to the employee.



Note 7Income Taxes



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



|                                                           |  | Year Ended December 31, |        
|---------------------------------------------------------- |  | ----------------------- | -------
|                                                           |  | 2002                    |        
|Current                                                    |  |                         |        
|Federal                                                    |  | $                       | (23,525
|State                                                      |  |                         | (6,038 
|                                                           |  |                         |        
|                                                           |  |                         | (29,563
|                                                           |  |                         |        
|Deferred                                                   |  |                         |        
|Federal                                                    |  |                         | 9,656  
|State                                                      |  |                         | 1,637  
|                                                           |  |                         |        
|                                                           |  |                         | 11,293 
|                                                           |  |                         |        
|Income tax benefits credited to additional paid-in capital |  |                         |       
|                                                           |  |                         |        
|                                                           |  | $                       | (18,270
|                                                           |  |                         |        
|                                                          
|Provision for income taxes before extraordinary item       |  | $                       | (18,270
|Provision for income taxes on extraordinary item           |  |                         |       
|                                                           |  |                         |        
|                                                           |  | $                       | (18,270
|                                                           |  |                         |        



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



|                                                                     |  | Year Ended December 31, |        
|-------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                     |  | 2002                    |        
|Provision for Federal income taxes at the statutory rate             |  | $                       | (23,723
|Provision for state income taxes, net of Federal income
tax benefits |  |                         | (2,860 
|Extraordinary itemgain from retirement of debt                      |  |                         |       
|Valuation allowance for deferred tax asset                           |  |                         | 8,348  
|Other                                                                |  |                         | (35    
|                                                                     |  |                         |        
|                                                                     |  | $                       | (18,270
|                                                                     |  |                         |        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)





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



|                                                                                  |  | December 31, |       
|--------------------------------------------------------------------------------- |  | ------------ | ------
|                                                                                  |  | 2002         |       
|Deferred tax assets                                                               |  |              |       
|Reserves deducted for financial reporting purposes not allowable for
tax purposes |  | $            | 3,880 
|Compensation deductible for tax purposes when paid                                |  |              | 2,802 
|Interest expensed for financial reporting purposes and capped for
tax purposes    |  |              | 104   
|Net operating loss and alternative minimum tax credit carryovers                  |  |              | 1,830 
|State income tax provisions deductible when paid for Federal tax
purposes         |  |              | 1,780 
|Effect of book/tax differences for joint ventures                                 |  |              | 410   
|Valuation allowance                                                               |  |              |      
|                                                                                  |  |              |       
|                                                                                  |  |              | 10,806
|Deferred tax liabilities                                                          |  |              |       
|Effect of book/tax differences for joint ventures                                 |  |              | (4,509
|                                                                                  |  |              |       
|                                                                                  |  | $            | 6,297 
|                                                                                  |  |              |       



As of
December 31, 2000, the Company had substantial net operating loss carryforwards for Federal tax purposes which were utilized to reduce taxable income during the year ended December 31, 2001. As a result of the reduction in the valuation allowance
associated with such utilized net operating loss carryforwards, the Companys overall effective tax rate for the year ended December 31, 2001 was approximately 10.9%. The elimination during 2002 of the remaining valuation allowances for
deferred tax assets reduces the Companys estimated overall effective tax rate for the year ending December 31, 2002 from 39.3% to 27.0%. At December 31, 2002 the Company has net operating loss carryforwards for Federal tax purposes of
approximately $5,231,000 which expire in 2009. In addition, unused recognized built-in losses in the amount of $23,891,000 are available to offset future income and expire between 2009 and 2011. The utilization of these losses is limited to offset
$3,235,000 of taxable income per year; however, any unused losses in any year may be carried forward for utilization in future years through 2011. The Companys ability to utilize the foregoing tax benefits will depend upon the amount of its
future taxable income and may be limited in the event of an ownership change under federal tax laws and regulations.



As discussed in Note 1, the Company implemented a quasi-reorganization effective January 1, 1994. Income tax benefits resulting from the
utilization of net operating loss and other carryforwards existing at January 1, 1994 and temporary differences existing prior to the quasi-reorganization, are excluded from results of operations and credited to additional paid-in capital. For the
year ended December 31, 2000, income tax benefits of $9,287,000 related to temporary differences resulting from the quasi-reorganization were excluded from the results of operations and not reflected as a reduction to the Companys provision
for income taxes but credited directly to additional paid-in capital.



