##### 









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,
2001

OR



|  |                                                                                            
|- | -------------------------------------------------------------------------------------------
|o | 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:

|                                        |  |                        
|--------------------------------------- |  | -----------------------
|                                        |  | Name of Each Exchange  
|Title of Each Class                     |  | 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 o.

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

The aggregate market value of the voting stock
held by non-affiliates of the registrant as of February 15,
2002 was $112,524,919. (This calculation assumes that all
officers and directors of the Company are affiliates.)

The number of shares of Common Stock outstanding
as of February 15, 2002 was 10,619,399.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrants Proxy Statement for
the Annual Meeting of Holders of Common Stock to be held on
May 13, 2002 are incorporated herein by reference into
Part III.



---






---



##### 



WILLIAM LYON HOMES

INDEX

|         |  |                                                                                        |  |          |    | 
|-------- |  | -------------------------------------------------------------------------------------- |  | -------- | -- | 
|         |  |                                                                                        |  | Page No.
|         |  |                                                                                        |  |         
|PART I  
|Item 1.  |  | Business                                                                               |  |          | 1  | 
|Item 2.  |  | Properties                                                                             |  |          | 12 | 
|Item 3.  |  | Legal Proceedings                                                                      |  |          | 12 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
	Holders                                   |  |          | 12 | 
|PART II 
|        
|Item 5.  |  | Market for the Registrants Common Equity
	and Related Stockholder Matters             |  |          | 13 | 
|Item 6.  |  | Selected Financial Data                                                                |  |          | 14 | 
|Item 7.  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |          | 15 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |  |          | 30 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                            |  |          | 30 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |  |          | 30 | 
|PART III
|        
|Item 10. |  | Directors and Executive Officers of the Registrant                                     |  |          | 30 | 
|Item 11. |  | Executive Compensation                                                                 |  |          | 30 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |          | 30 | 
|Item 13. |  | Certain Relationships and Related Transactions                                         |  |          | 30 | 
|PART IV 
|        
|Item 14. |  | Exhibits, Consolidated Financial Statement
	Schedules and Reports on Form 8-K          |  |          | 31 | 
|         |  | Index to Consolidated Financial Statements                                             |  |          | 35 | 

i



---



##### 



PART I

Item 1. Business


General

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. Since its
founding in 1956, the Company has sold over 53,000 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 2001. Approximately 70% of the
Companys home closings were derived from its California
operations. In 2001, the Company and its unconsolidated joint
ventures had combined revenues of $789.7 million and
delivered 2,566 homes.

The Company designs, constructs and sells a wide
range of homes designed to meet the specific needs of each of
its markets, although it primarily emphasizes sales to the
entry-level and move-up home buyer markets. The Company
currently markets its homes through 43 sales locations in
both its wholly-owned projects and projects being developed in
unconsolidated joint ventures. In 2001, the average sales price
for homes delivered was $299,300, with homes priced from
$100,000 to $893,000.

The Company and its unconsolidated joint ventures
currently own approximately 4,906 lots (including 2,027 in
unconsolidated joint ventures) and control an additional
3,461 lots, substantially all of which are entitled. As
used in this Annual Report on Form 10-K,
entitled land has a Development Agreement and/or
Vesting Tentative Map, or a final recorded plat or map from the
appropriate county or city government. Development Agreements
and Vesting Tentative Maps generally provide for the right to
develop the land in accordance with the provisions of the
Development Agreement or Vesting Tentative Map unless an issue
arises concerning health, safety or general welfare. The
Companys sources of developed lots for its homebuilding
operations are (1) development of master-planned communities,
primarily through unconsolidated joint ventures at the current
time, and (2) purchase of smaller projects with shorter life
cycles (merchant homebuilding). The Company estimates that its
current inventory of land is adequate to supply its homebuilding
operations at current operating levels for approximately
2 years.

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

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

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

1



---



##### 



$8,689,000 has been reflected as goodwill and is
being amortized on a straight-line basis over an estimated
useful life of seven years. 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 will no longer be amortized
but will be subject to annual impairment tests in accordance
with Statement No. 142. The Company will apply the new rule
on accounting for goodwill beginning in the first quarter of
2002. Application of the nonamortization provisions of Statement
No. 142 is expected to result in an increase in net income
of approximately $800,000 ($0.08 per share) per year. During
2002, the Company will perform the first of the required
impairment tests of goodwill as of January 1, 2002 and has
not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.


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

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

The principal purpose of the merger is to help
preserve the Companys substantial net operating loss
carryforwards and other tax benefits for use in offsetting
future taxable income by decreasing, but not eliminating, the
risk of an ownership change for federal income tax
purposes. The Companys future use of tax carryforwards
could be severely limited if there is an ownership
change as defined in applicable tax laws and regulations,
over any three year period. The imposition of transfer
restrictions in connection with the merger was intended to
reduce the risk of an ownership change. In general, the transfer
restrictions prohibit, without prior approval of the board of
directors of the Company, the direct or indirect disposition or
acquisition of any stock of the Company by or to any holder who
owns or would so own upon the acquisition (either directly or
through the tax attribution rules) 5% or more of the
Companys stock. The Company has learned that one
stockholder unknowingly violated such transfer restrictions,
which restrictions are set forth in the Companys
Certificate of Incorporation. The stockholder has agreed to
divest itself of the requisite number of the Companys
shares so that such stockholder can return to compliance with
the Companys Certificate of Incorporation.

The Company after the consummation of the merger
had substantially the same financial position as that of The
Presley Companies immediately before the merger (the merger took
effect after consummation of the transactions contemplated in
the Purchase Agreement with Old William Lyon Homes as described
above). Except for the transfer restrictions and the elimination
of provisions dividing the common stock into two

2



---



##### 



series, the new shares of common stock issued by
the surviving company in the merger have terms substantially
similar to the old shares of common stock.


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

The Company changed its operating strategy during
1997 to finance certain projects by forming joint ventures with
venture partners that would provide a substantial portion of the
capital necessary to develop these projects. The Company
believes that the use of joint venture partnerships better
enables it to reduce its capital investments and risks in the
highly capital intensive California markets. The Company
generally receives, after priority returns and capital
distributions to its partners, approximately 50% of the profits
and losses, and cash flows from joint ventures.

As of December 31, 2001, the Company and
certain of its subsidiaries are general partners or members in
25 joint ventures involved in the development and sale of
residential projects. Such joint ventures are 50% or less owned
and, accordingly, the financial statements of such joint
ventures are not consolidated with the Companys financial
statements. The Companys investments in unconsolidated
joint ventures are accounted for using the equity method. See
Note 7 of Notes to Consolidated Financial
Statements for condensed combined financial information
for these joint ventures. Based upon current estimates,
substantially all future development and construction costs will
be funded by the Companys joint venture partners or from
the proceeds of construction financing obtained by the joint
ventures.

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

The Company had total consolidated revenues from
operations of $468.2 million, $417.3 million and
$444.8 million for the years ended December 31, 2001,
2000 and 1999, respectively. Homes closed by the Company,
including unconsolidated joint ventures, were 2,566, 2,666 and
2,618 for the years ended December 31, 2001, 2000 and 1999,
respectively.

The Companys operations are dependent to a
significant extent on debt financing and, beginning in the
fourth quarter of 1997, on joint venture financing. The
Companys principal credit sources are the
12 1/2% Senior Notes, Revolving Credit Facilities,
project construction loans, and seller-provided financing. The
Company filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 for the sale of
$200.0 million of 12 1/2% Senior Notes which became
effective on June 23, 1994. The offering closed on
June 29, 1994 and was fully subscribed and issued. At
December 31, 2001, the outstanding principal amount of the
12 1/2% Senior Notes was $70.3 million. The Revolving
Credit Facilities are revolving lines of credit with a maximum
commitment of $180.0 million. However, the credit
facilities have limitations on the amounts that can be borrowed
at any time based on assets which are included in the credit
facilities and the specified borrowings permitted under
borrowing base calculations. The Revolving Credit Facilities are
secured by substantially all of the Companys assets. At
December 31, 2001, the outstanding principal amount under
the Revolving Credit Facilities was $76.1 million. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Financial
Condition and Liquidity and Note 8 of Notes to
Consolidated Financial Statements.

The ability of the Company to meet its
obligations on its indebtedness will depend to a large degree on
its future performance which in turn will be subject, in part,
to factors beyond its control, such as prevailing economic
conditions, mortgage and other interest rates, weather, the
occurrence of events such as landslides, soil subsidence and
earthquakes that are uninsurable, not economically insurable or
not subject to effective

3



---



##### 



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.

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,
|                              |                        |                        
|                              |                        |                         |         |         |  |        
|                              |                        | 2001                    |         | 2000    |  | 1999(7)
|                              |                        |                         |         |         |  |        
|                              |                        | Dollar                  |         | % of    |  | Dollar  |     | % of  |   | Dollar |         | % of   
|                              |                        | Amount                  |         | Total   |  | Amount  |     | Total |   | Amount |         | Total  
|                              |                        |                         |         |         |  |         |     |       |   |        |         |        
|                              |                        |                        
|                              |                        | (Dollars in Thousands) 
|Wholly-owned                  |                        |                         |         |         |  |         |     |       |   |        |         |         |  |  |     |    |   |   |         |         |  |  |     |   
|                              | Southern California(1) |                         | $       | 118,611 |  |         |     | 15    | % |        | $       | 107,249 |  |  |     | 14 | % |   | $       | 169,394 |  |  |     | 26 | %
|                              | San Diego(2)           |                         |         | 117,652 |  |         |     | 15    | % |        |         | 90,137  |  |  |     | 12 | % |   |         | 40,168  |  |  |     | 6  | %
|                              | Northern California(3) |                         |         | 75,108  |  |         |     | 10    | % |        |         | 111,026 |  |  |     | 14 | % |   |         | 110,920 |  |  |     | 17 | %
|                              | Arizona(4)             |                         |         | 46,262  |  |         |     | 6     | % |        |         | 26,309  |  |  |     | 3  | % |   |         | 32,014  |  |  |     | 5  | %
|                              | New Mexico(5)          |                         |         |        |  |         |     |      |   |        |         | 6,011   |  |  |     | 1  | % |   |         | 23,989  |  |  |     | 4  | %
|                              | Nevada(6)              |                         |         | 101,423 |  |         |     | 13    | % |        |         | 66,134  |  |  |     | 8  | % |   |         | 63,496  |  |  |     | 10 | %
|                              |                        |                         |         |         |  |         |     |       |   |        |         |         |  |  |     |    |   |   |         |         |  |  |     |   
|                              |                        |                         | 459,056 |         |  |         | 59  | %     |   |        | 406,866 |         |  |  | 52  | %  |   |   | 439,981 |         |  |  | 68  | % 
|                              |                        |                         |         |         |  |         |     |       |   |        |         |         |  |  |     |    |   |   |         |         |  |  |     |   
|Unconsolidated joint ventures |                        |                         |         |         |  |         |     |       |   |        |         |         |  |  |     |    |   |   |         |         |  |  |     |   
|                              | Southern California(1) |                         |         | 156,336 |  |         |     | 20    | % |        |         | 112,233 |  |  |     | 14 | % |   |         | 39,054  |  |  |     | 6  | %
|                              | San Diego(2)           |                         |         | 49,748  |  |         |     | 6     | % |        |         | 116,048 |  |  |     | 15 | % |   |         | 121,226 |  |  |     | 19 | %
|                              | Northern California(3) |                         |         | 115,385 |  |         |     | 15    | % |        |         | 146,571 |  |  |     | 19 | % |   |         | 43,056  |  |  |     | 7  | %
|                              |                        |                         |         |         |  |         |     |       |   |        |         |         |  |  |     |    |   |   |         |         |  |  |     |   
|                              |                        |                         | 321,469 |         |  |         | 41  | %     |   |        | 374,852 |         |  |  | 48  | %  |   |   | 203,336 |         |  |  | 32  | % 
|                              |                        |                         |         |         |  |         |     |       |   |        |         |         |  |  |     |    |   |   |         |         |  |  |     |   
|Combined                      |                        |                         |         |         |  |         |     |       |   |        |         |         |  |  |     |    |   |   |         |         |  |  |     |   
|                              | Southern California(1) |                         |         | 274,947 |  |         |     | 35    | % |        |         | 219,482 |  |  |     | 28 | % |   |         | 208,448 |  |  |     | 32 | %
|                              | San Diego(2)           |                         |         | 167,400 |  |         |     | 21    | % |        |         | 206,185 |  |  |     | 27 | % |   |         | 161,394 |  |  |     | 25 | %
|                              | Northern California(3) |                         |         | 190,493 |  |         |     | 25    | % |        |         | 257,597 |  |  |     | 33 | % |   |         | 153,976 |  |  |     | 24 | %
|                              | Arizona(4)             |                         |         | 46,262  |  |         |     | 6     | % |        |         | 26,309  |  |  |     | 3  | % |   |         | 32,014  |  |  |     | 5  | %
|                              | New Mexico(5)          |                         |         |        |  |         |     |      |   |        |         | 6,011   |  |  |     | 1  | % |   |         | 23,989  |  |  |     | 4  | %
|                              | Nevada(6)              |                         |         | 101,423 |  |         |     | 13    | % |        |         | 66,134  |  |  |     | 8  | % |   |         | 63,496  |  |  |     | 10 | %
|                              |                        |                         |         |         |  |         |     |       |   |        |         |         |  |  |     |    |   |   |         |         |  |  |     |   
|                              |                        | $                       | 780,525 |         |  |         | 100 | %     |   | $      | 781,718 |         |  |  | 100 | %  |   | $ | 643,317 |         |  |  | 100 | % 
|                              |                        |                         |         |         |  |         |     |       |   |        |         |         |  |  |     |    |   |   |         |         |  |  |     |   




|    |                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Southern California Division consists of
	operations in Los Angeles, Orange, Riverside,
	San Bernardino and Ventura Counties.                
|   
|(2) | The San Diego Division consists of operations in
	San Diego and Riverside Counties.                                                              
|   
|(3) | The Northern California Division consists of
	operations in Alameda, Contra Costa, El Dorado, Sacramento,
	Solano, Yolo and Santa Clara Counties.
|   
|(4) | The Arizona Division consists of operations in
	the Phoenix area and, until January 1999, Tucson, Arizona.                                       
|   
|(5) | The New Mexico Division consisted of operations
	in Albuquerque and Santa Fe, New Mexico.                                                        

4



---



##### 





|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(6) | The Nevada Division consists of operations in the
	Las Vegas area.                                                                         
|   
|(7) | In November 1999, the Company acquired
	substantially all of the assets of Old William Lyon Homes, all
	of which are located in California.

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

Homebuilding

The Company currently has a wide variety of
product lines which enables it to meet the specific needs of
each of its markets. The Companys products include
entry-level, move-up and luxury homes, although it primarily
emphasizes sales to the entry-level and move-up home markets.
The Company believes that this diversified product strategy
enables it to mitigate some of the risks inherent in the
homebuilding industry and to meet a variety of market
conditions. In order to reduce exposure to local market
conditions, the Companys sales locations are
geographically dispersed. The Company currently has
43 sales locations.

Because the decision as to which product to
develop is based on the Companys assessment of market
conditions and the restrictions imposed by government
regulations, homestyles and sizes vary from project to project.
The Companys attached housing ranges in size from 868 to
1,825 square feet, and the Companys detached housing
ranges from 1,231 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. Prices for the Companys attached
housing range from approximately $165,000 to $319,000 and prices
for detached housing range from approximately $100,000 to
$893,000. The average sales price of the Companys homes
for the year ended December 31, 2001 was $299,300.