Note 8Other Gains



In April, May and November 2000, the Company purchased $22,799,000 principal amount of its outstanding Senior Notes at a cost of $22,107,000. The net gain from the purchase was $496,000, after giving effect to income taxes and
amortization of related deferred loan costs, and is reflected as an extraordinary item on the Consolidated Statement of Income for the year ended December 31, 2000.





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



Note 9Related Party Transactions



The Company and certain members of the Companys Board of Directors entered into certain transactions
with respect to the Companys 121/2% Senior Notes as described in Note 5.



The Company purchased real estate projects for a total
purchase price of $8,468,000 during the year ended December 31, 2000 from entities controlled by William Lyon and William H. Lyon. In addition, one-half of the net profits in excess of six to eight percent from the development are to be paid to the
seller. During the year ended December 31, 2002, $1,770,000 was paid to the seller in accordance with the agreement.



On October 26, 2000, the Companys Board of Directors (with Messrs. William Lyon and William H. Lyon abstaining) approved the
purchase of 579 lots for a total purchase price of $12,581,000 from an entity controlled by William Lyon and William H. Lyon. The terms of the purchase agreement provide for an initial option payment of $1,000,000 and a rolling option takedown of
the lots. Phase takedowns of approximately 20 lots each are anticipated to occur at two to three month intervals for each of several product types through September 2004. In addition, one-half of the net profits in excess of six percent from the
development are to be paid to the seller. During the years ended December 31, 2002 and 2001, the Company purchased 183 and 143 lots, respectively, under this agreement for a total purchase price of $4,150,000 and $2,777,000, respectively. In
addition, during the year ended December 31, 2002, payments in the amount of $1,614,000 were made for one-half of the net profits in excess of six percent from the development. This land acquisition qualifies 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 has determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated
person. The Company has delivered to the Trustee under the Indenture a resolution of the Board of Directors of the Company set forth in an Officers Certificate certifying that the land acquisition is on terms that are no less favorable to the
Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition has been approved by a majority of the disinterested members of the Board of Directors of the Company.
Further, the Company has delivered to the Trustee under the Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.



On July 9, 2002, the Companys Board
of Directors (with Messrs. William Lyon and William H. Lyon abstaining) approved the purchase of 144 lots, through a land banking arrangement, for a total purchase price of $16,660,000 from an entity that purchased the lots from William Lyon. The
terms of the purchase agreement provide for an initial deposit of $3,300,000 (paid on July 23, 2002) and monthly option payments of 11.5% on the sellers outstanding investment. Such option payments entitle the Company to phase takedowns of
approximately 14 lots each, which are anticipated to occur at one to two month intervals through December 2003. As of December 31, 2002, 16 lots have been purchased under this agreement for a purchase price of $1,851,000. Had the Company purchased
the property directly, the acquisition would qualify as an affiliate transaction under the Indenture. Even though the Companys agreement is not with William Lyon, the Company has chosen to treat it as an affiliate transaction. Pursuant to the
terms of the Indenture, the Company has determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The
Company has delivered to the Trustee



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



under the Indenture a resolution of the Board of Directors of the Company set forth in an Officers Certificate certifying that the land
acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition has been approved by a majority of the
disinterested members of the Board of Directors of the Company. Further, the Company has delivered to the Trustee under the Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the
subject property is located and is MAI certified.



The Company purchased land for a total purchase price of $17,079,000, $5,371,000 and $7,128,000 during the years ended December 31, 2002, 2001 and 2000, respectively, from certain of its unconsolidated joint ventures.



For the years ended December 31, 2002 and 2001, the Company
incurred reimbursable on-site labor costs of $178,000 and $175,000, respectively, for providing customer service to real estate projects developed by entities controlled by William Lyon and William H. Lyon, of which $72,000 was due to the Company at
December 31, 2002. In addition, the Company earned fees of $99,000 and $108,000, respectively, for tax and accounting services performed for entities controlled by William Lyon and William H. Lyon during the years ended December 31, 2002 and 2001.



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



For the years ended December 31, 2002, 2001 and 2000, the
Company incurred charges of $729,000, $729,000 and $717,000, respectively, related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary.



During the years ended December 31, 2002 and 2001, the Company incurred charges of $177,000 and $201,000,
respectively, related to the charter and use of aircraft owned by an affiliate of William Lyon.



Note 10Commitments and Contingencies



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



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



The Company enters into purchase agreements with various land sellers. In some instances, and as a method of acquiring land in staged
takedowns, 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 its right in such purchase agreements to entities owned by
third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the 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 equal to 20% or less of the total purchase price. Additionally, the Company may be subject to other penalties if lots are not acquired. 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 are not purchased. The



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Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. The deposits and penalties
related to such land banking projects have been recorded in the accompanying balance sheet. The financial statements of these entities are not consolidated with the Companys consolidated financial statements. 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. Summary information with respect to the Companys land banking arrangements is as follows as of December 31, 2002 (in thousands):



|Total number of land banking projects                      |  |   | 7      
|---------------------------------------------------------- |  | - | -------
|                                                           |  |   |        
|Total number of lots                                       |  |   | 1,264  
|                                                           |  |   |        
|Total purchase price                                       |  | $ | 111,814
|                                                           |  |   |        
|Balance of lots still under option and not purchased:      |  |   |        
|Number of lots                                             |  |   | 1,147  
|                                                           |  |   |        
|Purchase Price                                             |  | $ | 104,687
|                                                           |  |   |        
|Forfeited deposits and penalties if lots are not purchased |  | $ | 23,587 
|                                                           |  |   |        



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, 2002, the Company had $4,014,000 of outstanding irrevocable standby letters of credit to guarantee the Companys financial obligations under certain land banking arrangements and other contractual
arrangements in the normal course of business. Letters of credit totaling $3,263,000 related to land banking arrangements are recorded on the accompanying balance sheet. The beneficiary may draw upon these letters of credit in the event of a
contractual default by the Company relating to each respective obligation. These letters of credit have a stated term of 12 months and have varying maturities throughout 2003, at which time the Company may be required to renew to coincide with the
term of the respective arrangement.



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 4 and 5 for additional information relating to the Companys guarantee arrangements.



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 11Unaudited Summarized Quarterly Financial Information



Summarized quarterly financial information for the years
ended December 31, 2002, 2001 and 2000 is as follows (in thousands except per common share amounts):



|                                                                                |  | Three Months Ended |        
|------------------------------------------------------------------------------- |  | ------------------ | -------
|                                                                                |  | March 31, 2002     |        
|Sales                                                                           |  | $                  | 90,149 
|Other income, costs and expenses, net                                           |  |                    | (86,359
|                                                                                |  |                    |        
|Income before income taxes                                                      |  |                    | 3,790  
|Provision for income taxes                                                      |  |                    | (677   
|                                                                                |  |                    |        
|Net income                                                                      |  | $                  | 3,113  
|                                                                                |  |                    |        
|Basic earnings per common share                                                 |  | $                  | 0.30   
|                                                                                |  |                    |        
|Diluted earnings per common share                                               |  | $                  | 0.29   
|                                                                                |  |                    |        
|                                                                               
|                                                                                |  | Three Months Ended |        
|                                                                                |  | March 31, 2001     |        
|Sales                                                                           |  | $                  | 72,455 
|Other income, costs and expenses, net                                           |  |                    | (65,662
|                                                                                |  |                    |        
|Income before income taxes                                                      |  |                    | 6,793  
|Provision for income taxes                                                      |  |                    | (712   
|                                                                                |  |                    |        
|Net income                                                                      |  | $                  | 6,081  
|                                                                                |  |                    |        
|Basic earnings per common share                                                 |  | $                  | 0.58   
|                                                                                |  |                    |        
|Diluted earnings per common share                                               |  | $                  | 0.57   
|                                                                                |  |                    |        
|                                                                               
|                                                                                |  | Three Months Ended |        
|                                                                                |  | March 31, 2000     |        
|Sales                                                                           |  | $                  | 65,373 
|Other income, costs and expenses, net                                           |  |                    | (57,341
|                                                                                |  |                    |        
|Income before income taxes and extraordinary item                               |  |                    | 8,032  
|Provision for income taxes                                                      |  |                    | (393   
|                                                                                |  |                    |        
|Income before extraordinary item                                                |  |                    | 7,639  
|Extraordinary itemgain from retirement of debt, net of applicable income
taxes |  |                    |       
|                                                                                |  |                    |        
|Net income                                                                      |  | $                  | 7,639  
|                                                                                |  |                    |        
|Basic and diluted earnings per common share                                     |  |                    |        
|Before extraordinary item                                                       |  | $                  | 0.73   
|Extraordinary item                                                              |  |                    |       
|                                                                                |  |                    |        
|After extraordinary item                                                        |  | $                  | 0.73   
|                                                                                |  |                    |        