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

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

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

5



---



##### 



Description of Projects

The Companys homebuilding projects usually
take two to five years to develop. The following table presents
project information relating to each of the Companys
homebuilding divisions.

|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   |  | 
|--------------------------------------------------------- | ----------------------------------- | -------- | ---- | ------------- |  | ------------ | ----- | ------------ |  | -------------- | ----- | ------------ |  | ----------- | --- | --- |  |  | --- | --- |  |  | --- | --- |  | - | ----------------- |  | 
|                                                          |                                     |          |      |               |  | Units        |       | Lots         |  | Homes Closed   |       |              |  |            
|                                                          |                                     |          |      | Estimated     |  | Closed       |       | Owned        |  | for the Period |       | Backlog      |  |            
|                                                          |                                     | Year of  |      | Number of     |  | as of        |       | as of        |  | Ended          |       | at           |  |            
|                                                          |                                     | First    |      | Homes at      |  | December 31, |       | December 31, |  | December 31,   |       | December 31, |  | Sales Price
|Project (County) Product                                  |                                     | Delivery |      | Completion(1) |  | 2001         |       | 2001         |  | 2001           |       | 2001(2)(4)   |  | Range(3)   
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |            
|SOUTHERN CALIFORNIA                                      
|                                                         
|Wholly-owned:                                             |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|                                                         
|Oak Park II  Irvine
	(Orange County)                     |                                     |          | 1998 |               |  |              | 102   |              |  |                | 102   |              |  |             | 0   |     |  |  | 30  |     |  |  | 0   |     |  | $ | 165,000  251,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Solana at Talega
	(Orange County)                         |                                     |          | 1999 |               |  |              | 120   |              |  |                | 120   |              |  |             | 0   |     |  |  | 29  |     |  |  | 0   |     |  | $ | 285,000  355,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Lyon Vineyard
	(San Bernardino County)                    |                                     |          | 2000 |               |  |              | 100   |              |  |                | 100   |              |  |             | 0   |     |  |  | 11  |     |  |  | 0   |     |  | $ | 218,000  253,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Lyon Orchard
	(San Bernardino County)                     |                                     |          | 2000 |               |  |              | 81    |              |  |                | 81    |              |  |             | 0   |     |  |  | 2   |     |  |  | 0   |     |  | $ | 171,000  200,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Archibald Ranch
	(San Bernardino County)                  |                                     |          | 2000 |               |  |              | 113   |              |  |                | 113   |              |  |             | 0   |     |  |  | 92  |     |  |  | 0   |     |  | $ | 208,000  252,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Crown Ridge  Palmdale (Los Angeles
	County)              |                                     |          | 2000 |               |  |              | 71    |              |  |                | 71    |              |  |             | 0   |     |  |  | 45  |     |  |  | 0   |     |  | $ | 160,000  185,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Andover  West Irvine (Orange County)                     |                                     |          | 2001 |               |  |              | 138   |              |  |                | 73    |              |  |             | 65  |     |  |  | 73  |     |  |  | 16  |     |  | $ | 264,000  302,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Terraza at Vista del Verde  Yorba
	Linda (Orange County) |                                     |          | 2001 |               |  |              | 106   |              |  |                | 23    |              |  |             | 83  |     |  |  | 23  |     |  |  | 11  |     |  | $ | 500,000  550,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Providence Ranch
	(Riverside County)                      |                                     |          | 2001 |               |  |              | 97    |              |  |                | 92    |              |  |             | 5   |     |  |  | 92  |     |  |  | 0   |     |  | $ | 210,000  245,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Cantada  Oxnard
	(Ventura County)                        |                                     |          | 2002 |               |  |              | 113   |              |  |                | 27    |              |  |             | 86  |     |  |  | 27  |     |  |  | 39  |     |  | $ | 303,000  323,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Monticello  North Park Square
	(Orange County)           |                                     |          | 2002 |               |  |              | 112   |              |  |                | 0     |              |  |             | 56  |     |  |  | 0   |     |  |  | 24  |     |  | $ | 263,000  319,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Montellano at Talega (Orange County)                      |                                     |          | 2002 |               |  |              | 61    |              |  |                | 0     |              |  |             | 61  |     |  |  | 0   |     |  |  | 0   |     |  | $ | 710,000  765,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Sterling Glen at Ladera Ranch (Orange County)             |                                     |          | 2002 |               |  |              | 102   |              |  |                | 0     |              |  |             | 102 |     |  |  | 0   |     |  |  | 22  |     |  | $ | 410,000  447,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|                                                          | Total wholly-owned                  |          |      |               |  |              |       | 1,316        |  |                |       | 802          |  |             |     | 458 |  |  |     | 424 |  |  |     | 112 |  |   |                   |  | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Unconsolidated joint
	ventures:                           |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |    
|White Cloud Estates (Ventura County)                      |                                     |          | 1999 |               |  |              | 78    |              |  |                | 78    |              |  |             | 0   |     |  |  | 1   |     |  |  | 0   |     |  | $ | 302,000  350,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Lyon Monterrey
	(Orange County)                           |                                     |          | 1999 |               |  |              | 99    |              |  |                | 99    |              |  |             | 0   |     |  |  | 24  |     |  |  | 0   |     |  | $ | 360,000  428,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Reston at Ladera Ranch (Orange County)                    |                                     |          | 2000 |               |  |              | 117   |              |  |                | 102   |              |  |             | 15  |     |  |  | 86  |     |  |  | 10  |     |  | $ | 365,000  425,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Hampton Road at Ladera Ranch (Orange County)              |                                     |          | 2000 |               |  |              | 82    |              |  |                | 63    |              |  |             | 19  |     |  |  | 63  |     |  |  | 3   |     |  | $ | 447,000  477,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Compass Pointe at Forster Ranch (Orange County)           |                                     |          | 2000 |               |  |              | 92    |              |  |                | 81    |              |  |             | 11  |     |  |  | 60  |     |  |  | 5   |     |  | $ | 540,000  575,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Avalon at Summerlane (Orange County)                      |                                     |          | 2000 |               |  |              | 113   |              |  |                | 109   |              |  |             | 4   |     |  |  | 81  |     |  |  | 3   |     |  | $ | 445,000  490,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Beachside  Huntington Beach (Orange
	County)             |                                     |          | 2001 |               |  |              | 86    |              |  |                | 7     |              |  |             | 79  |     |  |  | 7   |     |  |  | 31  |     |  | $ | 520,000  570,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Quintana (Ventura County)                                 |                                     |          | 2001 |               |  |              | 90    |              |  |                | 8     |              |  |             | 82  |     |  |  | 8   |     |  |  | 1   |     |  | $ | 475,000  610,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Coronado  Oxnard (Ventura County)                        |                                     |          | 2002 |               |  |              | 110   |              |  |                | 0     |              |  |             | 110 |     |  |  | 0   |     |  |  | 0   |     |  | $ | 335,000  355,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Cantabria  Oxnard (Ventura County)                       |                                     |          | 2002 |               |  |              | 87    |              |  |                | 0     |              |  |             | 87  |     |  |  | 0   |     |  |  | 0   |     |  | $ | 275,000  300,000 | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|Moorpark
	(Los Angeles County)                            |                                     |          | 2002 |               |  |              | 70    |              |  |                | 0     |              |  |             | 70  |     |  |  | 0   |     |  |  | 0   |     |  |   |                   | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|                                                          | Total unconsolidated joint ventures |          |      |               |  |              |       | 1,024        |  |                |       | 547          |  |             |     | 477 |  |  |     | 330 |  |  |     | 53  |  |   |                   |  | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 
|SOUTHERN CALIFORNIA REGION TOTAL                          |                                     |          |      |               |  |              | 2,340 |              |  |                | 1,349 |              |  |             | 935 |     |  |  | 754 |     |  |  | 165 |     |  |   |                   | 
|                                                          |                                     |          |      |               |  |              |       |              |  |                |       |              |  |             |     |     |  |  |     |     |  |  |     |     |  |   |                   | 

6



---



##### 



|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                   |  | 
|------------------------------------------------ | --------------- | ----------------------------------- | ---- | ------------- |  | ------------ | ----- | ------------ | ----- | -------------- | ----- | ------------ | --- | ----------- | ----- | --- | ----- |  | --- | -- | --- |  | -- | - | -- | - | ----------------- | ----------------- |  | 
|                                                 |                 |                                     |      |               |  | Units        |       | Lots         |       | Homes Closed   |       |              |     |            
|                                                 |                 |                                     |      | Estimated     |  | Closed       |       | Owned        |       | for the Period |       | Backlog      |     |            
|                                                 |                 | Year of                             |      | Number of     |  | as of        |       | as of        |       | Ended          |       | at           |     |            
|                                                 |                 | First                               |      | Homes at      |  | December 31, |       | December 31, |       | December 31,   |       | December 31, |     | Sales Price
|Project (County) Product                         |                 | Delivery                            |      | Completion(1) |  | 2001         |       | 2001         |       | 2001           |       | 2001(2)(4)   |     | Range(3)   
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |            
|NORTHERN CALIFORNIA                             
|Wholly-owned:                                    |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|St. Helena Westminster Estates (Napa County)     |                 |                                     | 1999 |               |  |              | 23    |              |       |                | 23    |              |     |             | 0     |     |       |  | 1   |    |     |  | 0  |   |    | $ | 495,000  565,000 |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Lyon Villas
	(San Joaquin County)                |                 |                                     | 1999 |               |  |              | 135   |              |       |                | 84    |              |     |             | 51    |     |       |  | 12  |    |     |  | 0  |   |    | $ | 203,000  279,000 |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Lyon Estates
	(San Joaquin County)               |                 |                                     | 1997 |               |  |              | 120   |              |       |                | 83    |              |     |             | 37    |     |       |  | 16  |    |     |  | 3  |   |    | $ | 291,000  327,000 |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Lyon Ironwood
	(San Joaquin County)              |                 |                                     | 2000 |               |  |              | 116   |              |       |                | 81    |              |     |             | 23    |     |       |  | 81  |    |     |  | 5  |   |    | $ | 209,000  297,000 |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Lyon Edgewood
	(San Joaquin County)              |                 |                                     | 2000 |               |  |              | 87    |              |       |                | 87    |              |     |             | 0     |     |       |  | 10  |    |     |  | 0  |   |    | $ | 198,000  287,000 |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Lyon Edgewood 2
	(San Joaquin County)            |                 |                                     | 2000 |               |  |              | 65    |              |       |                | 65    |              |     |             | 0     |     |       |  | 44  |    |     |  | 0  |   |    | $ | 233,000  279,000 |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Lyon Rhapsody
	(Contra Costa County)             |                 |                                     | 2001 |               |  |              | 81    |              |       |                | 43    |              |     |             | 38    |     |       |  | 43  |    |     |  | 9  |   |    | $ | 236,000  295,000 |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Lyon Estates at Stonebridge (San Joaquin County) |                 |                                     | 2001 |               |  |              | 103   |              |       |                | 23    |              |     |             | 41    |     |       |  | 23  |    |     |  | 5  |   |    | $ | 261,000  329,000 |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Lyon Palazzo
	(Sacramento County)                |                 |                                     | 2001 |               |  |              | 100   |              |       |                | 38    |              |     |             | 62    |     |       |  | 38  |    |     |  | 11 |   |    | $ | 266,000  301,000 |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Lyon Seasons
	(Stanislaus County)                |                 |                                     | 2002 |               |  |              | 71    |              |       |                | 0     |              |     |             | 71    |     |       |  | 0   |    |     |  | 0  |   |    |   |                   |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Yamanaka  Brentwood (Contra Costa
	County)      |                 |                                     | 2002 |               |  |              | 214   |              |       |                | 0     |              |     |             | 214   |     |       |  | 0   |    |     |  | 0  |   |    |   |                   |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Victoria P2  Hercules (Contra Costa
	County)    |                 |                                     | 2002 |               |  |              | 70    |              |       |                | 0     |              |     |             | 70    |     |       |  | 0   |    |     |  | 0  |   |    |   |                   |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Victoria P3  Hercules (Contra Costa
	County)    |                 |                                     | 2002 |               |  |              | 99    |              |       |                | 0     |              |     |             | 99    |     |       |  | 0   |    |     |  | 0  |   |    |   |                   |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|                                                 |                 | Total wholly-owned                  |      |               |  |              |       |              | 1,284 |                |       |              | 527 |             |       |     | 706   |  |     |    | 268 |  |    |   | 33 |   |                   |                   |  | 
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Unconsolidated joint ventures:                   |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |  
|The Ranch at Silver Creek (Santa Clara County)   |                 |                                     | 2002 |               |  |              | 538   |              |       |                | 0     |              |     |             | 538   |     |       |  | 0   |    |     |  | 0  |   |    |   |                   |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Lyon Groves
	(Contra Costa County)               |                 |                                     | 1999 |               |  |              | 103   |              |       |                | 103   |              |     |             | 0     |     |       |  | 20  |    |     |  | 0  |   |    | $ | 269,000  353,000 |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Lyon Ridge
	(Contra Costa County)                |                 |                                     | 1999 |               |  |              | 127   |              |       |                | 126   |              |     |             | 1     |     |       |  | 72  |    |     |  | 1  |   |    | $ | 348,000  407,000 |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Manor at Thomas Ranch (Contra Costa County)      |                 |                                     | 1999 |               |  |              | 63    |              |       |                | 63    |              |     |             | 0     |     |       |  | 1   |    |     |  | 0  |   |    | $ | 544,000  657,000 |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Plantation at Thomas Ranch (Contra Costa County) |                 |                                     | 1999 |               |  |              | 77    |              |       |                | 77    |              |     |             | 0     |     |       |  | 22  |    |     |  | 0  |   |    | $ | 643,000  799,000 |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Henry Ranch
	(Contra Costa County)               |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|                                                 | Lyon Tierra     |                                     |      | 2001          |  |              |       | 46           |       |                |       | 31           |     |             |       | 15  |       |  |     | 31 |     |  |    | 5 |    |   | $                 | 463,000  569,000 | 
|                                                 | Lyon Dorado     |                                     |      | 2001          |  |              |       | 54           |       |                |       | 21           |     |             |       | 33  |       |  |     | 21 |     |  |    | 5 |    |   | $                 | 778,000  893,000 | 
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|                                                 |                 |                                     |      |               |  |              | 100   |              |       |                | 52    |              |     |             | 48    |     |       |  | 52  |    |     |  | 10 |   |    |   |                   |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Woodlake Estates
	(Solano County)                |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|                                                 | Paradise Valley |                                     |      | 2003          |  |              |       | 9            |       |                |       | 0            |     |             |       | 9   |       |  |     | 0  |     |  |    | 0 |    |   | $                 | 353,000  378,000 | 
|                                                 | Brook           |                                     |      | 2001          |  |              |       | 121          |       |                |       | 23           |     |             |       | 98  |       |  |     | 23 |     |  |    | 2 |    |   | $                 | 278,000  341,000 | 
|                                                 | Falls           |                                     |      | 2001          |  |              |       | 102          |       |                |       | 35           |     |             |       | 67  |       |  |     | 35 |     |  |    | 6 |    |   | $                 | 332,000  386,000 | 
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|                                                 |                 |                                     |      |               |  |              | 232   |              |       |                | 58    |              |     |             | 174   |     |       |  | 58  |    |     |  | 8  |   |    |   |                   |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|Stonebriar
	(El Dorado County)                   |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|                                                 | Lyon Casina     |                                     |      | 2001          |  |              |       | 123          |       |                |       | 7            |     |             |       | 116 |       |  |     | 7  |     |  |    | 3 |    |   | $                 | 316,000  376,000 | 
|                                                 | Lyon Prima      |                                     |      | 2001          |  |              |       | 137          |       |                |       | 5            |     |             |       | 132 |       |  |     | 5  |     |  |    | 3 |    |   | $                 | 376,000  421,000 | 
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|                                                 |                 |                                     |      |               |  |              | 260   |              |       |                | 12    |              |     |             | 248   |     |       |  | 12  |    |     |  | 6  |   |    |   |                   |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|                                                 |                 | Total unconsolidated joint ventures |      |               |  |              |       |              | 1,500 |                |       |              | 491 |             |       |     | 1,009 |  |     |    | 237 |  |    |   | 25 |   |                   |                   |  | 
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  
|NORTHERN CALIFORNIA REGION TOTAL                 |                 |                                     |      |               |  |              | 2,784 |              |       |                | 1,018 |              |     |             | 1,715 |     |       |  | 505 |    |     |  | 58 |   |    |   |                   |                  
|                                                 |                 |                                     |      |               |  |              |       |              |       |                |       |              |     |             |       |     |       |  |     |    |     |  |    |   |    |   |                   |                  