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REPORT OF
INDEPENDENT AUDITORS



To the Board of Directors and
Stockholders

William Lyon Homes



We have audited the accompanying combined balance sheets of the Significant Subsidiaries of William Lyon Homes, as defined in Note 1, as
of December 31, 2001, and the related combined statements of income, members capital and cash flows for each of the two years in the period ended December 31, 2001. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our audits.



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



In our opinion, the combined
financial statements referred to above present fairly, in all material respects, the combined financial position of the Significant Subsidiaries of William Lyon Homes at December 31, 2001, and the combined results of their operations and their cash
flows for each of the two years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.



/s/    ERNST & YOUNG LLP



Irvine, California

February 15, 2002



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SIGNIFICANT
SUBSIDIARIES OF WILLIAM LYON HOMES



COMBINED BALANCE SHEETS

(in thousands)



|                                         |  | December 31,
|---------------------------------------- |  | ------------
|                                         |  | 2002        
|                                         |  | (unaudited) 
|ASSETS                                  
|                                        
|Cash                                     |  | $           
|Receivables                              |  |             
|Real estate inventories  Note 2         |  |             
|                                         |  |             
|                                         |  | $           
|                                         |  |             
|                                        
|LIABILITIES AND MEMBERS
CAPITAL        
|                                        
|Accounts payable and accrued liabilities |  | $           
|Amount due to member  Note 4            |  |             
|                                         |  |             
|                                         |  |             
|Commitments and contingencies  Note 5   |  |             
|                                        
|Members capital                         |  |             
|                                         |  |             
|                                         |  | $           
|                                         |  |             









See accompanying notes.





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SIGNIFICANT
SUBSIDIARIES OF WILLIAM LYON HOMES



COMBINED STATEMENTS OF INCOME

(in thousands)



|                                             |  | Year Ended December 31,
|-------------------------------------------- |  | -----------------------
|                                             |  | 2002                   
|                                             |  | (unaudited)            
|REVENUES                                     |  |                        
|Sales of homes                               |  | $                      
|Interest and other income                    |  |                        
|                                             |  |                        
|                                             |  |                        
|                                             |  |                        
|COSTS AND EXPENSES                           |  |                        
|Cost of homes sold                           |  |                        
|Sales, marketing and administrative expenses |  |                        
|                                             |  |                        
|                                             |  |                        
|                                             |  |                        
|NET INCOME                                   |  | $                      
|                                             |  |                        









See accompanying notes.



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SIGNIFICANT
SUBSIDIARIES OF WILLIAM LYON HOMES



COMBINED STATEMENTS OF MEMBERS CAPITAL



For the Years Ended December 31, 2002, 2001 and 2000

(in thousands)