7



---



##### 



|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                   |  | 
|---------------------------------------------------------------------- | ------------------------ | ----------------------------------- | ---- | ------------- |  | ------------ | ----- | ------------ | ----- | -------------- | ----- | ------------ | ----- | ----------- | --- | --- | --- |  | --- | --- | --- |  | -- | -- | -- | - | ----------------- | ----------------- |  | 
|                                                                       |                          |                                     |      |               |  | Units        |       | Lots         |       | Homes Closed   |       |              |       |            
|                                                                       |                          |                                     |      | Estimated     |  | Closed       |       | Owned        |       | for the Period |       | Backlog      |       |            
|                                                                       |                          | Year of                             |      | Number of     |  | as of        |       | as of        |       | Ended          |       | at           |       |            
|                                                                       |                          | First                               |      | Homes at      |  | December 31, |       | December 31, |       | December 31,   |       | December 31, |       | Sales Price
|Project (County) Product                                               |                          | Delivery                            |      | Completion(1) |  | 2001         |       | 2001         |       | 2001           |       | 2001(2)(4)   |       | Range(3)   
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |            
|SAN DIEGO                                                             
|Wholly-owned:                                                          |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|Horsethief Canyon Ranch (Riverside County)
	Previously Closed Products |                          |                                     | 1989 |               |  |              | 963   |              |       |                | 963   |              |       |             | 0   |     |     |  | 0   |     |     |  | 0  |    |    |   |                   |                  
|                                                                       | Series 400             |                                     |      | 1995          |  |              |       | 554          |       |                |       | 456          |       |             |     | 98  |     |  |     | 105 |     |  |    | 10 |    |   | $                 | 194,000  221,000 | 
|                                                                       | Series 500             |                                     |      | 1995          |  |              |       | 445          |       |                |       | 410          |       |             |     | 35  |     |  |     | 78  |     |  |    | 22 |    |   | $                 | 226,000  250,000 | 
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|                                                                       |                          |                                     |      |               |  |              | 1,962 |              |       |                | 1,829 |              |       |             | 133 |     |     |  | 183 |     |     |  | 32 |    |    |   |                   |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|Sycamore Ranch
	(Riverside County)                                     |                          |                                     | 1997 |               |  |              | 195   |              |       |                | 117   |              |       |             | 78  |     |     |  | 15  |     |     |  | 5  |    |    | $ | 431,000  560,000 |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|Vail Ranch
	(San Diego County)                                         |                          |                                     | 2000 |               |  |              | 152   |              |       |                | 151   |              |       |             | 1   |     |     |  | 84  |     |     |  | 0  |    |    | $ | 196,000  213,000 |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|East Grove
	(San Diego County)                                         |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|                                                                       | The Groves (Village A)   |                                     |      | 2001          |  |              |       | 26           |       |                |       | 3            |       |             |     | 23  |     |  |     | 3   |     |  |    | 3  |    |   | $                 | 295,000  318,000 | 
|                                                                       | The Orchards (Village B) |                                     |      | 2002          |  |              |       | 16           |       |                |       | 0            |       |             |     | 16  |     |  |     | 0   |     |  |    | 0  |    |   | $                 | 322,000  362,000 | 
|                                                                       | Vineyards                |                                     |      | 2002          |  |              |       | 75           |       |                |       | 0            |       |             |     | 75  |     |  |     | 0   |     |  |    | 0  |    |   | $                 | 376,000  416,000 | 
|                                                                       | Village D                |                                     |      | 2002          |  |              |       | 42           |       |                |       | 0            |       |             |     | 42  |     |  |     | 0   |     |  |    | 0  |    |   | $                 | 378,000  428,000 | 
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|                                                                       |                          |                                     |      |               |  |              | 159   |              |       |                | 3     |              |       |             | 156 |     |     |  | 3   |     |     |  | 3  |    |    |   |                   |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|Rancho Dorado
	(San Diego County)                                      |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|                                                                       | La Fuente                |                                     |      | 2000          |  |              |       | 56           |       |                |       | 56           |       |             |     | 0   |     |  |     | 20  |     |  |    | 0  |    |   | $                 | 299,000  322,000 | 
|                                                                       | Loma Real                |                                     |      | 2000          |  |              |       | 87           |       |                |       | 69           |       |             |     | 18  |     |  |     | 50  |     |  |    | 5  |    |   | $                 | 403,000  446,000 | 
|                                                                       | Los Reyes                |                                     |      | 2000          |  |              |       | 68           |       |                |       | 40           |       |             |     | 28  |     |  |     | 40  |     |  |    | 9  |    |   | $                 | 445,000  470,000 | 
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|                                                                       |                          |                                     |      |               |  |              | 211   |              |       |                | 165   |              |       |             | 46  |     |     |  | 110 |     |     |  | 14 |    |    |   |                   |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|                                                                       |                          | Total wholly-owned                  |      |               |  |              |       |              | 2,679 |                |       |              | 2,265 |             |     |     | 414 |  |     |     | 395 |  |    |    | 54 |   |                   |                   |  | 
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|Unconsolidated joint
	ventures:                                        |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |   
|Otay Ranch  Saratoga Trails (San Diego
	County)                       |                          |                                     | 1999 |               |  |              | 74    |              |       |                | 74    |              |       |             | 0   |     |     |  | 7   |     |     |  | 0  |    |    | $ | 261,000  276,000 |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|Otay Ranch  Mendocino (San Diego
	County)                             |                          |                                     | 1999 |               |  |              | 139   |              |       |                | 139   |              |       |             | 0   |     |     |  | 33  |     |     |  | 0  |    |    | $ | 222,000  242,000 |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|Otay Ranch  (R-29)
	(San Diego County)                                |                          |                                     | 2001 |               |  |              | 83    |              |       |                | 45    |              |       |             | 38  |     |     |  | 45  |     |     |  | 5  |    |    | $ | 260,000  271,000 |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|Rancho Dorado
	(San Diego County)                                      |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|                                                                       | Monte Verde              |                                     |      | 2000          |  |              |       | 65           |       |                |       | 65           |       |             |     | 0   |     |  |     | 45  |     |  |    | 0  |    |   | $                 | 357,000  404,000 | 
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|East Grove
	(San Diego County)                                         |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|                                                                       | The Groves (Village A)   |                                     |      | 2001          |  |              |       | 70           |       |                |       | 3            |       |             |     | 67  |     |  |     | 3   |     |  |    | 0  |    |   | $                 | 295,000  318,000 | 
|                                                                       | The Orchards (Village B) |                                     |      | 2002          |  |              |       | 62           |       |                |       | 0            |       |             |     | 62  |     |  |     | 0   |     |  |    | 0  |    |   | $                 | 322,000  362,000 | 
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|                                                                       |                          |                                     |      |               |  |              | 132   |              |       |                | 3     |              |       |             | 129 |     |     |  | 3   |     |     |  | 0  |    |    |   |                   |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|4S Ranch  Providence (San Diego County)                               |                          |                                     | 2001 |               |  |              | 123   |              |       |                | 5     |              |       |             | 118 |     |     |  | 5   |     |     |  | 14 |    |    | $ | 530,000  570,000 |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|4S Ranch
	(San Diego County)                                           |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|                                                                       | Tanglewood               |                                     |      | 2002          |  |              |       | 161          |       |                |       | 0            |       |             |     | 161 |     |  |     | 0   |     |  |    | 0  |    |   |                   |                   | 
|                                                                       | Summerwood               |                                     |      | 2002          |  |              |       | 95           |       |                |       | 0            |       |             |     | 95  |     |  |     | 0   |     |  |    | 0  |    |   |                   |                   | 
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|                                                                       |                          |                                     |      |               |  |              | 256   |              |       |                | 0     |              |       |             | 256 |     |     |  | 0   |     |     |  | 0  |    |    |   |                   |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|                                                                       |                          | Total unconsolidated joint ventures |      |               |  |              |       |              | 872   |                |       |              | 331   |             |     |     | 541 |  |     |     | 138 |  |    |    | 19 |   |                   |                   |  | 
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|SAN DIEGO REGION TOTAL                                                 |                          |                                     |      |               |  |              | 3,551 |              |       |                | 2,596 |              |       |             | 955 |     |     |  | 533 |     |     |  | 73 |    |    |   |                   |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|ARIZONA                                                               
|Wholly-owned:                                                          |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|Crystal Gardens
	(Maricopa County)                                     |                          |                                     | 1997 |               |  |              | 157   |              |       |                | 157   |              |       |             | 0   |     |     |  | 14  |     |     |  | 0  |    |    | $ | 100,000  130,000 |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|Sage Creek  Encanto (Maricopa County)                                 |                          |                                     | 2000 |               |  |              | 176   |              |       |                | 163   |              |       |             | 10  |     |     |  | 110 |     |     |  | 6  |    |    | $ | 110,000  123,000 |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  
|Sage Creek  Arcadia (Maricopa
	County)                                |                          |                                     | 2000 |               |  |              | 167   |              |       |                | 103   |              |       |             | 34  |     |     |  | 70  |     |     |  | 26 |    |    | $ | 136,000  160,000 |                  
|                                                                       |                          |                                     |      |               |  |              |       |              |       |                |       |              |       |             |     |     |     |  |     |     |     |  |    |    |    |   |                   |                  

8



---



##### 



|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   |  | 
|---------------------------------------------- | ----------------------------- | -------- | ---- | ------------- |  | ------------ | ------ | ------------ |  | -------------- | ----- | ------------ |  | ----------- | ----- | ----- |  |  | ----- | ----- |  |  | --- | --- |  | - | ----------------- |  | 
|                                               |                               |          |      |               |  | Units        |        | Lots         |  | Homes Closed   |       |              |  |            
|                                               |                               |          |      | Estimated     |  | Closed       |        | Owned        |  | for the Period |       | Backlog      |  |            
|                                               |                               | Year of  |      | Number of     |  | as of        |        | as of        |  | Ended          |       | at           |  |            
|                                               |                               | First    |      | Homes at      |  | December 31, |        | December 31, |  | December 31,   |       | December 31, |  | Sales Price
|Project (County) Product                       |                               | Delivery |      | Completion(1) |  | 2001         |        | 2001         |  | 2001           |       | 2001(2)(4)   |  | Range(3)   
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |            
|Sage Creek  Solano (Maricopa
	County)         |                               |          | 2000 |               |  |              | 82     |              |  |                | 59    |              |  |             | 21    |       |  |  | 44    |       |  |  | 14  |     |  | $ | 169,000  191,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Mesquite Grove  Small (Maricopa County)       |                               |          | 2001 |               |  |              | 112    |              |  |                | 2     |              |  |             | 110   |       |  |  | 2     |       |  |  | 21  |     |  | $ | 183,000  224,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Mesquite Grove  Large (Maricopa County)       |                               |          | 2001 |               |  |              | 93     |              |  |                | 2     |              |  |             | 91    |       |  |  | 2     |       |  |  | 21  |     |  | $ | 283,000  318,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Rio Del Verde
	(Maricopa County)               |                               |          | 2000 |               |  |              | 84     |              |  |                | 84    |              |  |             | 0     |       |  |  | 49    |       |  |  | 0   |     |  | $ | 165,000  201,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Power Ranch
	(Maricopa County)                 |                               |          | 2001 |               |  |              | 103    |              |  |                | 3     |              |  |             | 100   |       |  |  | 3     |       |  |  | 25  |     |  | $ | 175,000  232,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Tramonto
	(Maricopa County)                    |                               |          | 2001 |               |  |              | 76     |              |  |                | 2     |              |  |             | 74    |       |  |  | 2     |       |  |  | 5   |     |  | $ | 186,000  247,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Tramonto II
	(Maricopa County)                 |                               |          | 2002 |               |  |              | 114    |              |  |                | 0     |              |  |             | 114   |       |  |  | 0     |       |  |  | 0   |     |  |   |                   | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Country Place
	(Maricopa County)               |                               |          | 2001 |               |  |              | 115    |              |  |                | 2     |              |  |             | 28    |       |  |  | 2     |       |  |  | 0   |     |  | $ | 109,000  131,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Mountaingate
	(Maricopa County)                |                               |          | 2002 |               |  |              | 341    |              |  |                | 0     |              |  |             | 341   |       |  |  | 0     |       |  |  | 0   |     |  |   |                   | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|ARIZONA REGION TOTAL                           |                               |          |      |               |  |              | 1,620  |              |  |                | 577   |              |  |             | 923   |       |  |  | 298   |       |  |  | 118 |     |  |   |                   | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|NEVADA                                        
|Wholly-owned:                                  |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Bella Veranda
	(Clark County)                  |                               |          | 2000 |               |  |              | 79     |              |  |                | 79    |              |  |             | 0     |       |  |  | 39    |       |  |  | 0   |     |  | $ | 253,000  278,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Montecito Tesoro
	(Clark County)               |                               |          | 2000 |               |  |              | 121    |              |  |                | 120   |              |  |             | 1     |       |  |  | 98    |       |  |  | 1   |     |  | $ | 163,000  181,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Montecito Classico
	(Clark County)             |                               |          | 2000 |               |  |              | 100    |              |  |                | 72    |              |  |             | 28    |       |  |  | 59    |       |  |  | 28  |     |  | $ | 192,000  227,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Kingsway Ridge I
	(Clark County)               |                               |          | 2000 |               |  |              | 90     |              |  |                | 90    |              |  |             | 0     |       |  |  | 52    |       |  |  | 0   |     |  | $ | 172,000  185,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Kingsway Ridge II
	(Clark County)              |                               |          | 2000 |               |  |              | 67     |              |  |                | 67    |              |  |             | 0     |       |  |  | 50    |       |  |  | 0   |     |  | $ | 191,000  217,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Glenleigh Gardens at Summerlin
	(Clark County) |                               |          | 2000 |               |  |              | 96     |              |  |                | 74    |              |  |             | 22    |       |  |  | 65    |       |  |  | 19  |     |  | $ | 246,000  276,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Springfield at Summerlin (Clark County)        |                               |          | 2001 |               |  |              | 85     |              |  |                | 44    |              |  |             | 41    |       |  |  | 44    |       |  |  | 23  |     |  | $ | 208,000  228,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Topaz Ridge at Summerlin (Clark County)        |                               |          | 2002 |               |  |              | 89     |              |  |                | 0     |              |  |             | 12    |       |  |  | 0     |       |  |  | 8   |     |  | $ | 480,000  538,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Stallion Mountain
	(Clark County)              |                               |          | 2001 |               |  |              | 116    |              |  |                | 56    |              |  |             | 60    |       |  |  | 56    |       |  |  | 13  |     |  | $ | 154,000  174,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Fairfield at Summerlin (Clark County)          |                               |          | 2001 |               |  |              | 89     |              |  |                | 9     |              |  |             | 24    |       |  |  | 9     |       |  |  | 33  |     |  | $ | 266,000  292,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|Annendale
	(Clark County)                      |                               |          | 2001 |               |  |              | 194    |              |  |                | 4     |              |  |             | 190   |       |  |  | 4     |       |  |  | 3   |     |  | $ | 149,000  172,000 | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|NEVADA REGION TOTAL                            |                               |          |      |               |  |              | 1,126  |              |  |                | 615   |              |  |             | 378   |       |  |  | 476   |       |  |  | 128 |     |  |   |                   | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|GRAND TOTALS:                                  |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|                                               | Wholly-owned                  |          |      |               |  |              |        | 8,025        |  |                |       | 4,786        |  |             |       | 2,879 |  |  |       | 1,861 |  |  |     | 445 |  |   |                   |  | 
|                                               | Unconsolidated joint ventures |          |      |               |  |              |        | 3,396        |  |                |       | 1,369        |  |             |       | 2,027 |  |  |       | 705   |  |  |     | 97  |  |   |                   |  | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 
|                                               |                               |          |      |               |  |              | 11,421 |              |  |                | 6,155 |              |  |             | 4,906 |       |  |  | 2,566 |       |  |  | 542 |     |  |   |                   | 
|                                               |                               |          |      |               |  |              |        |              |  |                |       |              |  |             |       |       |  |  |       |       |  |  |     |     |  |   |                   | 




|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The estimated number of homes to be built at
	completion is subject to change, and there can be no assurance
	that the Company will build these homes.    
|   
|(2) | Backlog consists of homes sold under sales
	contracts that have not yet closed, and there can be no
	assurance that closings of sold homes will occur.    
|   
|(3) | Sales price range reflects base price only and
	excludes any lot premium, buyer incentive and buyer selected
	options, which vary from project to project.

9



---



##### 





|    |                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Of the total homes subject to pending sales
	contracts as of December 31, 2001, 493 represent homes
	completed or under construction and 49 represent homes not yet
	under construction.

Sales and Marketing

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

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

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

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

The Companys homes are typically sold
before or during construction through sales contracts which are
usually accompanied by a small cash deposit. Such sales
contracts are usually subject to certain contingencies such as
the buyers ability to qualify for financing. The
cancellation rate of buyers who contracted to buy a home but did
not close escrow at the Companys projects was
approximately 24% during 2001. Cancellation rates are
subject to a variety of factors beyond the Companys
control such as adverse economic conditions and increases in
mortgage interest rates.

The Company generally provides a one-year limited
warranty of workmanship and materials with each of its homes.
The Company normally reserves one-half to one percent of the
sales price of its homes against the possibility of future
charges relating to its one-year limited warranty and similar
potential claims. The Companys historical experience is
that one-year warranty claims generally fall within the one-half
to one percent reserve. In addition, California law provides
that consumers can seek redress for patent defects in new homes
within four years from when the defect is discovered, or
should have been discovered, provided that if the defect is
latent there is an outside limit for seeking redress which is
ten years from the completion of construction. Consumers
purchasing homes in Arizona and Nevada may also be able to
obtain redress under state laws for either patent or latent
defects in their new homes after the one year warranty has
expired. In addition, because the Company generally subcontracts
its homebuilding work to qualified subcontractors who generally
provide the Company with an indemnity and a certificate of
insurance prior to receiving payment from the Company for their
work, the Company generally has recourse against the
subcontractors or their insurance carriers for claims relating
to the subcontractors workmanship or materials. However,
there can be no assurance that claims will not arise out of
matters such as landslides, soil subsidence or earthquakes that
are uninsurable, not economically insurable or not subject to
effective indemnification agreements.

10



---



##### 



Customer Financing  Duxford
Financial, Inc.

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

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

Sale of Lots and Land

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

Information Systems and Controls

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

Competition

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

Governmental Regulations and Environmental
Matters

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

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

11



---



##### 



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

Corporate Organization and Personnel

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

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

As of December 31, 2001, the Companys
real estate development and homebuilding operations employed
approximately 497 full-time and 16 part-time employees,
including corporate staff, supervisory personnel of construction
projects, maintenance crews to service completed projects, as
well as persons engaged in administrative, finance and
accounting, engineering, land acquisition, sales and marketing
activities.

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

Item 2. Properties

Headquarters

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 area offices, design centers and Duxford Financial, Inc.,
but none of these properties is material to the operation of the
Companys business. For information about properties owned
by the Company for use in its homebuilding activities, see
Item 1.

Item 3. Legal Proceedings

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

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

No matters were submitted to the Companys
stockholders during the fourth quarter of 2001.

12



---



##### 



PART II

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

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

|     |                |      |  |         |  |  |  |         | 
|---- | -------------- | ---- |  | ------- |  |  |  | ------- | 
|     |                | High |  | Low    
|     |                |      |  |        
|2000 |                |      |  |         |  |  |  |        
|     | First Quarter  |      |  | 8.3750  |  |  |  | 4.0000  | 
|     | Second Quarter |      |  | 9.8750  |  |  |  | 5.5000  | 
|     | Third Quarter  |      |  | 8.3750  |  |  |  | 5.3750  | 
|     | Fourth Quarter |      |  | 9.3750  |  |  |  | 6.6250  | 
|    
|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 | 

As of February 15, 2002, the closing price
for the Companys Common Stock as reported on the NYSE was
$22.06.

As of February 15, 2002, there were
approximately 2,075 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 as of December 31, 2001. For the period
January 1, 2002 through March 12, 2002, the Company
has repurchased 283,300 shares of its outstanding common
shares for approximately $3,443,000.

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 8 of Notes to Consolidated Financial
Statements.

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.