|                                        |  | Lyon Members |         |   | Common Unaffiliated Members |   |          | Total Members Capital | 
|--------------------------------------- |  | ------------ | ------- | - | --------------------------- | - | -------- | ---------------------- | 
|BALANCE  December 31, 1999             |  | $            | 35,619  |   |                             | $ | 93,346   |                        | 
|Contributions                           |  |              | 11,472  |   |                             |   | 145,489  |                        | 
|Distributions                           |  |              | (36,815 | ) |                             |   | (167,920 | )                      | 
|Net income                              |  |              | 21,491  |   |                             |   | 20,325   |                        | 
|                                        |  |              |         |   |                             |   |          |                        | 
|                                       
|BALANCE  December 31, 2000             |  |              | 31,767  |   |                             |   | 91,240   |                        | 
|Contributions                           |  |              | 15,555  |   |                             |   | 141,543  |                        | 
|Distributions                           |  |              | (21,510 | ) |                             |   | (143,082 | )                      | 
|Net income                              |  |              | 15,009  |   |                             |   | 16,455   |                        | 
|                                        |  |              |         |   |                             |   |          |                        | 
|                                       
|BALANCE  December 31, 2001             |  |              | 40,821  |   |                             |   | 106,156  |                        | 
|Contributions (unaudited)               |  |              | 2,959   |   |                             |   | 72,937   |                        | 
|Distributions (unaudited)               |  |              | (36,707 | ) |                             |   | (163,880 | )                      | 
|Net income (unaudited)                  |  |              | 10,871  |   |                             |   | 12,245   |                        | 
|                                        |  |              |         |   |                             |   |          |                        | 
|                                       
|BALANCE  December 31, 2002 (unaudited) |  | $            | 17,944  |   |                             | $ | 27,458   |                        | 
|                                        |  |              |         |   |                             |   |          |                        | 







See accompanying notes.



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SIGNIFICANT
SUBSIDIARIES OF WILLIAM LYON HOMES



COMBINED STATEMENTS OF CASH FLOWS



(in thousands)



|                                                                                       |  | Year Ended December 31, |         
|-------------------------------------------------------------------------------------- |  | ----------------------- | --------
|                                                                                       |  | 2002                    |         
|                                                                                       |  | (unaudited)             |         
|Operating activities                                                                   |  |                         |         
|Net income                                                                             |  | $                       | 23,116  
|Adjustments to reconcile net income to net cash provided by operating
activities:      |  |                         |         
|Net changes in operating assets and liabilities:                                       |  |                         |         
|Receivables                                                                            |  |                         | (2,666  
|Real estate inventories                                                                |  |                         | 34,246  
|Other assets                                                                           |  |                         |        
|Accounts payable and accrued liabilities                                               |  |                         | (9,133  
|Amount due member                                                                      |  |                         | (362    
|                                                                                       |  |                         |         
|Net cash provided by operating activities                                              |  |                         | 45,201  
|                                                                                       |  |                         |         
|Financing activities                                                                   |  |                         |         
|Contributions from members                                                             |  |                         | 75,896  
|Distributions to members                                                               |  |                         | (115,284
|Proceeds from notes payable                                                            |  |                         |        
|Repayment of notes payable                                                             |  |                         |        
|                                                                                       |  |                         |         
|Net cash used in financing activities                                                  |  |                         | (39,388 
|                                                                                       |  |                         |         
|Net increase (decrease) in cash                                                        |  |                         | 5,813   
|Cash  beginning of year                                                               |  |                         | 3,797   
|                                                                                       |  |                         |         
|Cash  end of year                                                                     |  | $                       | 9,610   
|                                                                                       |  |                         |         
|                                                                                      
|Supplemental disclosures of cash flow and non-cash activities                          |  |                         |         
|Cash paid for interest                                                                 |  | $                       |        
|                                                                                       |  |                         |         
|Debt assumed by joint venture in connection with contribution of land to joint
venture |  | $                       |        
|                                                                                       |  |                         |         
|Contribution of land, net of assumed debt                                              |  | $                       |        
|                                                                                       |  |                         |         





See accompanying notes.



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##### Table of Contents



SIGNIFICANT
SUBSIDIARIES OF WILLIAM LYON HOMES



NOTES
TO COMBINED FINANCIAL STATEMENTS



December
31, 2002 and 2001



1.    Organization
and Summary of Significant Accounting Policies



Basis of Presentation



The combined financial statements are presented in accordance with Rule 3-09 of SEC Regulation S-X (Rule 3-09) and represent the combined financial position, results of operations and cash flows of the subsidiaries which
are accounted for using the equity method by William Lyon Homes (Lyon) which have a common unaffiliated member and are deemed significant when aggregated for purposes of Rule 3-09 (collectively, the Significant
Subsidiaries of William Lyon Homes) as of December 31, 2001 and for each of the two years in the period ended December 31, 2001. The significant subsidiaries of William Lyon Homes are not deemed significant as of December 31,
2002 and for the year then ended. As such, information for such period is presented herein unaudited.



Organization



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



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



During the year ended
December 31, 2002, an entity included in the Significant Subsidiaries of William Lyon Homes (Existing Venture) was restructured such that Lyon is required to purchase the 538 lots owned by the Existing Venture on a specified takedown
basis through October 15, 2003 at a purchase price equal to the future cost of such lots including a 20% preferred return on invested capital to the unaffiliated member of the Existing Venture. Because Lyon is required to purchase the lots owned by
the Existing Venture and Lyon controls the Existing Venture, the financial statements of the Existing Venture have been consolidated with Lyons financial statements as of December 31, 2002. As such, the Existing Venture is not included in the
Significant Subsidiaries of William Lyon Homes as of December 31, 2002.



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



The Agreements provide among other things that the Unaffiliated Member is entitled to receive a construction
loan equivalent return consisting of a rate that ranges from prime (4.25% and 4.75% as of December 31, 2002 and 2001, respectively) plus 1% to prime plus 4.75% on between 100% and 70% of the Unaffiliated Members unrecovered capital which
is payable by the companies in all events in accordance with the Agreements. Additionally, the Unaffiliated Member is entitled to receive a preferred return consisting of a rate that ranges from prime plus 1% to prime plus 4.75% on between 0% and
30% of the Unaffiliated Members unrecovered capital. The Lyon Member is entitled to receive a preferred return consisting of a rate of interest that ranges from prime plus 1% to prime plus 4.75% on the Lyon Members unrecovered capital.



93



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SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES



NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)





The
following is a summary of the Unaffiliated Members construction loan equivalent returns and preferred returns and the Lyon Members preferred returns through December 31, 2002 (unaudited, in thousands):



|                                                       |  | Unaffiliated Members Construction Loan Equivalent
Returns |         |   | Unaffiliated Members Preferred Returns |   |         | Lyon Members Preferred Returns | 
|------------------------------------------------------ |  | ---------------------------------------------------------- | ------- | - | --------------------------------------- | - | ------- | ------------------------------- | 
|Cumulative returns on unrecovered capital              |  | $                                                          | 14,035  |   |                                         | $ | 12,085  |                                 | 
|Cumulative return distributions                        |  |                                                            | (14,017 | ) |                                         |   | (12,082 | )                               | 
|                                                       |  |                                                            |         |   |                                         |   |         |                                 | 
|Remaining undistributed returns as ofDecember 31, 2002 |  | $                                                          | 18      |   |                                         | $ | 3       |                                 | 
|                                                       |  |                                                            |         |   |                                         |   |         |                                 | 



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



Use of Estimates



The preparation of the Significant Subsidiaries of William Lyon Homes combined financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of December 31, 2002 and 2001 and the revenues and expenses for each of the three years in the period ended December 31, 2002. Actual results
could materially differ from these estimates in the near-term.



Real Estate Inventories



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



The Significant Subsidiaries of William Lyon Homes account for their real estate inventories in accordance with Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement No. 144). This pronouncement superseded Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement No. 121) and was required to be adopted on January 1, 2002. Statement No. 144 retained the fundamental provisions of
Statement No. 121 as it relates to assets to be held and used and assets to be sold. Statement No. 144 requires impairment losses to be recorded on assets to be held and used by the Significant Subsidiaries of William Lyon Homes when indicators of
impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of the assets. When an impairment loss is required for assets to be held and used by the Significant Subsidiaries of
William Lyon Homes, the related assets are adjusted to their estimated fair value.



Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties; that is, other than a forced or liquidation sale. The estimation process
involved in determining if



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SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES



NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)



assets have been impaired and in the determination of fair value is inherently uncertain since it requires estimates of current market yields
as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing to fund development and construction activities. The realization of the Significant
Subsidiaries of William Lyon Homes projects is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Significant Subsidiaries of William Lyon Homes may be materially different
from their estimated fair values.



Management has
evaluated the projects and determined that no indicators of impairment are present as of December 31, 2002 and 2001.



Revenue and Profit Recognition



A sale is recorded and profit recognized when a sale is consummated, the buyers initial and continuing investments are adequate, any
receivables are not subject to future subordination, and the usual risks and rewards of ownership have been transferred to the buyer in accordance with the provisions of Financial Accounting Standards Board Statement 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. As of December 31, 2002 and 2001,
there are no deferred profits.