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

13



---



##### 



Item 6. Selected Financial
Data

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

|                                                           |                                                                           |                                               |                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         | 
|---------------------------------------------------------- | ------------------------------------------------------------------------- | --------------------------------------------- | ----------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                           |                                                                           | 2001                                          |                         | 2000    |         | 1999(1) |   | 1998    |         | 1997   
|                                                           |                                                                           |                                               |                         |         |         |         |   |         |         |        
|                                                           |                                                                           |                                              
|                                                           |                                                                           | (In Thousands Except Per Common Share Amounts
|                                                           |                                                                           | and Number of Homes)                         
|STATEMENT OF OPERATIONS DATA:                              |                                                                           |                                               |                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |        
|                                                           | Operating revenue                                                         |                                               |                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         |        
|                                                           |                                                                           | Home sales                                    |                         | $       | 452,002 |         |   | $       | 403,850 |         |   | $       | 426,839 |         |   | $       | 348,352 |         |   | $       | 307,332 |        
|                                                           |                                                                           | Lots, land and other sales                    |                         |         | 7,054   |         |   |         | 3,016   |         |   |         | 13,142  |         |   |         | 19,930  |         |   |         | 22,610  |        
|                                                           |                                                                           | Management fees(5)                            |                         |         | 9,127   |         |   |         | 10,456  |         |   |         | 4,825   |         |   |         | 2,217   |         |   |         |        |        
|                                                           |                                                                           |                                               |                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |        
|                                                           |                                                                           |                                               | Total operating revenue |         |         | 468,183 |   |         |         | 417,322 |   |         |         | 444,806 |   |         |         | 370,499 |   |         |         | 329,942 | 
|                                                           | Income from unconsolidated joint ventures                                 |                                               |                         | 22,384  |         |         |   | 24,416  |         |         |   | 17,859  |         |         |   | 3,499   |         |         |   |        |        
|                                                           | Operating income (loss)                                                   |                                               |                         | 46,239  |         |         |   | 49,362  |         |         |   | 48,402  |         |         |   | 15,580  |         |         |   | (84,534 | )      
|                                                           | Income (loss) before income taxes and
	extraordinary item                 |                                               |                         | 53,525  |         |         |   | 51,129  |         |         |   | 43,497  |         |         |   | 8,305   |         |         |   | (89,894 | )      
|                                                           | Provision for income taxes                                                |                                               |                         | (5,847  | )       |         |   | (12,357 | )       |         |   | (220    | )       |         |   | (1,191  | )       |         |   |        |        
|                                                           | Income (loss) before extraordinary item                                   |                                               |                         | 47,678  |         |         |   | 38,772  |         |         |   | 43,277  |         |         |   | 7,114   |         |         |   | (89,894 | )      
|                                                           | Extraordinary item-gain from retirement of debt,
	net of applicable taxes |                                               |                         |        |         |         |   | 496     |         |         |   | 4,200   |         |         |   | 2,741   |         |         |   |        |        
|                                                           | Net income (loss)                                                         |                                               | $                       | 47,678  |         |         | $ | 39,268  |         |         | $ | 47,477  |         |         | $ | 9,855   |         |         | $ | (89,894 | )      
|                                                           | Basic earnings (loss) per common share(2):                                |                                               |                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         |        
|                                                           |                                                                           | Before extraordinary item                     |                         | $       | 4.50    |         |   | $       | 3.69    |         |   | $       | 4.15    |         |   | $       | 0.68    |         |   | $       | (8.61   | )      
|                                                           |                                                                           | Extraordinary item                            |                         |         |        |         |   |         | 0.05    |         |   |         | 0.40    |         |   |         | 0.26    |         |   |         |        |        
|                                                           |                                                                           |                                               |                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |        
|                                                           |                                                                           | After extraordinary item                      |                         | $       | 4.50    |         |   | $       | 3.74    |         |   | $       | 4.55    |         |   | $       | 0.94    |         |   | $       | (8.61   | )      
|                                                           | Diluted earnings (loss) per common share(2):                              |                                               |                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         |        
|                                                           |                                                                           | Before extraordinary item                     |                         | $       | 4.44    |         |   | $       | 3.69    |         |   | $       | 4.15    |         |   | $       | 0.68    |         |   | $       | (8.61   | )      
|                                                           |                                                                           | Extraordinary item                            |                         |         |        |         |   |         | 0.05    |         |   |         | 0.40    |         |   |         | 0.26    |         |   |         |        |        
|                                                           |                                                                           |                                               |                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |        
|                                                           |                                                                           | After extraordinary item                      |                         | $       | 4.44    |         |   | $       | 3.74    |         |   | $       | 4.55    |         |   | $       | 0.94    |         |   | $       | (8.61   | )      
|                                                           | Ratio of earnings to fixed charges(3)(4)                                  |                                               |                         | 3.58    |         |         |   | 2.92    |         |         |   | 2.59    |         |         |   | 1.31    |         |         |   |         | (4)    
|BALANCE SHEET DATA:                                        |                                                                           |                                               |                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |        
|                                                           | Real estate inventories                                                   |                                               | $                       | 294,678 |         |         | $ | 214,418 |         |         | $ | 184,271 |         |         | $ | 174,502 |         |         | $ | 255,472 |        
|                                                           | Total assets                                                              |                                               |                         | 433,709 |         |         |   | 330,280 |         |         |   | 278,483 |         |         |   | 246,404 |         |         |   | 285,244 |        
|                                                           | Notes payable                                                             |                                               |                         | 221,470 |         |         |   | 166,910 |         |         |   | 176,630 |         |         |   | 195,393 |         |         |   | 254,935 |        
|                                                           | Stockholders equity (deficit)                                            |                                               |                         | 150,617 |         |         |   | 102,512 |         |         |   | 53,301  |         |         |   | 5,824   |         |         |   | (5,681  | )      
|OPERATING DATA (including unconsolidated joint
	ventures): |                                                                           |                                               |                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |        
|                                                           | Number of homes sold                                                      |                                               |                         | 2,541   |         |         |   | 2,603   |         |         |   | 2,303   |         |         |   | 2,139   |         |         |   | 1,718   |        
|                                                           | Number of homes closed                                                    |                                               |                         | 2,566   |         |         |   | 2,666   |         |         |   | 2,618   |         |         |   | 1,925   |         |         |   | 1,597   |        
|                                                           | Number of homes in escrow at end of period                                |                                               |                         | 542     |         |         |   | 567     |         |         |   | 630     |         |         |   | 617     |         |         |   | 403     |        
|                                                           | Average sales prices of homes closed                                      |                                               | $                       | 299     |         |         | $ | 289     |         |         | $ | 241     |         |         | $ | 202     |         |         | $ | 192     |        




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

14



---



##### 





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Reflects the conversion of each outstanding share
	of The Presley Companies Common Stock into 0.2 share of the
	Companys Common Stock as a result of the merger of The
	Presley Companies with and into the Company. See Notes 2
	and 3 of Notes to Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                       
|   
|(3) | Ratio of earnings to fixed charges is calculated
	by dividing income as adjusted by fixed charges. For this
	purpose, income as adjusted means income (loss)
	before (i) minority partners interest in consolidated
	income (loss) and (ii) income taxes, plus (i) interest
	expense and (ii) amortization of capitalized interest included
	in cost of sales. For this purpose fixed charges
	means (i) interest expense and (ii) interest
	capitalized during the period.                                                                                                                                                
|   
|(4) | Earnings were not adequate to cover fixed charges
	by $25.4 million for the year ended December 31, 1997.
	This deficit, as well as the operating income (loss), include
	the effect of an impairment loss on real estate assets of
	$74 million.                                                                                                                                                                                                                                                                                                                                                                               
|   
|(5) | Prior to January 1, 2000, management fee income
	had been reflected as a reduction of general and administrative
	expense. For the years ended December 31, 2001 and 2000,
	management fee income has been reported as a separate item and
	not reflected as a reduction of general and administrative
	expense. The corresponding amounts of management fee income for
	all prior years reported have been reclassified to conform to
	the presentation for the years ended December 31, 2001 and
	2000. This reclassification did not change the reported amount
	of operating income or net income for any periods presented.

Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations

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

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

The total purchase price consisted of
approximately $42,598,000 in cash and the assumption of
approximately $101,058,000 of liabilities of Old William Lyon
Homes. The acquisition has been accounted for as a purchase and,
accordingly, the purchase price has been allocated based on the
fair value of the assets and liabilities acquired. The excess of
the purchase price over the net assets acquired amounting to
approximately $8,689,000 has been reflected as goodwill and is
being amortized on a straight-line basis over an estimated
useful life of seven years. 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 will no longer be amortized
but will be subject to annual impairment tests in accordance
with Statement No. 142. The Company will apply the new rule
on accounting for goodwill beginning in the first quarter of
2002. Application of the nonamortization provisions of Statement
No. 142 is expected to result in an increase in net income
of approximately $800,000 ($0.08 per share) per year. During
2002, the Company will perform the first of the required
impairment tests of goodwill as of January 1, 2002 and has
not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.

After the acquisition described above and prior
to the effectiveness of the merger as described below, William
Lyon and a trust of which William H. Lyon is the
beneficiary acquired (1) 5,741,454 shares of the
Companys Series A Common Stock for $0.655 per share
in a tender offer for the purchase of up to
10,678,792 shares of the Companys Series A
Common Stock which closed on November 5, 1999 and
(2) 14,372,150 shares of the Companys Series B
Common Stock for $0.655 per share under agreements with certain
holders of the Companys Series B Common Stock which
closed on November 8, 1999. On

15



---



##### 



November 5, 1999 William Lyon and the
Company cancelled all of William Lyons outstanding options
to purchase 750,000 shares of the Companys
Series A Common Stock. The completion of these
transactions, together with the previous disposition on
August 12, 1999 of 3,000,000 shares by William Lyon and a
trust of which William H. Lyon is the beneficiary, resulted
in William Lyon and a trust of which William H. Lyon is a
beneficiary owning approximately 49.9% of the Companys
outstanding Common Stock. The foregoing number of shares does
not reflect the subsequent merger and the conversion of each
share of Series A and Series B Common Stock into 0.2
share of common stock as described in Note 2 of Notes
to Consolidated Financial Statements.


The Company changed its operating strategy during
1997 to finance certain projects by forming joint ventures with
venture partners that would provide a substantial portion of the
capital necessary to develop these projects. The Company
believes that the use of joint venture partnerships better
enables it to reduce its capital investments and risks in the
highly capital intensive California markets. The Company
generally receives, after priority returns and capital
distributions to its partners, approximately 50% of the profits
and losses, and cash flows from joint ventures.

As of December 31, 2001, the Company and
certain of its subsidiaries are general partners or members in
25 joint ventures involved in the development and sale of
residential projects. Such joint ventures are 50% or less owned
and, accordingly, the financial statements of such joint
ventures are not consolidated in the preparation of the
Companys financial statements. The Companys
investments in unconsolidated joint ventures are accounted for
using the equity method. See Note 7 of Notes to
Consolidated Financial Statements for condensed combined
financial information for these joint ventures. Based upon
current estimates, substantially all future development and
construction costs will be funded by the Companys joint
venture partners or from the proceeds of construction financing
obtained by the joint ventures.

At December 31, 2001 the Company had net
operating loss carryforwards for Federal tax purposes of
approximately $8.5 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 offset $3.2 million of taxable income per year;
however, any unused losses in any year may be carried forward
for utilization in future years through 2011. The Companys
ability to utilize the foregoing tax benefits will depend upon
the amount of its future taxable income and may be limited in
the event of an ownership change under federal tax
laws and regulations.

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.

16



---



##### 



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 ended
|                                                                                               |                    | December 31, 2001           
|                                                                                               |                    |                             
|                                                                                               |                    |                              |   | Unconsolidated |         |         
|                                                                                               |                    | Company                      |   | Joint          |         | Combined
|                                                                                               |                    | Wholly-owned                 |   | Ventures       |         | Total   
|                                                                                               |                    |                              |   |                |         |         
|Selected Financial Information
	(dollars in thousands)                                         |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | Homes closed       |                              |   | 1,861          |         |          |   | 705      |         |   |   | 2,566    |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | Home sales revenue |                              | $ | 452,002        |         |          | $ | 316,098  |         |   | $ | 768,100  |        
|                                                                                               | Cost of sales      |                              |   | (382,608       | )       |          |   | (258,997 | )       |   |   | (641,605 | )      
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Gross margin                 |   | $              | 69,394  |          |   | $        | 57,101  |   |   | $        | 126,495 |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Gross margin percentage      |   |                | 15.4    | %        |   |          | 18.1    | % |   |          | 16.5    | %
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Number of homes closed                                                                         |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   | 1,087          |         |          |   | 705      |         |   |   | 1,792    |        
|                                                                                               | Arizona            |                              |   | 298            |         |          |   | 0        |         |   |   | 298      |        
|                                                                                               | Nevada             |                              |   | 476            |         |          |   | 0        |         |   |   | 476      |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                | 1,861   |          |   |          | 705     |   |   |          | 2,566   |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Average sales price                                                                            |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              | $ | 281,300        |         |          | $ | 448,400  |         |   | $ | 347,100  |        
|                                                                                               | Arizona            |                              |   | 150,200        |         |          |   | 0        |         |   |   | 150,200  |        
|                                                                                               | Nevada             |                              |   | 213,100        |         |          |   | 0        |         |   |   | 213,100  |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   | $              | 242,900 |          |   | $        | 448,400 |   |   | $        | 299,300 |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Number of net new home orders                                                                  |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   | 1,080          |         |          |   | 618      |         |   |   | 1,698    |        
|                                                                                               | Arizona            |                              |   | 336            |         |          |   | 0        |         |   |   | 336      |        
|                                                                                               | Nevada             |                              |   | 507            |         |          |   | 0        |         |   |   | 507      |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                | 1,923   |          |   |          | 618     |   |   |          | 2,541   |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Average number of sales locations during period                                                |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   | 15             |         |          |   | 13       |         |   |   | 28       |        
|                                                                                               | Arizona            |                              |   | 6              |         |          |   | 0        |         |   |   | 6        |        
|                                                                                               | Nevada             |                              |   | 6              |         |          |   | 0        |         |   |   | 6        |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                | 27      |          |   |          | 13      |   |   |          | 40      |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Backlog of homes sold but not closed at end of
	period                                         |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   | 199            |         |          |   | 97       |         |   |   | 296      |        
|                                                                                               | Arizona            |                              |   | 118            |         |          |   | 0        |         |   |   | 118      |        
|                                                                                               | Nevada             |                              |   | 128            |         |          |   | 0        |         |   |   | 128      |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                | 445     |          |   |          | 97      |   |   |          | 542     |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Dollar amount of backlog of homes sold but not
	closed at end of period (dollars in thousands) |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              | $ | 68,013         |         |          | $ | 50,115   |         |   | $ | 118,128  |        
|                                                                                               | Arizona            |                              |   | 24,523         |         |          |   | 0        |         |   |   | 24,523   |        
|                                                                                               | Nevada             |                              |   | 33,880         |         |          |   | 0        |         |   |   | 33,880   |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   | $              | 126,416 |          |   | $        | 50,115  |   |   | $        | 176,531 |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Lots owned and controlled                                                                      |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   |                |         |          |   |          |         |   |   | 4,761    |        
|                                                                                               | Arizona            |                              |   |                |         |          |   |          |         |   |   | 2,782    |        
|                                                                                               | Nevada             |                              |   |                |         |          |   |          |         |   |   | 824      |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                |         |          |   |          |         |   |   |          | 8,367   |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         

17



---



##### 



|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |          |         |  
|---------------------------------------------------------------------------------------------- | ------------------ | ---------------------------- | - | -------------- | ------- | -------- | - | -------- | ------- | - | - | -------- | ------- | -
|                                                                                               |                    |                             
|                                                                                               |                    | As of and for the year ended
|                                                                                               |                    | December 31, 2000           
|                                                                                               |                    |                             
|                                                                                               |                    |                              |   | Unconsolidated |         |         
|                                                                                               |                    | Company                      |   | Joint          |         | Combined
|                                                                                               |                    | Wholly-owned                 |   | Ventures       |         | Total   
|                                                                                               |                    |                              |   |                |         |         
|Selected Financial Information
	(dollars in thousands)                                         |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | Homes closed       |                              |   | 1,757          |         |          |   | 909      |         |   |   | 2,666    |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | Home sales revenue |                              | $ | 403,850        |         |          | $ | 367,723  |         |   | $ | 771,573  |        
|                                                                                               | Cost of sales      |                              |   | (335,891       | )       |          |   | (307,215 | )       |   |   | (643,106 | )      
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Gross margin                 |   | $              | 67,959  |          |   | $        | 60,508  |   |   | $        | 128,467 |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Gross margin percentage      |   |                | 16.8    | %        |   |          | 16.5    | % |   |          | 16.7    | %
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Number of homes closed                                                                         |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   | 1,183          |         |          |   | 909      |         |   |   | 2,092    |        
|                                                                                               | Arizona            |                              |   | 189            |         |          |   | 0        |         |   |   | 189      |        
|                                                                                               | Nevada             |                              |   | 349            |         |          |   | 0        |         |   |   | 349      |        
|                                                                                               | New Mexico(1)      |                              |   | 36             |         |          |   | 0        |         |   |   | 36       |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                | 1,757   |          |   |          | 909     |   |   |          | 2,666   |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Average sales price                                                                            |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              | $ | 259,300        |         |          | $ | 404,500  |         |   | $ | 322,400  |        
|                                                                                               | Arizona            |                              |   | 139,200        |         |          |   | 0        |         |   |   | 139,200  |        
|                                                                                               | Nevada             |                              |   | 189,500        |         |          |   | 0        |         |   |   | 189,500  |        
|                                                                                               | New Mexico(1)      |                              |   | 130,800        |         |          |   | 0        |         |   |   | 130,800  |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   | $              | 229,900 |          |   | $        | 404,500 |   |   | $        | 289,400 |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Number of net new home orders                                                                  |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   | 1,103          |         |          |   | 906      |         |   |   | 2,009    |        
|                                                                                               | Arizona            |                              |   | 252            |         |          |   | 0        |         |   |   | 252      |        
|                                                                                               | Nevada             |                              |   | 321            |         |          |   | 0        |         |   |   | 321      |        
|                                                                                               | New Mexico(1)      |                              |   | 21             |         |          |   | 0        |         |   |   | 21       |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                | 1,697   |          |   |          | 906     |   |   |          | 2,603   |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Average number of sales locations during period                                                |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   | 18             |         |          |   | 13       |         |   |   | 31       |        
|                                                                                               | Arizona            |                              |   | 5              |         |          |   | 0        |         |   |   | 5        |        
|                                                                                               | Nevada             |                              |   | 6              |         |          |   | 0        |         |   |   | 6        |        
|                                                                                               | New Mexico(1)      |                              |   | 1              |         |          |   | 0        |         |   |   | 1        |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                | 30      |          |   |          | 13      |   |   |          | 43      |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Backlog of homes sold but not closed at end of
	period                                         |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   | 206            |         |          |   | 184      |         |   |   | 390      |        
|                                                                                               | Arizona            |                              |   | 80             |         |          |   | 0        |         |   |   | 80       |        
|                                                                                               | Nevada             |                              |   | 97             |         |          |   | 0        |         |   |   | 97       |        
|                                                                                               | New Mexico(1)      |                              |   | 0              |         |          |   | 0        |         |   |   | 0        |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                | 383     |          |   |          | 184     |   |   |          | 567     |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Dollar amount of backlog of homes sold but not
	closed at end of period (dollars in thousands) |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              | $ | 57,001         |         |          | $ | 82,169   |         |   | $ | 139,170  |        
|                                                                                               | Arizona            |                              |   | 11,842         |         |          |   | 0        |         |   |   | 11,842   |        
|                                                                                               | Nevada             |                              |   | 20,638         |         |          |   | 0        |         |   |   | 20,638   |        
|                                                                                               | New Mexico(1)      |                              |   | 0              |         |          |   | 0        |         |   |   | 0        |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   | $              | 89,481  |          |   | $        | 82,169  |   |   | $        | 171,650 |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Lots owned and controlled                                                                      |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   |                |         |          |   |          |         |   |   | 5,662    |        
|                                                                                               | Arizona            |                              |   |                |         |          |   |          |         |   |   | 1,642    |        
|                                                                                               | Nevada             |                              |   |                |         |          |   |          |         |   |   | 986      |        
|                                                                                               | New Mexico(1)      |                              |   |                |         |          |   |          |         |   |   | 0        |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                |         |          |   |          |         |   |   |          | 8,290   |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         

18



---



##### 



|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |          |         |  
|---------------------------------------------------------------------------------------------- | ------------------ | ---------------------------- | - | -------------- | ------- | -------- | - | -------- | ------- | - | - | -------- | ------- | -
|                                                                                               |                    |                             
|                                                                                               |                    | As of and for the year ended
|                                                                                               |                    | December 31, 1999           
|                                                                                               |                    |                             
|                                                                                               |                    |                              |   | Unconsolidated |         |         
|                                                                                               |                    | Company                      |   | Joint          |         | Combined
|                                                                                               |                    | Wholly-owned                 |   | Ventures       |         | Total   
|                                                                                               |                    |                              |   |                |         |         
|Selected Financial Information
	(dollars in thousands)                                         |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | Homes closed       |                              |   | 2,028          |         |          |   | 590      |         |   |   | 2,618    |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | Home sales revenue |                              | $ | 426,839        |         |          | $ | 203,336  |         |   | $ | 630,175  |        
|                                                                                               | Cost of sales      |                              |   | (357,153       | )       |          |   | (163,215 | )       |   |   | (520,368 | )      
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Gross margin                 |   | $              | 69,686  |          |   | $        | 40,121  |   |   | $        | 109,807 |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Gross margin percentage      |   |                | 16.3    | %        |   |          | 19.7    | % |   |          | 17.4    | %
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Number of homes closed                                                                         |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   | 1,296          |         |          |   | 590      |         |   |   | 1,886    |        
|                                                                                               | Arizona            |                              |   | 163            |         |          |   | 0        |         |   |   | 163      |        
|                                                                                               | Nevada             |                              |   | 397            |         |          |   | 0        |         |   |   | 397      |        
|                                                                                               | New Mexico(1)      |                              |   | 172            |         |          |   | 0        |         |   |   | 172      |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                | 2,028   |          |   |          | 590     |   |   |          | 2,618   |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Average sales price                                                                            |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              | $ | 238,100        |         |          | $ | 344,600  |         |   | $ | 271,400  |        
|                                                                                               | Arizona            |                              |   | 196,400        |         |          |   | 0        |         |   |   | 196,400  |        
|                                                                                               | Nevada             |                              |   | 159,900        |         |          |   | 0        |         |   |   | 159,900  |        
|                                                                                               | New Mexico(1)      |                              |   | 132,600        |         |          |   | 0        |         |   |   | 132,600  |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   | $              | 210,500 |          |   | $        | 344,600 |   |   | $        | 240,700 |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Number of net new home orders                                                                  |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   | 1,010          |         |          |   | 587      |         |   |   | 1,597    |        
|                                                                                               | Arizona            |                              |   | 106            |         |          |   | 0        |         |   |   | 106      |        
|                                                                                               | Nevada             |                              |   | 452            |         |          |   | 0        |         |   |   | 452      |        
|                                                                                               | New Mexico(1)      |                              |   | 148            |         |          |   | 0        |         |   |   | 148      |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                | 1,716   |          |   |          | 587     |   |   |          | 2,303   |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Average number of sales locations during period                                                |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   | 23             |         |          |   | 10       |         |   |   | 33       |        
|                                                                                               | Arizona            |                              |   | 3              |         |          |   | 0        |         |   |   | 3        |        
|                                                                                               | Nevada             |                              |   | 6              |         |          |   | 0        |         |   |   | 6        |        
|                                                                                               | New Mexico(1)      |                              |   | 3              |         |          |   | 0        |         |   |   | 3        |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                | 35      |          |   |          | 10      |   |   |          | 45      |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Backlog of homes sold but not closed at end of
	period                                         |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   | 286            |         |          |   | 187      |         |   |   | 473      |        
|                                                                                               | Arizona            |                              |   | 17             |         |          |   | 0        |         |   |   | 17       |        
|                                                                                               | Nevada             |                              |   | 125            |         |          |   | 0        |         |   |   | 125      |        
|                                                                                               | New Mexico(1)      |                              |   | 15             |         |          |   | 0        |         |   |   | 15       |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                | 443     |          |   |          | 187     |   |   |          | 630     |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Dollar amount of backlog of homes sold but not
	closed at end of period (dollars in thousands) |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              | $ | 86,600         |         |          | $ | 74,100   |         |   | $ | 160,700  |        
|                                                                                               | Arizona            |                              |   | 3,100          |         |          |   | 0        |         |   |   | 3,100    |        
|                                                                                               | Nevada             |                              |   | 20,000         |         |          |   | 0        |         |   |   | 20,000   |        
|                                                                                               | New Mexico(1)      |                              |   | 2,000          |         |          |   | 0        |         |   |   | 2,000    |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   | $              | 111,700 |          |   | $        | 74,100  |   |   | $        | 185,800 |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|Lots owned and controlled                                                                      |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               | California         |                              |   |                |         |          |   |          |         |   |   | 5,357    |        
|                                                                                               | Arizona            |                              |   |                |         |          |   |          |         |   |   | 3,033    |        
|                                                                                               | Nevada             |                              |   |                |         |          |   |          |         |   |   | 539      |        
|                                                                                               | New Mexico(1)      |                              |   |                |         |          |   |          |         |   |   | 89       |        
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         
|                                                                                               |                    | Total                        |   |                |         |          |   |          |         |   |   |          | 9,018   |  
|                                                                                               |                    |                              |   |                |         |          |   |          |         |   |   |         




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


19



---



##### 



Homes in backlog are generally closed within
three to six months. The dollar amount of backlog of homes sold
but not closed as of December 31, 2001 was
$176.5 million as compared to $171.7 million as of
December 31, 2000. The cancellation rate of buyers who
contracted to buy a home but did not close escrow at the
Companys projects was approximately 24% during 2001.

The number of homes closed in 2001 decreased 3.8%
to 2,566 from 2,666 in 2000. Net new home orders for the year
ended December 31, 2001 decreased 2.4% to 2,541 units from
2,603 for the year ended December 31, 2000. The backlog of
homes sold as of December 31, 2001 was 542, down 4.4% from
567 units as of December 31, 2000. The Companys
inventory of completed and unsold homes as of December 31,
2001 increased to 59 units from 52 units as of
December 31, 2000.

The decline in net new home orders and closings
for 2001 as compared with 2000 is primarily the result of
(1) a weakening economy whose short-term outlook has 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.

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

The net loss for the year ended December 31,
1997 included a non-cash charge of $74.0 million during the
second quarter of 1997 to record impairment losses on certain
real estate assets held and used by the Company. The impairment
losses related to three of the Companys master-planned
communities. The impairment losses related to two communities,
which are located in the Inland Empire area of Southern
California, arose primarily from declines in home sales prices
due to continued weak economic conditions and competitive
pressures in that area of Southern California. The impairment
loss relating to the other community, which is located in Contra
Costa County in the East San Francisco Bay area of Northern
California, was primarily attributable to lower than expected
cash flow relating to one of the high end residential products
in this community and to a deterioration in the value of the
non-residential portion of the project. The significant
deteriorations in the market conditions associated with these
communities resulted in the undiscounted cash flows (excluding
interest) estimated to be generated by these communities being
less than their historical book values. Accordingly, the
master-planned communities were written-down to their estimated
fair value.

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

|               |  |                   |            |                   |  |                   |            |                   |  |                   |            |   |  |   |            |   |  |   |            |  
|-------------- |  | ----------------- | ---------- | ----------------- |  | ----------------- | ---------- | ----------------- |  | ----------------- | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|               |  | For the           |            | For the           |  | For the           |            | For the           |  | For the          
|               |  | Year Ended        |            | Year Ended        |  | Year Ended        |            | Year Ended        |  | Six Months Ended 
|               |  | December 31, 2001 |            | December 31, 2000 |  | December 31, 1999 |            | December 31, 1998 |  | December 31, 1997
|               |  |                   |            |                   |  |                   |            |                   |  |                  
|Sales          |  | $                 | 39,281,000 |                   |  | $                 | 51,917,000 |                   |  | $                 | 79,584,000 |   |  | $ | 54,828,000 |   |  | $ | 17,662,000 |  
|Gross profit   |  |                   | 12,575,000 |                   |  |                   | 13,884,000 |                   |  |                   | 13,012,000 |   |  | $ | 5,850,000  |   |  | $ | 1,202,000  |  
|Gross profit % |  |                   | 32.0       | %                 |  |                   | 26.7       | %                 |  |                   | 16.4       | % |  |   | 10.7       | % |  |   | 6.8        | %

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

The Company periodically evaluates its real
estate assets to determine whether such assets have been
impaired and therefore would be required to be adjusted to fair
value. Fair value represents the amount at which an asset could
be bought or sold in a current transaction between willing
parties, that is, other than in a forced or liquidation sale.
The estimation process involved in determining if assets have
been impaired and in the determination of fair value is
inherently uncertain since it requires estimates of current
market yields as well as future events and conditions. Such
future events and conditions include economic and market

20



---



##### 



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.


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), effective for fiscal years beginning after
December 15, 2001, Statement No. 144 supersedes
Statement of Financial Accounting Standards No. 121. The
Company does not believe Statement No. 144 will have a
significant impact on the earnings or financial position of the
Company upon adoption.

Interest incurred during the period in which real
estate projects are not under development or during the period
subsequent to the completion of product available for sale is
expensed in the period incurred. Economic conditions in the real
estate industry can cause a delay in the development of certain
real estate projects and, as a result, can lengthen the periods
when such projects are not under development and, accordingly,
have a significant impact on profitability as a result of
expensed interest. Interest expense during 2001, 2000, and 1999
was approximately $0.2 million, $5.6 million and
$6.2 million, respectively.

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

Comparison of Years Ended December 31,
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. The
Company generally receives, after priority returns and a return
of capital, approximately 50% of the profits and losses and cash
flows from joint ventures.

Total operating income 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 increased by $1.4 million to $69.4 million in
2001 from $68.0 million in 2000. This increase was
primarily due to a 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
margins 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

21



---



##### 



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.

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. As of December
31, 2000, all quasi-reorganization income tax benefits have been
fully utilized.

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

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

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

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

Other income (expense), net increased to
$7.3 million in 2000 from $3.4 million in 1999
primarily as a result of the gain of $1.7 million on the
sale of an office building in 2000, increased income from the

22



---



##### 



Companys mortgage company operations and
increased income from the Companys design center
operations.


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

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. As of
December 31, 2000, all quasi-reorganization income tax
benefits have been fully utilized.

Financial Condition and Liquidity

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

The ability of the Company to meet its
obligations on 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.

Quasi-Reorganization

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

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

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

Senior Notes

As of December 31, 2001, the Companys
outstanding balance under its 12 1/2% Senior Notes was
$70.3 million. On May 1, 2001, the Company completed a
consent solicitation with respect to the 12 1/2% 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.

23



---



##### 



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 had also repurchased
$31.4 million 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 $30.0 million of the 12 1/2%
Senior Notes. William Harwell 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 12 1/2% 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 12 1/2% Senior Notes which matured on
July 1, 2001 amounting to $5.9 million.

In April and May 2000, the Company purchased
$21.8 million principal amount of its outstanding Senior
Notes at a cost of $21.1 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 12 1/2% 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. However, William Lyon Homes, Inc. has granted liens on
substantially all of its assets as security for its obligations
under the Revolving Credit Facilities and other loans. Because
the William Lyon Homes, Inc. guarantee is not secured, holders
of the Senior Notes are effectively junior to borrowings under
the Revolving Credit Facilities with respect to such assets.
Delaware Lyon and its consolidated subsidiaries are referred to
collectively herein as the Company. Interest on the
Senior Notes is payable on January 1 and July 1 of
each year.

The 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 Senior Notes.

Delaware Lyon is required to offer to repurchase
certain Senior Notes at a price equal to 100% of the principal
amount plus any accrued and unpaid interest to the date of
repurchase if Delaware Lyons Consolidated Tangible Net
Worth is less than $60.0 million on the last day of any two
consecutive fiscal quarters, as well as from the proceeds of
certain asset sales.

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

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

As of December 31, 2001, the outstanding
12 1/2% 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.

The Company will in all likelihood be required to
refinance the Senior Notes at the maturity date of July 1,
2003 and no assurances can be given that the Company will be
successful in that regard.

24



---



##### 



Revolving Credit
Facilities

The Revolving Credit Facilities have an aggregate
maximum loan commitment of $180.0 million, and mature at
various dates beginning in June 2002 through September
2004. The collateral for the loans provided by the Revolving
Credit Facilities includes specific real estate assets funded by
such respective Revolving Credit Facilities. Although the
aggregate maximum loan commitment for these loans is
$180.0 million, the credit facilities have limitations on
the amounts which can be borrowed at any time based on assets
which are included in the credit facilities and the specified
borrowings permitted under borrowing base calculations. The
undrawn availability at December 31, 2001 was
$44.8 million and the principal outstanding under the
Revolving Credit Facilities at December 31, 2001 was
$76.1 million.

Pursuant to the terms of the Revolving Credit
Facilities, outstanding advances bear interest at various rates
which approximate the prime rate. The Revolving Credit
Facilities include financial covenants which may limit the
amount which may be borrowed thereunder.

Unsecured Revolving
Line

Effective March 8, 2001, the Company
obtained 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, 2001, $8.0 million was
outstanding under the Unsecured Revolving Line.

Construction Notes
Payable

At December 31, 2001, the Company had
construction notes payable amounting to $21.8 million
related to various real estate projects. The notes are due as
units close or at various dates on or before June 11, 2004
and bear interest at rates of prime plus 0.25% to 19%.

Seller Financing

Another source of financing available to the
Company is seller-provided financing for land acquired by the
Company. At December 31, 2001, the Company had various
notes payable outstanding related to land acquisitions for which
seller financing was provided in the amount of
$34.4 million. The notes are due at various dates through
December 31, 2003 and bear interest at rates ranging from
prime plus 2.0% to 12%.

Revolving Mortgage Warehouse
Credit Facility

The Company has a $15.0 million revolving
mortgage warehouse credit facility with a bank to fund its
mortgage origination operations. Mortgage loans are generally
held for a short period of time and are typically sold to
investors within 7 to 15 days following funding. Borrowings are
secured by the related mortgage loans held for sale. At
December 31, 2001 the outstanding balance was
$11.0 million. The facility, which has a current maturity
date of May 31, 2002, also contains a financial covenant
requiring the Company to maintain cash and/or marketable
securities on the books of account of its subsidiary, Duxford
Financial, Inc., a California corporation (Duxford)
in an amount equal to no less than $1.0 million and a
financial covenant requiring the Company to maintain total
assets net of total liabilities and net of amounts receivable
from the Company and/or affiliates on the books of account of
Duxford in an amount equal to no less than $1.0 million.

Land Banking
Arrangements

The Company has entered into land banking
arrangements for two projects totaling 204 lots for a purchase
price of $8.7 million. As of December 31, 2001, the
balance of the lots still under option and unclosed was
141 lots for a purchase price of $5.8 million. The
Company is under no obligation to purchase the balance of the
lots, but, as of December 31, 2001, would forfeit
$3.1 million in penalties if the lots were not purchased.

25



---



##### 



Joint Venture
Financing

As of December 31, 2001, the Company and
certain of its subsidiaries are general partners or members in
25 joint ventures involved in the development and sale of
residential projects. Such joint ventures are 50% or less owned
and, accordingly, the financial statements of such joint
ventures are not consolidated with the Companys financial
statements. The Companys investments in unconsolidated
joint ventures are accounted for using the equity method. See
Note 7 of Notes to Consolidated Financial
Statements for condensed combined financial information
for these joint ventures. Based upon current estimates,
substantially all future development and construction costs will
be funded by the Companys venture partners or from the
proceeds of construction financing obtained by the joint
ventures.

As of December 31, 2001, the Companys
investment in and advances to such joint ventures was
approximately $66.8 million and the Companys venture
partners investment in such joint ventures was
approximately $144.5 million. In addition, certain joint
ventures have obtained financing from land sellers or
construction lenders which amounted to approximately
$72.3 million at December 31, 2001.

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.

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 12 1/2% Senior Notes in 2001.

Cash Flows 
Comparison of Years Ended December 31, 2000 and
1999

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

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

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

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

26



---



##### 



increases in mortgage interest rates. Further,
the Companys profits will be affected by its ability to
recover through higher sales prices increases in the costs of
land, construction, labor and administrative expenses. The
Companys ability to raise prices at such times will depend
upon demand and other competitive factors.


Critical Accounting Policies

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

Real Estate
Inventories and Cost of Sales

Real estate inventories are carried at cost net
of impairment losses, if any. Real estate inventories consist
primarily of raw land, lots under development, houses under
construction and completed houses. All direct and indirect land
costs, offsite and onsite improvements and applicable interest
and other carrying charges are capitalized to real estate
projects during periods when the project is under development.
Land, offsite costs and all other common costs are allocated to
land parcels benefited based upon relative fair values before
construction. Onsite construction costs and related carrying
charges (principally interest and property taxes) are allocated
to the individual homes within a phase based upon the relative
sales value of the homes. 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

Financial Accounting Standards Board 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), requires impairment losses to be recorded
on assets to be held and used by the Company when

27



---



##### 



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.


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.

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), effective for fiscal years beginning after
December 15, 2001, Statement No. 144 supersedes
Statement No. 121. The Company does not believe Statement
144 will have a significant impact on the earnings or financial
position of the Company upon adoption.

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.

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 12 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 1998, the Financial Accounting Standards
Board issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities,as amended by
Statement No. 137 and Statement No. 138 (collectively,
Statement No. 133), which is required to be
adopted for fiscal years beginning after June 15, 2000.
Statement No. 133 requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If
the derivative is a hedge, depending on the nature of the hedge,
a change in the fair value of the derivative will either be
offset against the change in the fair value of the hedged asset,
liability, or firm commitment through earnings or recognized in
other comprehensive income until the hedged item is recognized
in earnings. The implementation of Statement No. 133 had no
impact on the Companys results of operations or financial
position for the year ended December 31, 2001.