Warranty Costs



The Significant Subsidiaries of William Lyon Homes account for warranty costs under the reserve method. As homes are sold, an estimate of warranty costs is charged to the cost of homes sold and an accrual for future warranty costs is
established. As actual costs are incurred, the warranty reserve is reduced. If actual warranty costs of the Significant Subsidiaries of William Lyon Homes are in excess of amounts estimated in the Agreements (which generally range from 0.5% to 1.0%
of the sales price of homes sold), the Lyon Member will be obligated to complete all warranty work without reimbursement from the Significant Subsidiaries of William Lyon Homes. If actual warranty costs of the Significant Subsidiaries of William
Lyon Homes are less than the amounts estimated in the Agreements, the Lyon Member will be paid the difference. Changes in the Significant Subsidiaries of William Lyon Homes warranty liability during the year ended December 31 are as follows
(in thousands):



|                                      |  | December 31, |       
|------------------------------------- |  | ------------ | ------
|                                      |  | 2002         |       
|                                      |  | (unaudited)  |       
|Warranty liability, beginning of year |  | $            | 1,116 
|Warranty provision during year        |  |              | 1,207 
|Warranty settlements during year      |  |              | (1,716
|                                      |  |              |       
|Warranty liability, end of year       |  | $            | 607   
|                                      |  |              |       



Income Taxes



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



95



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SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES



NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)







2.    Real Estate Inventories



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



|                                            |  | 2002        |        | 2001
|------------------------------------------- |  | ----------- | ------ | ----
|                                            |  | (unaudited) |        |     
|Land under development                      |  | $           | 19,042 |     
|Construction in process and completed homes |  |             | 21,786 |     
|                                            |  |             |        |     
|                                            |  | $           | 40,828 |     
|                                            |  |             |        |     



3.    Notes Payable



During the year ended December 31, 2001, the Significant Subsidiaries of William Lyon Homes incurred $94,000, of interest cost, all of which was capitalized to the real estate inventories.



4.    Related Party Transactions



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



The following amounts were incurred during the years ended December 31 (in thousands):



|                                |  | 2002        |       | 2001 |   | 2000  
|------------------------------- |  | ----------- | ----- | ---- | - | ------
|                                |  | (unaudited) |       |      |   |       
|Lyon Member fees                |  | $           | 3,844 |      | $ | 5,432 
|Lyon Member cost reimbursements |  |             | 2,890 |      |   | 4,071 
|Unaffiliated Member fees        |  |             | 1,288 |      |   | 1,745 
|                                |  |             |       |      |   |       
|                                |  | $           | 8,022 |      | $ | 11,248
|                                |  |             |       |      |   |       



As of
December 31, 2002, 2001 and 2000, $2,282,000 (unaudited), $2,407,000 and $2,439,000, respectively, is due Lyon Member for fees and cost reimbursements.