28



---



##### 



In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 141, Business Combinations (Statement
No. 141). This Statement addresses financial
accounting and reporting for business combinations and
supersedes APB Opinion No. 16, Business
Combinations and Financial Accounting Standards Board
Statement No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. All business
combinations in the scope of this Statement are to be accounted
for using one method, the purchase method. We will adopt
Statement No. 141 for all business combinations initiated
after June 30, 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 will no longer be amortized but will be
subject to annual impairment tests in accordance with Statement
No. 142. The Company will apply the new rule on accounting
for goodwill beginning in the first quarter of 2002. Application
of the nonamortization provisions of Statement No. 142 is
expected to result in an increase in net income of approximately
$800,000 ($0.08 per share) per year. During 2002, the Company
will perform the first of the required impairment tests of
goodwill as of January 1, 2002 and has not yet determined
what the effect of these tests will be on the earnings and
financial position of the Company.

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), effective for fiscal years beginning after
December 15, 2001. Statement No. 144 supersedes
Statement of Financial Accounting Standards No. 121. The
Company does not believe Statement No. 144 will have a
significant impact on the earnings or financial position of the
Company upon adoption.

Forward Looking Statements

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

Actual events and results may differ materially
from those expressed or forecasted in the forward-looking
statements due to a number of factors. The principal factors
that could cause the Companys actual performance and
future events and actions to differ materially from such
forward-looking statements include, but are not limited to,
changes in general economic conditions either nationally or in
regions in which the Company operates (including, but not
limited to changes directly or indirectly related to the tragic
events of September 11, 2001 and thereafter), whether an
ownership change occurs which results in the limitation of the
Companys ability to utilize the tax benefits associated
with its net operating loss carryforward, changes in home
mortgage interest rates, changes in prices of homebuilding
materials, labor shortages, adverse weather conditions, the
occurrence of events such as landslides, soil subsidence and
earthquakes that are uninsurable, not economically insurable or
not subject to effective indemnification agreements, changes in
governmental laws and regulations, whether the Company is able
to refinance the outstanding balances of Senior Notes at their
maturity, the timing of receipt of regulatory approvals and the
opening of projects and the availability and cost of land for
future growth.

29



---



##### 



Item 7A. Quantitative and Qualitative
Disclosures About Market Risk

The Companys exposure to market risk for
changes in interest rates relates primarily to the
Companys revolving lines of credit with a total
outstanding balance at December 31, 2001 of
$76.1 million where the interest rate is variable based
upon certain bank reference or prime rates. If interest rates
were to increase by 10%, the estimated impact on the
Companys consolidated financial statements would be to
reduce income before taxes by approximately $10,000 based on
amounts outstanding and rates in effect at December 31,
2001, as well as to increase capitalized interest by
approximately $918,000 which would be amortized to cost of sales
as unit closings occur.

Item 8. Financial Statements and
Supplementary Data

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



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

None.

PART III

Item 10. Directors and Executive Officers
of Registrant

The information required by this item is
incorporated by reference from the Companys Proxy
Statement for the 2002 Annual Meeting of Holders of Common
Stock to be held on May 13, 2002.

Item 11. Executive
Compensation

The information required by this item is
incorporated by reference from the Companys Proxy
Statement for the 2002 Annual Meeting of Holders of Common Stock
to be held on May 13, 2002.

Item 12. Security Ownership of Certain
Beneficial Owners and Management

The information required by this item is
incorporated by reference from the Companys Proxy
Statement for the 2002 Annual Meeting of Holders of Common
Stock to be held on May 13, 2002.

Item 13. Certain Relationships and Related
Transactions

The information required by this item is
incorporated by reference from the Companys Proxy
Statement for the 2002 Annual Meeting of Holders of Common
Stock to be held on May 13, 2002.

30



---



##### 



PART IV



|         |                                                                              
|-------- | -----------------------------------------------------------------------------
|Item 14. | Exhibits, Consolidated Financial Statement
	Schedules and Reports on Form 8-K

(a)(1) Financial Statements

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

|                                                 |  |      |    | 
|------------------------------------------------ |  | ---- | -- | 
|                                                 |  | Page
|                                                 |  |     
|William Lyon Homes                               |  |      |    | 
|Report of Independent Auditors                   |  |      | 36 | 
|Consolidated Balance Sheets                      |  |      | 37 | 
|Consolidated Statements of Income                |  |      | 38 | 
|Consolidated Statements of Stockholders
	Equity |  |      | 39 | 
|Consolidated Statements of Cash Flows            |  |      | 40 | 
|Notes to Consolidated Financial Statements       |  |      | 41 | 
|                                                
|Significant Subsidiaries of William Lyon
	Homes  |  |      |    | 
|Report of Independent Auditors                   |  |      | 67 | 
|Combined Balance Sheets                          |  |      | 68 | 
|Combined Statements of Income                    |  |      | 69 | 
|Combined Statements of Members Capital          |  |      | 70 | 
|Combined Statements of Cash Flows                |  |      | 71 | 
|Notes to Combined Financial Statements           |  |      | 72 | 

(2) Financial Statement
Schedules:

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

(3) Listing of Exhibits:

|        |         |             |  |                                                                                                                                                                           
|------- | ------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                          
|        | 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(7) |             |  | Amended and Restated 1991 Stock Option Plan of
	The Presley Companies, a Delaware corporation.                                                                            
|        | 10.4(4) |             |  | Forms of Stock Option Agreements, dated as of
	May 20, 1994, between the Company and Wade H. Cable.                                                                       
|        | 10.5(4) |             |  | Form of Stock Option Agreement, dated as of
	May 20, 1994, between the Company and Nancy M. Harlan.                                                                       
|        | 10.6(4) |             |  | Form of Stock Option Agreement, dated as of
	May 20, 1994, between the Company and Linda L. Foster.                                                                       

31



---



##### 



|        |           |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | --------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |            
|Number  |           | Description
|        |           |            
|        | 10.7(4)   |             |  | Form of Stock Option Agreement, dated as of
	May 20, 1994, between the Company and W. Douglass
	Harris.                                                                                                                                                                                                                                                                                                                                                               
|        | 10.8(4)   |             |  | Form of Stock Option Agreement, dated as of
	May 20, 1994, between the Company and C. Dean Stewart.                                                                                                                                                                                                                                                                                                                                                                   
|        | 10.9(4)   |             |  | Form of Stock Option Agreement, dated as of
	May 20, 1994, between the Company and Alan Uman.                                                                                                                                                                                                                                                                                                                                                                         
|        | 10.10(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.                                                                                                                                                                                                                                                         
|        | 10.11(5)  |             |  | Mortgage Company Agreement between Presley
	Mortgage Company, a California corporation and Duxford Financial
	Services, Inc., executed as of November 5, 1999.                                                                                                                                                                                                                                                                                                        
|        | 10.12(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.                                                                                                                                                                                                                                                                              
|        | 10.13(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.                                                                                                                                                                                                                                                                   
|        | 10.14(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).                                                                                                                                                                                                 
|        | 10.15(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(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.                                                                                                                                                                                                                                                                   
|        | 10.17(7)  |             |  | William Lyon Homes 2000 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10.18(8)  |             |  | Form of Stock Option Agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10.19(8)  |             |  | William Lyon Homes, Inc. 2000 Cash Bonus Plan.                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.20(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.                                                                                                                                                                                                                                                                                                             
|        | 10.21(8)  |             |  | Mortgage Warehouse Loan and Security Agreement
	effective as of July 28, 2000 by and between Duxford
	Financial Inc., a California corporation (Borrower)
	and First Tennessee Bank (Bank).                                                                                                                                                                                                                                                                       
|        | 10.22(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).
|        | 10.23(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) |             |  | Agreement for First Modification of Deeds of
	Trust and Other Loan Instruments (this First
	Modification) dated as of June 8, 2001 by and between
	William Lyon Homes, Inc., a California Corporation
	(Borrower) and Guaranty Bank, a federal savings bank
	organized and existing under the laws of the United States
	(formerly known as Guaranty Federal Bank, F.S.B.)
	(Lender).                                                                         

32



---



##### 



|        |           |             |  |                                                                                                                                                                                                                             
|------- | --------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |            
|Number  |           | Description
|        |           |            
|        | 10.25(10) |             |  | Mortgage Warehouse Loan and Security Agreement
	dated as of May 31, 2001, by and between Duxford Financial,
	Inc., and/or Bayport Mortgage, L.P., a California Corporation
	(Borrower) and First Tennessee Bank
	(Bank).
|        | 10.26(11) |             |  | William Lyon Homes Executive Deferred
	Compensation Plan effective as of February 11, 2002.                                                                                                                                 
|        | 10.27     |             |  | William Lyon Homes Outside Directors Deferred
	Compensation Plan effective as of February 11, 2002.                                                                                                                         
|        | 21.1      |             |  | List of Subsidiaries of the Company.                                                                                                                                                                                        
|        | 23.1      |             |  | Consent of Independent Auditors.                                                                                                                                                                                            




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

(b) Reports on Form 8-K

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

33



---



##### 



SIGNATURES

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



| |                   
| | ------------------
| | WILLIAM LYON HOMES



| |     |                      
| | --- | ---------------------
| | By: | /s/ MICHAEL D. GRUBBS

| |                                      
| | -------------------------------------
| |                                      
| | Michael D. Grubbs                    
| | Senior Vice President,               
| | Chief Financial Officer and Treasurer

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

|                                             |  |                                                                                             |  |               
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------
|Signature                                    |  | Title                                                                                       |  | Date          
|                                             |  |                                                                                             |  |               
|/s/ WILLIAM LYONWilliam Lyon                 |  | Chairman of the Board, Chief Executive Officer
	and Director (Principal Executive Officer)  |  | March 12, 2002
|                                            
|/s/ WADE H. CABLEWade H. Cable               |  | Director, President and Chief Operating Officer                                             |  | March 12, 2002
|                                            
|/s/ JAMES E. DALTONJames E. Dalton           |  | Director                                                                                    |  | March 14, 2002
|                                            
|/s/ RICHARD E. FRANKELRichard E. Frankel     |  | Director                                                                                    |  | March 14, 2002
|                                            
|/s/ WILLIAM H. LYONWilliam H. Lyon           |  | Director                                                                                    |  | March 14, 2002
|                                            
|/s/ WILLIAM H. MCFARLANDWilliam H. McFarland |  | Director                                                                                    |  | March 13, 2002
|                                            
|Michael L. Meyer                             |  | Director                                                                                    |  | March   , 2002
|                                            
|/s/ RAY A. WATTRay A. Watt                   |  | Director                                                                                    |  | March 13, 2002
|                                            
|Randolph W. Westerfield                      |  | Director                                                                                    |  | March   , 2002
|                                            
|/s/ MICHAEL D. GRUBBSMichael D. Grubbs       |  | Senior Vice President, Chief Financial Officer
	and Treasurer (Principal Financial Officer) |  | March 12, 2002
|                                            
|/s/ W. DOUGLASS HARRISW. Douglass Harris     |  | Vice President and Corporate Controller
	(Principal Accounting Officer)                     |  | March 12, 2002

34



---



##### 



INDEX TO FINANCIAL STATEMENTS

|                                                 |  |      |    | 
|------------------------------------------------ |  | ---- | -- | 
|                                                 |  | Page
|                                                 |  |     
|William Lyon Homes                               |  |      |    | 
|Report of Independent Auditors                   |  |      | 36 | 
|Consolidated Balance Sheets                      |  |      | 37 | 
|Consolidated Statements of Income                |  |      | 38 | 
|Consolidated Statements of Stockholders
	Equity |  |      | 39 | 
|Consolidated Statements of Cash Flows            |  |      | 40 | 
|Notes to Consolidated Financial Statements       |  |      | 41 | 
|                                                
|Significant Subsidiaries of William Lyon
	Homes  |  |      |    | 
|Report of Independent Auditors                   |  |      | 67 | 
|Combined Balance Sheets                          |  |      | 68 | 
|Combined Statements of Income                    |  |      | 69 | 
|Combined Statements of Members Capital          |  |      | 70 | 
|Combined Statements of Cash Flows                |  |      | 71 | 
|Notes to Combined Financial Statements           |  |      | 72 | 

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.

35



---



##### 



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,
2001 and 2000, and the related consolidated statements of
income, stockholders equity, and cash flows for each of
the three 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 financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of William Lyon Homes at
December 31, 2001 and 2000, and the consolidated results of
its operations and its cash flows for each of the three 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


36



---



##### 



WILLIAM LYON HOMES

CONSOLIDATED BALANCE SHEETS

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


(Notes 2 and 3)


ASSETS

|                                                                                                                         |                                                                                                                                                                              |              |         |         |  |   |         |         |  
|------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------- | ------- |  | - | ------- | ------- | -
|                                                                                                                         |                                                                                                                                                                              |             
|                                                                                                                         |                                                                                                                                                                              | December 31,
|                                                                                                                         |                                                                                                                                                                              |             
|                                                                                                                         |                                                                                                                                                                              | 2001         |         | 2000   
|                                                                                                                         |                                                                                                                                                                              |              |         |        
|Cash and cash equivalents                                                                                                |                                                                                                                                                                              | $            | 19,751  |         |  | $ | 14,711  |        
|Receivables  Note 5                                                                                                     |                                                                                                                                                                              |              | 26,224  |         |  |   | 18,538  |        
|Real estate inventories  Note 6                                                                                         |                                                                                                                                                                              |              | 294,678 |         |  |   | 214,418 |        
|Investments in and advances to unconsolidated
	joint ventures  Note 7                                                   |                                                                                                                                                                              |              | 66,753  |         |  |   | 49,966  |        
|Property and equipment, less accumulated
	depreciation of $4,309 and $3,112 at December 31, 2001 and
	2000, respectively |                                                                                                                                                                              |              | 2,171   |         |  |   | 2,818   |        
|Deferred loan costs                                                                                                      |                                                                                                                                                                              |              | 2,831   |         |  |   | 754     |        
|Goodwill  Note 2                                                                                                        |                                                                                                                                                                              |              | 5,896   |         |  |   | 7,138   |        
|Other assets                                                                                                             |                                                                                                                                                                              |              | 15,405  |         |  |   | 21,937  |        
|                                                                                                                         |                                                                                                                                                                              |              |         |         |  |   |         |        
|                                                                                                                         |                                                                                                                                                                              | $            | 433,709 |         |  | $ | 330,280 |        
|                                                                                                                         |                                                                                                                                                                              |              |         |         |  |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                    
|Accounts payable                                                                                                         |                                                                                                                                                                              | $            | 19,346  |         |  | $ | 25,762  |        
|Accrued expenses                                                                                                         |                                                                                                                                                                              |              | 42,276  |         |  |   | 35,096  |        
|Notes payable  Note 8                                                                                                   |                                                                                                                                                                              |              | 151,191 |         |  |   | 89,709  |        
|12 1/2% Senior Notes due July 1,
	2003  Note 8                                                                          |                                                                                                                                                                              |              | 70,279  |         |  |   | 77,201  |        
|                                                                                                                         |                                                                                                                                                                              |              |         |         |  |   |         |        
|                                                                                                                         |                                                                                                                                                                              |              | 283,092 |         |  |   | 227,768 |        
|                                                                                                                         |                                                                                                                                                                              |              |         |         |  |   |         |        
|Commitments and contingencies 
	Note 13                                                                                 |                                                                                                                                                                              |              |         |         |  |   |         |        
|Stockholders equity 
	Notes 3 and 10                                                                                   |                                                                                                                                                                              |              |         |         |  |   |         |        
|                                                                                                                         | Common stock, par value $.01 per share;
	30,000,000 shares authorized; 10,619,399 and
	10,570,223 shares issued and outstanding at
	December 31, 2001 and 2000, respectively |              |         | 106     |  |   |         | 106     |  
|                                                                                                                         | Additional paid-in capital                                                                                                                                                   |              |         | 127,035 |  |   |         | 126,608 |  
|                                                                                                                         | Retained earnings (accumulated deficit) from
	January 1, 1994                                                                                                                |              |         | 23,476  |  |   |         | (24,202 | )
|                                                                                                                         |                                                                                                                                                                              |              |         |         |  |   |         |        
|                                                                                                                         |                                                                                                                                                                              |              | 150,617 |         |  |   | 102,512 |        
|                                                                                                                         |                                                                                                                                                                              |              |         |         |  |   |         |        
|                                                                                                                         |                                                                                                                                                                              | $            | 433,709 |         |  | $ | 330,280 |        
|                                                                                                                         |                                                                                                                                                                              |              |         |         |  |   |         |        

See accompanying notes.

37



---



##### 



WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands except per common share
amounts)


(Notes 2 and 3)


|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |          |  
|----------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------- | -------- | -------- | - | ---- | -------- | -------- | - | - | -------- | -------- | -
|                                                                                                      |                                                     |                        
|                                                                                                      |                                                     | Year Ended December 31,
|                                                                                                      |                                                     |                        
|                                                                                                      |                                                     | 2001                    |          | 2000     |   | 1999
|                                                                                                      |                                                     |                         |          |          |   |     
|Operating revenue                                                                                     |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|                                                                                                      | Home sales                                          |                         | $        | 452,002  |   |      | $        | 403,850  |   |   | $        | 426,839  |  
|                                                                                                      | Lots, land and other sales  Note 12                |                         |          | 7,054    |   |      |          | 3,016    |   |   |          | 13,142   |  
|                                                                                                      | Management fees  Note 1                            |                         |          | 9,127    |   |      |          | 10,456   |   |   |          | 4,825    |  
|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|                                                                                                      |                                                     |                         | 468,183  |          |   |      | 417,322  |          |   |   | 444,806  |         
|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|Operating costs                                                                                       |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|                                                                                                      | Cost of sales  homes                               |                         |          | (382,608 | ) |      |          | (335,891 | ) |   |          | (357,153 | )
|                                                                                                      | Cost of sales  lots, land and other                |                         |          | (5,158   | ) |      |          | (3,378   | ) |   |          | (13,223  | )
|                                                                                                      | Sales and marketing                                 |                         |          | (18,149  | ) |      |          | (16,515  | ) |   |          | (19,387  | )
|                                                                                                      | General and administrative                          |                         |          | (37,171  | ) |      |          | (35,348  | ) |   |          | (24,193  | )
|                                                                                                      | Amortization of goodwill  Note 2                   |                         |          | (1,242   | ) |      |          | (1,244   | ) |   |          | (307     | )
|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|                                                                                                      |                                                     |                         | (444,328 | )        |   |      | (392,376 | )        |   |   | (414,263 | )       
|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|Equity in income of unconsolidated joint
	ventures  Note 7                                           |                                                     |                         | 22,384   |          |   |      | 24,416   |          |   |   | 17,859   |         
|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|Operating income                                                                                      |                                                     |                         | 46,239   |          |   |      | 49,362   |          |   |   | 48,402   |         
|Interest expense, net of amounts
	capitalized  Note 8                                                |                                                     |                         | (227     | )        |   |      | (5,557   | )        |   |   | (6,153   | )       
|Financial advisory expenses 
	Note 3                                                                 |                                                     |                         |         |          |   |      |         |          |   |   | (2,197   | )       
|Other income (expense),
	net  Note 2                                                                 |                                                     |                         | 7,513    |          |   |      | 7,324    |          |   |   | 3,445    |         
|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|Income before income taxes and extraordinary item                                                     |                                                     |                         | 53,525   |          |   |      | 51,129   |          |   |   | 43,497   |         
|                                                                                                     
|Provision for income taxes  Notes 4
	and 10                                                          |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|                                                                                                      | Income taxes  benefit credited to
	paid-in capital |                         |          |         |   |      |          | (9,287   | ) |   |          |         |  
|                                                                                                      | Income taxes  net of benefit                       |                         |          | (5,847   | ) |      |          | (3,070   | ) |   |          | (220     | )
|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|Income before extraordinary item                                                                      |                                                     |                         | 47,678   |          |   |      | 38,772   |          |   |   | 43,277   |         
|Extraordinary item  gain from
	retirement of debt, net of applicable income taxes 
	Notes 10 and 11 |                                                     |                         |         |          |   |      | 496      |          |   |   | 4,200    |         
|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|Net income                                                                                            |                                                     | $                       | 47,678   |          |   | $    | 39,268   |          |   | $ | 47,477   |         
|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|Basic earnings per common share: 
	Note 1                                                            |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|                                                                                                      | Before extraordinary item                           |                         | $        | 4.50     |   |      | $        | 3.69     |   |   | $        | 4.15     |  
|                                                                                                      | Extraordinary item                                  |                         |          |         |   |      |          | 0.05     |   |   |          | 0.40     |  
|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|                                                                                                      | After extraordinary item                            |                         | $        | 4.50     |   |      | $        | 3.74     |   |   | $        | 4.55     |  
|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|Diluted earnings per common share: 
	Note 1                                                          |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|                                                                                                      | Before extraordinary item                           |                         | $        | 4.44     |   |      | $        | 3.69     |   |   | $        | 4.15     |  
|                                                                                                      | Extraordinary item                                  |                         |          |         |   |      |          | 0.05     |   |   |          | 0.40     |  
|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |         
|                                                                                                      | After extraordinary item                            |                         | $        | 4.44     |   |      | $        | 3.74     |   |   | $        | 4.55     |  
|                                                                                                      |                                                     |                         |          |          |   |      |          |          |   |   |          |         

See accompanying notes.

38



---



##### 



WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(in thousands)


(Notes 3 and 4)


|                                                                                                                   |  |              |        |            |  |               |     |          |  |       |         |  |  |   |          |   |  |   |         | 
|------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------ | ---------- |  | ------------- | --- | -------- |  | ----- | ------- |  |  | - | -------- | - |  | - | ------- | 
|                                                                                                                   |  |              |        |            |  |               |     | Retained |  |      
|                                                                                                                   |  |              |        |            |  |               |     | Earnings |  |      
|                                                                                                                   |  |              |        |            |  | (Accumulated  |     |         
|                                                                                                                   |  | Common Stock |        | Additional |  | Deficit) from |     |         
|                                                                                                                   |  |              |        | Paid-In    |  | January 1,    |     |         
|                                                                                                                   |  | Shares       |        | Amount     |  | Capital       |     | 1994     |  | Total
|                                                                                                                   |  |              |        |            |  |               |     |          |  |      
|Balance  December 31, 1998                                                                                        |  |              | 10,439 |            |  | $             | 104 |          |  | $     | 116,667 |  |  | $ | (110,947 | ) |  | $ | 5,824   | 
|Net income for the year                                                                                            |  |              |       |            |  |               |    |          |  |       |        |  |  |   | 47,477   |   |  |   | 47,477  | 
|                                                                                                                   |  |              |        |            |  |               |     |          |  |       |         |  |  |   |          |   |  |   |         | 
|Balance  December 31, 1999                                                                                        |  |              | 10,439 |            |  |               | 104 |          |  |       | 116,667 |  |  |   | (63,470  | ) |  |   | 53,301  | 
|Issuance of common stock upon exercise of stock
	options  Note 9                                                  |  |              | 131    |            |  |               | 2   |          |  |       | 654     |  |  |   |         |   |  |   | 656     | 
|Net income for the year                                                                                            |  |              |       |            |  |               |    |          |  |       |        |  |  |   | 39,268   |   |  |   | 39,268  | 
|Income tax benefits related to temporary
	differences existing prior to the
	quasi-reorganization  Notes 4 and 10 |  |              |       |            |  |               |    |          |  |       | 9,287   |  |  |   |         |   |  |   | 9,287   | 
|                                                                                                                   |  |              |        |            |  |               |     |          |  |       |         |  |  |   |          |   |  |   |         | 
|Balance  December 31, 2000                                                                                        |  |              | 10,570 |            |  |               | 106 |          |  |       | 126,608 |  |  |   | (24,202  | ) |  |   | 102,512 | 
|Issuance of common stock upon exercise of stock
	options  Note 9                                                  |  |              | 49     |            |  |               |    |          |  |       | 427     |  |  |   |         |   |  |   | 427     | 
|Net income for the year                                                                                            |  |              |       |            |  |               |    |          |  |       |        |  |  |   | 47,678   |   |  |   | 47,678  | 
|                                                                                                                   |  |              |        |            |  |               |     |          |  |       |         |  |  |   |          |   |  |   |         | 
|Balance  December 31, 2001                                                                                        |  |              | 10,619 |            |  | $             | 106 |          |  | $     | 127,035 |  |  | $ | 23,476   |   |  | $ | 150,617 | 
|                                                                                                                   |  |              |        |            |  |               |     |          |  |       |         |  |  |   |          |   |  |   |         | 

See accompanying notes.

39



---



##### 



WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(in thousands)


(Notes 2 and 3)


|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |          |         |         |  
|-------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------- | -------- | ------- | ------- | ------ | -------- | ------- | ------- | ------- | -------- | ------- | ------- | -
|                                                               |                                                                                                                |                                                  
|                                                               |                                                                                                                | Year Ended December 31,                          
|                                                               |                                                                                                                |                                                  
|                                                               |                                                                                                                | 2001                                              |                         | 2000     |         | 1999   
|                                                               |                                                                                                                |                                                   |                         |          |         |        
|Operating activities                                           |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|                                                               | Net income                                                                                                     |                                                   | $                       | 47,678   |         |         | $      | 39,268   |         |         | $       | 47,477   |        
|                                                               | Adjustments to reconcile net income to net cash
	(used in) provided by operating activities:                   |                                                   |                         |          |         |         |        |          |         |         |         |          |        
|                                                               |                                                                                                                | Depreciation and amortization                     |                         |          | 2,519   |         |        |          | 2,499   |         |         |          | 1,518   |        
|                                                               |                                                                                                                | Equity in income of unconsolidated joint ventures |                         |          | (22,384 | )       |        |          | (24,416 | )       |         |          | (17,859 | )      
|                                                               |                                                                                                                | Extraordinary gain on repurchase of Senior Notes  |                         |          |        |         |        |          | (561    | )       |         |          | (4,225  | )      
|                                                               |                                                                                                                | Provision for income taxes                        |                         |          | 5,847   |         |        |          | 12,383  |         |         |          | 245     |        
|                                                               |                                                                                                                | Net changes in operating assets and liabilities:  |                         |          |         |         |        |          |         |         |         |          |         |        
|                                                               |                                                                                                                |                                                   | Receivables             |          |         | 2,480   |        |          |         | (113    | )       |          |         | (6,531  | )
|                                                               |                                                                                                                |                                                   | Real estate inventories |          |         | (37,810 | )      |          |         | (25,255 | )       |          |         | 63,191  |  
|                                                               |                                                                                                                |                                                   | Deferred loan costs     |          |         | (2,077  | )      |          |         | 841     |         |          |         | 1,280   |  
|                                                               |                                                                                                                |                                                   | Other assets            |          |         | 6,532   |        |          |         | (4,515  | )       |          |         | (15,099 | )
|                                                               |                                                                                                                |                                                   | Accounts payable        |          |         | (6,416  | )      |          |         | 10,109  |         |          |         | (6,847  | )
|                                                               |                                                                                                                |                                                   | Accrued expenses        |          |         | 1,333   |        |          |         | (899    | )       |          |         | 2,704   |  
|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|                                                               | Net cash (used in) provided by operating
	activities                                                           |                                                   |                         | (2,298   | )       |         |        | 9,341    |         |         |         | 65,854   |        
|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|Investing activities                                           |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|                                                               | Investment in and advances to unconsolidated
	joint ventures                                                   |                                                   |                         | (30,547  | )       |         |        | (20,600  | )       |         |         | (5,494   | )      
|                                                               | Distributions from unconsolidated joint ventures                                                               |                                                   |                         | 32,947   |         |         |        | 45,018   |         |         |         | 11,680   |        
|                                                               | Proceeds from contribution of land to joint
	ventures                                                          |                                                   |                         |         |         |         |        |         |         |         |         | 3,700    |        
|                                                               | Mortgage notes receivable originations/issuances                                                               |                                                   |                         | (220,505 | )       |         |        | (116,773 | )       |         |         | (54,965  | )      
|                                                               | Mortgage notes receivable sales/repayments                                                                     |                                                   |                         | 214,636  |         |         |        | 113,474  |         |         |         | 58,933   |        
|                                                               | Purchases of property and equipment                                                                            |                                                   |                         | (630     | )       |         |        | (1,890   | )       |         |         | (22      | )      
|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|                                                               | Net cash (used in) provided by investing
	activities                                                           |                                                   |                         | (4,099   | )       |         |        | 19,229   |         |         |         | 13,832   |        
|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|Financing activities                                           |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|                                                               | Proceeds from borrowings on notes payable                                                                      |                                                   |                         | 687,641  |         |         |        | 467,446  |         |         |         | 198,052  |        
|                                                               | Principal payments on notes payable                                                                            |                                                   |                         | (669,709 | )       |         |        | (462,008 | )       |         |         | (264,139 | )      
|                                                               | Repurchase of 12 1/2% Senior Notes                                                                             |                                                   |                         | (51,637  | )       |         |        | (22,107  | )       |         |         | (35,400  | )      
|                                                               | Reissuance of 12 1/2% Senior Notes                                                                             |                                                   |                         | 44,715   |         |         |        |         |         |         |         |         |        
|                                                               | Common stock issued for exercised options                                                                      |                                                   |                         | 427      |         |         |        | 656      |         |         |         |         |        
|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|                                                               | Net cash provided by (used in) financing
	activities                                                           |                                                   |                         | 11,437   |         |         |        | (16,013  | )       |         |         | (101,487 | )      
|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|Net increase (decrease) in cash and cash
	equivalents          |                                                                                                                |                                                   | 5,040                   |          |         |         | 12,557 |          |         |         | (21,801 | )       
|Cash and cash equivalents  beginning
	of year                 |                                                                                                                |                                                   | 14,711                  |          |         |         | 2,154  |          |         |         | 23,955  |         
|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|Cash and cash equivalents  end of year                        |                                                                                                                | $                                                 | 19,751                  |          |         | $       | 14,711 |          |         | $       | 2,154   |         
|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|Supplemental disclosures of cash flow and
	non-cash activities |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|                                                               | Cash paid during the period for interest, net of
	amounts capitalized                                          |                                                   | $                       | (1,301   | )       |         | $      | 5,304    |         |         | $       | 7,198    |        
|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|                                                               | Issuance of notes payable for land acquisitions                                                                |                                                   | $                       | 43,550   |         |         | $      | 10,042   |         |         | $       | 22,181   |        
|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|                                                               | Investment in joint venture in connection with
	contribution of land to joint venture                          |                                                   | $                       | 1,100    |         |         | $      | 2,749    |         |         | $       | 1,845    |        
|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|                                                               | Debt assumed by joint venture in connection with
	contribution of land to joint venture                        |                                                   | $                       |         |         |         | $      | 2,401    |         |         | $       | 33,662   |        
|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         
|                                                               | Assumption of liabilities related to purchase of
	substantially all of the assets of William Lyon Homes,
	Inc. |                                                   | $                       |         |         |         | $      |         |         |         | $       | 101,058  |        
|                                                               |                                                                                                                |                                                   |                         |          |         |         |        |          |         |         |         |         

See accompanying notes.

40



---



##### 



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, 2001, 2000 and 1999, and
accordingly, are not separately reported.

The Company evaluates performance and allocates
resources primarily based on the operating income of individual
home building projects. Operating income is defined by the
Company as sales of homes, lots and land; less cost of sales,
impairment losses on real estate, selling and marketing, and
general and administrative expenses. Accordingly, operating
income excludes certain expenses included in the determination
of net income. Operating income from home building operations
totaled $46.2 million, $49.4 million and
$48.4 million for the years ended December 31, 2001,
2000 and 1999, respectively.

All revenues are from external customers. There
were no customers that contributed 10% or more of the
Companys total revenues during 2001, 2000 or 1999.

Real Estate Inventories and
Related Indebtedness

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

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

41



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

Financial Accounting Standards Board Statement 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),
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.

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), effective for fiscal years beginning after
December 15, 2001. Statement No. 144 supersedes
Statement No. 121. The Company does not believe
Statement 144 will have a significant impact on the
earnings or financial position of the Company upon adoption.

Interest incurred during the period in which real
estate projects are not under development or during the period
subsequent to the completion of projects are expensed in the
period incurred. Economic conditions in the real estate industry
can cause a delay in the development of certain real estate
projects and, as a result, can lengthen the periods when such
projects are not under development and, accordingly, have a
significant impact on profitability as a result of expensed
interest. Interest expensed during 2001, 2000 and 1999 was
approximately $227,000, $5,557,000 and $6,153,000, respectively.

Property and Equipment

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

Deferred Loan Costs

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

Goodwill

Goodwill, which represents the excess of the
purchase price over net assets acquired (Note 2), is
amortized on a straight-line basis over an estimated useful life
of seven years. 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 will no longer be amortized but will be
subject to annual impairment tests in accordance with Statement
No. 142. The Company will apply the new rule on accounting
for goodwill beginning in the first quarter of 2002. Application
of the nonamortization provisions of Statement No. 142 is

42



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

expected to result in an increase in net income
of approximately $800,000 ($0.08 per share) per year. During
2002, the Company will perform the first of the required
impairment tests of goodwill as of January 1, 2002 and has
not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.

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 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, 2001,
the partial recourse note receivable of $2,278,000 and related
deferred profits of $2,385,000 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 .0475% (6.49% at December 31,
2001).

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.

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, 2001.

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.

43



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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, 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. Basic and diluted earnings per common
share for the year ended December 31, 1999 are based on
10,439,135 shares of common stock outstanding, after adjustment
for the retroactive effect of the merger with a wholly-owned
subsidiary and the conversion of each share of previously
outstanding Series A and Series B common stock into
0.2 common share of the surviving company as described in
Note 3.

Use of Estimates

The preparation of the Companys financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of
the assets and liabilities as of December 31, 2001 and 2000
and revenues and expenses for each of the three years in the
period ended December 31, 2001. Accordingly, actual results
could differ from those estimates in the near-term.

Impact of New Accounting
Pronouncements

In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by
Statement No. 137 and Statement No. 138 (collectively
Statement No. 133), which is required to be
adopted for fiscal years beginning after June 15, 2000.
Statement No. 133 requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If
the derivative is a hedge, depending on the nature of the hedge,
a change in the fair value of the derivative will either be
offset against the change in the fair value of the hedged asset,
liability, or firm commitment through earnings or recognized in
other comprehensive income until the hedged item is recognized
in earnings. The implementation of Statement No. 133 had no
impact on the Companys results of operations or financial
position for the year ended December 31, 2001.

Note 2  Acquisition of
Substantially All of the Assets of William Lyon Homes,
Inc.

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

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

44



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

$8,689,000 has been reflected as goodwill and is
being amortized on a straight-line basis over an estimated
useful life of seven years. 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 will no longer be amortized
but will be subject to annual impairment tests in accordance
with Statement No. 142. The Company will apply the new rule
on accounting for goodwill beginning in the first quarter of
2002. Application of the nonamortization provisions of Statement
No. 142 is expected to result in an increase in net income
of approximately $800,000 ($0.08 per share) per year. During
2002, the Company will perform the first of the required
impairment tests of goodwill as of January 1, 2002 and has
not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.

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

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

Note 3  Company Merges with and
into Wholly-owned Subsidiary

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

The principal purpose of the merger is to help
preserve the Companys substantial net operating loss
carryforwards and other tax benefits for use in offsetting
future taxable income by decreasing, but not eliminating, the
risk of an ownership change for federal income tax
purposes. The Companys future use of tax carryforwards
could be severely limited if there is an ownership
change as defined in applicable tax laws and regulations,
over any three year period. The imposition of transfer
restrictions in connection with the merger was intended to
reduce the risk of an ownership change. In general, the transfer
restrictions prohibit,

45



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

without prior approval of the board of directors
of the Company, the direct or indirect disposition or
acquisition of any stock of the Company by or to any holder who
owns or would so own upon the acquisition (either directly or
through the tax attribution rules) 5% or more of the
Companys stock. The Company has learned that one
stockholder unknowingly violated such transfer restrictions,
which restrictions are set forth in the Companys
Certificate of Incorporation. The stockholder has agreed to
divest itself of the requisite number of the Companys
shares so that such stockholder can return to compliance with
the Companys Certificate of Incorporation.