5.    Commitments and Contingencies



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



96



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##### Table of Contents



EXHIBIT
INDEX



|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1(1)        |  | Certificate of Ownership and Merger                                                                                                                                                                                                                                                                                                                                                                                                                            
|             
|3.1(2)        |  | Certificate of Incorporation of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                   
|             
|3.3(2)        |  | Bylaws of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|             
|4.1(2)        |  | Specimen certificate of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                          
|             
|4.2(3)        |  | Indenture dated June 29, 1994, between American Bank & Trust Company, as Trustee, and The Presley Companies and
Presley Homes.                                                                                                                                                                                                                                                                                                                                 
|             
|4.3(9)        |  | Form of First Supplemental Indenture dated as of July 1, 2001 amending and supplementing the Indenture dated as of
June 29, 1994 by and among William Lyon Homes f/k/a The Presley Companies, a Delaware corporation (as Company), William Lyon Homes, Inc. f/k/a Presley Homes, f/k/a The Presley Companies, a California corporation (as Guarantor) and Firstar Bank, N.A.
as successor-in-interest to American National Bank and Trust Company (as Trustee).
|             
|10.1(5)       |  | Form of Indemnity Agreement, between the Company and the Directors and Officers of the Company.                                                                                                                                                                                                                                                                                                                                                                
|             
|10.2(2)       |  | Purchase Agreement and Escrow Instructions dated October 7, 1999 among The Presley Companies, Presley Homes, William
Lyon Homes, Inc., William Lyon and William H. Lyon.                                                                                                                                                                                                                                                                                       
|             
|10.3(5)       |  | 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.                                                                                                                                                                                                                                                     
|             
|10.4(5)       |  | Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes,
Inc., a California corporation dated and effective November 5, 1999.                                                                                                                                                                                                                                                                          
|             
|10.5(6)       |  | Loan Agreement dated as of September 25, 2000 between William Lyon Homes, Inc., a California corporation, the
Borrower, and Residential Funding Corporation, a Delaware corporation, Lender.                                                                                                                                                                                                                                                               
|             
|10.6          |  | First Amendment to Loan Agreement, dated as of July 13, 2001, between William Lyon Homes, Inc., a California
corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.                                                                                                                                                                                                                                                  
|             
|10.7          |  | Second Amendment to Loan Agreement and to Other Loan Documents, dated as of March 28, 2002, between William Lyon
Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.                                                                                                                                                                                                                    
|             
|10.8          |  | Third Amendment to Loan Agreement and to Other Loan Documents, dated as of January 10, 2003, between William Lyon
Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.                                                                                                                                                                                                                   
|             
|10.9          |  | Fourth Amendment to Loan Agreement, dated as of January 23, 2003, between William Lyon Homes, Inc., a California
corporation, as borrower, and RFC Construction Funding Corp., a Delaware corporation, as lender.                                                                                                                                                                                                                                              
|             
|10.10(6)      |  | 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).                                                                                                                                                                                              
|             
|10.11(10)     |  | 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.                                                                                                  



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##### Table of Contents

|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                       
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             
|10.12         |  | 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.   
|             
|10.13         |  | 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.
|             
|10.14         |  | 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.    
|             
|10.15(6)      |  | 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(13)     |  | 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         |  | 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(6)      |  | 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.                                                                                                                                                                  
|             
|10.19(7)      |  | William Lyon Homes 2000 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                     
|             
|10.20(8)      |  | Form of Stock Option Agreements.                                                                                                                                                                                                                                                                                                                                  
|             
|10.21(8)      |  | William Lyon Homes, Inc. 2000 Cash Bonus Plan.                                                                                                                                                                                                                                                                                                                    
|             
|10.22(8)      |  | Standard Industrial/Commercial Single-Tenant Lease  Net Between William Lyon Homes, Inc. and a trust of which
William H. Lyon is the sole beneficiary.                                                                                                                                                                                                           
|             
|10.23(9)      |  | Business Loan Agreement dated as of March 8, 2001 between William Lyon Homes, Inc. (Borrower) and First
Bank and Trust (Lender).                                                                                                                                                                                                                              
|             
|10.24(10)     |  | Mortgage Warehouse Loan and Security Agreement dated as of June 28, 2002, by and between Duxford Financial, Inc.,
and/or Bayport Mortgage, L.P., a California Corporation (Borrower) and First Tennessee Bank (Bank).                                                                                                                                         
|             
|10.25(11)     |  | William Lyon Homes Executive Deferred Compensation Plan effective as of February 11,
2002.                                                                                                                                                                                                                                                                        
|             
|10.26(13)     |  | William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11,
2002.                                                                                                                                                                                                                                                                
|             
|10.27         |  | The Presley Companies Non-Qualified Retirement Plan for Outside Directors.                                                                                                                                                                                                                                                                                        
|             
|12.1          |  | Statement of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                  
|             
|21.1          |  | List of Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                              
|             
|23.1          |  | Consent of Independent Auditors.                                                                                                                                                                                                                                                                                                                                  
|             
|99.1          |  | 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.                                                                                                                                                                                                                 
|             
|99.2          |  | 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.                                                                                                                                                                                                                 



---

##### Table of Contents

---

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



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



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



|(4) |  | Previously filed in connection with the Companys Registration Statement on Form S-1, and amendments thereto (S.E.C. Registration No. 33-79088) and
incorporated herein by this reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | 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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | 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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-8 (SEC Registration No. 333-50232) and incorporated herein by this
reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|(9) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001 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, 2001 and incorporated herein by this
reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(11) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-8 (SEC Registration No. 333-82448) dated February 8, 2002 and
incorporated herein by this reference.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(12) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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