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

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

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

Note 4 
Quasi-Reorganization

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

46



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 5  Receivables

Receivables consist of the following (in
thousands):

|                                                                                |                                                                                                                                  |              |        |        |  |   |        |       | 
|------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------ | ------ |  | - | ------ | ----- | 
|                                                                                |                                                                                                                                  |             
|                                                                                |                                                                                                                                  | December 31,
|                                                                                |                                                                                                                                  |             
|                                                                                |                                                                                                                                  | 2001         |        | 2000  
|                                                                                |                                                                                                                                  |              |        |       
|Notes receivable:                                                               |                                                                                                                                  |              |        |        |  |   |        |      
|                                                                                | First trust deed mortgage notes receivable,
	pledged as collateral for revolving mortgage warehouse credit
	facility             |              | $      | 10,985 |  |   | $      | 7,163 | 
|                                                                                | Notes receivable from sale and related leaseback
	of 56 model homes which is accounted for on the cost
	recovery method (Note 1) |              |        | 2,278  |  |   |        |      | 
|                                                                                | Other notes receivable                                                                                                           |              |        | 2,046  |  |   |        |      | 
|                                                                                |                                                                                                                                  |              |        |        |  |   |        |      
|                                                                                |                                                                                                                                  |              | 15,309 |        |  |   | 7,163  |      
|Receivables from affiliates for management fees,
	cost reimbursements and other |                                                                                                                                  |              | 6,573  |        |  |   | 6,859  |      
|Other receivables  primarily escrow
	proceeds                                  |                                                                                                                                  |              | 4,342  |        |  |   | 4,516  |      
|                                                                                |                                                                                                                                  |              |        |        |  |   |        |      
|                                                                                |                                                                                                                                  | $            | 26,224 |        |  | $ | 18,538 |      
|                                                                                |                                                                                                                                  |              |        |        |  |   |        |      

Note 6  Real Estate
Inventories

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

|                    |  |                   |         |                    |  |       |        |  |  |   |         | 
|------------------- |  | ----------------- | ------- | ------------------ |  | ----- | ------ |  |  | - | ------- | 
|                    |  |                  
|                    |  | December 31, 2001
|                    |  |                  
|                    |  |                   |         | Completed          |  |      
|                    |  |                   |         | Inventory,         |  |      
|                    |  | Land and          |         | Including Models   |  |      
|                    |  | Construction      |         | and Completed      |  |      
|Division            |  | In Progress       |         | Lots Held for Sale |  | Total
|                    |  |                   |         |                    |  |      
|Southern California |  | $                 | 75,764  |                    |  | $     | 10,231 |  |  | $ | 85,995  | 
|San Diego           |  |                   | 51,559  |                    |  |       | 10,459 |  |  |   | 62,018  | 
|Northern California |  |                   | 62,240  |                    |  |       | 3,978  |  |  |   | 66,218  | 
|Arizona             |  |                   | 41,340  |                    |  |       | 2,648  |  |  |   | 43,988  | 
|Nevada              |  |                   | 33,339  |                    |  |       | 2,262  |  |  |   | 35,601  | 
|Other               |  |                   | 858     |                    |  |       |       |  |  |   | 858     | 
|                    |  |                   |         |                    |  |       |        |  |  |   |         | 
|                    |  | $                 | 265,100 |                    |  | $     | 29,578 |  |  | $ | 294,678 | 
|                    |  |                   |         |                    |  |       |        |  |  |   |         | 

|                    |  |                   |         |                    |  |       |        |  |  |   |         | 
|------------------- |  | ----------------- | ------- | ------------------ |  | ----- | ------ |  |  | - | ------- | 
|                    |  |                  
|                    |  | December 31, 2000
|                    |  |                  
|                    |  |                   |         | Completed          |  |      
|                    |  |                   |         | Inventory,         |  |      
|                    |  | Land and          |         | Including Models   |  |      
|                    |  | Construction      |         | and Completed      |  |      
|Division            |  | In Progress       |         | Lots Held for Sale |  | Total
|                    |  |                   |         |                    |  |      
|Southern California |  | $                 | 48,889  |                    |  | $     | 5,747  |  |  | $ | 54,636  | 
|San Diego           |  |                   | 51,753  |                    |  |       | 6,066  |  |  |   | 57,819  | 
|Northern California |  |                   | 30,609  |                    |  |       | 2,862  |  |  |   | 33,471  | 
|Arizona             |  |                   | 23,325  |                    |  |       | 5,336  |  |  |   | 28,661  | 
|Nevada              |  |                   | 32,252  |                    |  |       | 7,195  |  |  |   | 39,447  | 
|Other               |  |                   | 384     |                    |  |       |       |  |  |   | 384     | 
|                    |  |                   |         |                    |  |       |        |  |  |   |         | 
|                    |  | $                 | 187,212 |                    |  | $     | 27,206 |  |  | $ | 214,418 | 
|                    |  |                   |         |                    |  |       |        |  |  |   |         | 

47



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 7  Investments in and Advances
to Unconsolidated Joint Ventures

The Company and certain of its subsidiaries are
general partners or members in 25 joint ventures involved in the
development and sale of residential projects. Such joint
ventures are 50% or less owned and, accordingly, such joint
ventures are not consolidated with the Companys financial
statements. The Companys investments in unconsolidated
joint ventures are accounted for using the equity method.
Condensed combined financial information of these joint ventures
as of December 31, 2001 and 2000 is summarized as follows:

CONDENSED COMBINED BALANCE SHEETS

(in thousands)


|                                 |                    |              |         |         |  |   |         |         | 
|-------------------------------- | ------------------ | ------------ | ------- | ------- |  | - | ------- | ------- | 
|                                 |                    |             
|                                 |                    | December 31,
|                                 |                    |             
|                                 |                    | 2001         |         | 2000   
|                                 |                    |              |         |        
|ASSETS                          
|Cash and cash equivalents        |                    | $            | 9,404   |         |  | $ | 10,693  |        
|Receivables                      |                    |              | 5,711   |         |  |   | 1,440   |        
|Real estate inventories          |                    |              | 294,698 |         |  |   | 240,019 |        
|Other assets                     |                    |              |        |         |  |   | 275     |        
|                                 |                    |              |         |         |  |   |         |        
|                                 |                    | $            | 309,813 |         |  | $ | 252,427 |        
|                                 |                    |              |         |         |  |   |         |        
|LIABILITIES AND OWNERS CAPITAL 
|Accounts payable                 |                    | $            | 21,931  |         |  | $ | 15,921  |        
|Accrued expenses                 |                    |              | 4,288   |         |  |   | 4,984   |        
|Notes payable                    |                    |              | 72,344  |         |  |   | 45,162  |        
|Advances from William Lyon Homes |                    |              | 11,768  |         |  |   | 1,959   |        
|                                 |                    |              |         |         |  |   |         |        
|                                 |                    |              | 110,331 |         |  |   | 68,026  |        
|                                 |                    |              |         |         |  |   |         |        
|Owners Capital                  |                    |              |         |         |  |   |         |        
|                                 | William Lyon Homes |              |         | 54,985  |  |   |         | 48,007  | 
|                                 | Others             |              |         | 144,497 |  |   |         | 136,394 | 
|                                 |                    |              |         |         |  |   |         |        
|                                 |                    |              | 199,482 |         |  |   | 184,401 |        
|                                 |                    |              |         |         |  |   |         |        
|                                 |                    | $            | 309,813 |         |  | $ | 252,427 |        
|                                 |                    |              |         |         |  |   |         |        

48



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

CONDENSED COMBINED STATEMENTS OF
INCOME

(in thousands)


|                     |                       |                         |         |          |   |      |         |          |   |   |         |          |  
|-------------------- | --------------------- | ----------------------- | ------- | -------- | - | ---- | ------- | -------- | - | - | ------- | -------- | -
|                     |                       |                        
|                     |                       | Year Ended December 31,
|                     |                       |                        
|                     |                       | 2001                    |         | 2000     |   | 1999
|                     |                       |                         |         |          |   |     
|Operating revenue    |                       |                         |         |          |   |      |         |          |   |   |         |         
|                     | Home sales            |                         | $       | 316,098  |   |      | $       | 367,724  |   |   | $       | 203,336  |  
|                     | Land sale             |                         |         | 5,371    |   |      |         | 7,128    |   |   |         |         |  
|                     |                       |                         |         |          |   |      |         |          |   |   |         |         
|                     |                       |                         | 321,469 |          |   |      | 374,852 |          |   |   | 203,336 |         
|Operating costs      |                       |                         |         |          |   |      |         |          |   |   |         |         
|                     | Cost of sales  homes |                         |         | (258,997 | ) |      |         | (307,215 | ) |   |         | (163,215 | )
|                     | Cost of sales  land  |                         |         | (4,214   | ) |      |         | (7,128   | ) |   |         |         |  
|                     | Sales and marketing   |                         |         | (10,609  | ) |      |         | (11,567  | ) |   |         | (6,734   | )
|                     |                       |                         |         |          |   |      |         |          |   |   |         |         
|Operating income     |                       |                         | 47,649  |          |   |      | 48,942  |          |   |   | 33,387  |         
|Other income, net    |                       |                         | 295     |          |   |      | 581     |          |   |   | 588     |         
|                     |                       |                         |         |          |   |      |         |          |   |   |         |         
|Net income           |                       | $                       | 47,944  |          |   | $    | 49,523  |          |   | $ | 33,975  |         
|                     |                       |                         |         |          |   |      |         |          |   |   |         |         
|Allocation to owners |                       |                         |         |          |   |      |         |          |   |   |         |         
|                     | William Lyon Homes    |                         | $       | 22,384   |   |      | $       | 24,416   |   |   | $       | 17,859   |  
|                     | Others                |                         |         | 25,560   |   |      |         | 25,107   |   |   |         | 16,116   |  
|                     |                       |                         |         |          |   |      |         |          |   |   |         |         
|                     |                       | $                       | 47,944  |          |   | $    | 49,523  |          |   | $ | 33,975  |         
|                     |                       |                         |         |          |   |      |         |          |   |   |         |         

Note 8  Notes Payable and
12 1/2% Senior Notes

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

|                                      |                                                                                                                                                 |              |         |        |  |   |         |        | 
|------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------- | ------ |  | - | ------- | ------ | 
|                                      |                                                                                                                                                 |             
|                                      |                                                                                                                                                 | December 31,
|                                      |                                                                                                                                                 |             
|                                      |                                                                                                                                                 | 2001         |         | 2000  
|                                      |                                                                                                                                                 |              |         |       
|Notes payable:                        |                                                                                                                                                 |              |         |        |  |   |         |       
|                                      | Revolving Credit Facilities                                                                                                                     |              | $       | 76,053 |  |   | $       | 66,322 | 
|                                      | Construction notes payable                                                                                                                      |              |         | 21,795 |  |   |         | 9,592  | 
|                                      | Purchase money notes payable  land
	acquisitions                                                                                               |              |         | 34,358 |  |   |         | 6,632  | 
|                                      | Collateralized mortgage obligations under
	revolving mortgage warehouse credit facility, secured by first
	trust deed mortgage notes receivable |              |         | 10,985 |  |   |         | 7,163  | 
|                                      | Unsecured line of credit                                                                                                                        |              |         | 8,000  |  |   |         |       | 
|                                      |                                                                                                                                                 |              |         |        |  |   |         |       
|                                      |                                                                                                                                                 |              | 151,191 |        |  |   | 89,709  |       
|12 1/2% Senior Notes due July 1, 2003 |                                                                                                                                                 |              | 70,279  |        |  |   | 77,201  |       
|                                      |                                                                                                                                                 |              |         |        |  |   |         |       
|                                      |                                                                                                                                                 | $            | 221,470 |        |  | $ | 166,910 |       
|                                      |                                                                                                                                                 |              |         |        |  |   |         |       

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

|                     |  |                         |         |      |  |      |         |   |  |   |         |  
|-------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                     |  |                        
|                     |  | Year Ended December 31,
|                     |  |                        
|                     |  | 2001                    |         | 2000 |  | 1999
|                     |  |                         |         |      |  |     
|Interest incurred    |  | $                       | 21,908  |      |  | $    | 26,012  |   |  | $ | 24,500  |  
|Interest capitalized |  |                         | (21,681 | )    |  |      | (20,455 | ) |  |   | (18,347 | )
|                     |  |                         |         |      |  |      |         |   |  |   |         |  
|Interest expense     |  | $                       | 227     |      |  | $    | 5,557   |   |  | $ | 6,153   |  
|                     |  |                         |         |      |  |      |         |   |  |   |         |  

49



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Senior Notes

As of December 31, 2001, the Companys
outstanding balance under its 12 1/2% Senior Notes was
$70,279,000. On May 1, 2001, the Company completed a
consent solicitation with respect to the 12 1/2% 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 12 1/2% 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 12 1/2% 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 12 1/2% Senior Notes which matured on
July 1, 2001 amounting to $5,893,000.

In April and May 2000, the Company purchased
$21,775,000 principal amount of its outstanding Senior Notes at
a cost of $21,125,000. 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 12 1/2% 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 Senior Notes are effectively junior to borrowings under
the Revolving Credit Facilities with respect to such assets.
Delaware Lyon and its consolidated subsidiaries are referred to
collectively herein as the Company. Interest on the
Senior Notes is payable on January 1 and July 1 of
each year.

The 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 Senior Notes.

Delaware Lyon is required to offer to repurchase
certain Senior Notes at a price equal to 100% of the principal
amount plus any accrued and unpaid interest to the date of
repurchase if Delaware Lyons Consolidated Tangible Net
Worth is less than $60,000,000 on the last day of any two
consecutive fiscal quarters, as well as from the proceeds of
certain asset sales.

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

The Indenture governing the Senior Notes
restricts Delaware Lyon and certain of its subsidiaries with
respect to, among other things: (i) the payment of
dividends on and redemptions of capital stock, (ii) the
incurrence of indebtedness or the issuance of preferred stock,
(iii) the creation of certain liens,
(iv) consolidations or mergers with or 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.

50



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

As of December 31, 2001, the outstanding
12 1/2% 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.

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, 2001

(in thousands)


|                                                              |                   |                |         |              |  |               |         |             |  |              |        |        |  |   |          |         |   |   |         |         | 
|------------------------------------------------------------- | ----------------- | -------------- | ------- | ------------ |  | ------------- | ------- | ----------- |  | ------------ | ------ | ------ |  | - | -------- | ------- | - | - | ------- | ------- | 
|                                                              |                   |                |         |              |  |              
|                                                              |                   | Unconsolidated |         |              |  |              
|                                                              |                   |                |         |              |  |              
|                                                              |                   | Delaware       |         | William Lyon |  | Non-Guarantor |         | Eliminating |  | Consolidated
|                                                              |                   | Lyon           |         | Homes, Inc.  |  | Subsidiaries  |         | Entries     |  | Company     
|                                                              |                   |                |         |              |  |               |         |             |  |             
|ASSETS                                                        |                   |                |         |              |  |               |         |             |  |              |        |        |  |   |          |         |   |   |         |        
|                                                             
|Cash and cash equivalents                                     |                   | $              |        |              |  | $             | 17,270  |             |  | $            | 2,481  |        |  | $ |         |         |   | $ | 19,751  |        
|Receivables                                                   |                   |                |        |              |  |               | 9,736   |             |  |              | 16,488 |        |  |   |         |         |   |   | 26,224  |        
|Real estate inventories                                       |                   |                |        |              |  |               | 287,275 |             |  |              | 7,403  |        |  |   |         |         |   |   | 294,678 |        
|Investments in and advances to unconsolidated
	joint ventures |                   |                |        |              |  |               | 25,359  |             |  |              | 41,394 |        |  |   |         |         |   |   | 66,753  |        
|Property and equipment, net                                   |                   |                |        |              |  |               | 1,944   |             |  |              | 227    |        |  |   |         |         |   |   | 2,171   |        
|Deferred loan costs                                           |                   |                | 1,993   |              |  |               | 838     |             |  |              |       |        |  |   |         |         |   |   | 2,831   |        
|Goodwill                                                      |                   |                |        |              |  |               | 5,896   |             |  |              |       |        |  |   |         |         |   |   | 5,896   |        
|Other assets                                                  |                   |                |        |              |  |               | 15,348  |             |  |              | 57     |        |  |   |         |         |   |   | 15,405  |        
|Investments in subsidiaries                                   |                   |                | 147,567 |              |  |               | 49,174  |             |  |              |       |        |  |   | (196,741 | )       |   |   |        |        
|Intercompany receivables                                      |                   |                | 79,308  |              |  |               | 7,972   |             |  |              |       |        |  |   | (87,280  | )       |   |   |        |        
|                                                              |                   |                |         |              |  |               |         |             |  |              |        |        |  |   |          |         |   |   |         |        
|                                                              |                   | $              | 228,868 |              |  | $             | 420,812 |             |  | $            | 68,050 |        |  | $ | (284,021 | )       |   | $ | 433,709 |        
|                                                              |                   |                |         |              |  |               |         |             |  |              |        |        |  |   |          |         |   |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY                          |                   |                |         |              |  |               |         |             |  |              |        |       
|                                                             
|Accounts payable                                              |                   | $              |        |              |  | $             | 19,114  |             |  | $            | 232    |        |  | $ |         |         |   | $ | 19,346  |        
|Accrued expenses                                              |                   |                |        |              |  |               | 39,740  |             |  |              | 2,536  |        |  |   |         |         |   |   | 42,276  |        
|Notes payable                                                 |                   |                |        |              |  |               | 139,168 |             |  |              | 12,023 |        |  |   |         |         |   |   | 151,191 |        
|12 1/2% Senior Notes                                          |                   |                | 70,279  |              |  |               |        |             |  |              |       |        |  |   |         |         |   |   | 70,279  |        
|Intercompany payables                                         |                   |                | 7,972   |              |  |               | 79,308  |             |  |              |       |        |  |   | (87,280  | )       |   |   |        |        
|                                                              |                   |                |         |              |  |               |         |             |  |              |        |        |  |   |          |         |   |   |         |        
|                                                              | Total liabilities |                |         | 78,251       |  |               |         | 277,330     |  |              |        | 14,791 |  |   |          | (87,280 | ) |   |         | 283,092 | 
|Stockholders equity                                          |                   |                | 150,617 |              |  |               | 143,482 |             |  |              | 53,259 |        |  |   | (196,741 | )       |   |   | 150,617 |        
|                                                              |                   |                |         |              |  |               |         |             |  |              |        |        |  |   |          |         |   |   |         |        
|                                                              |                   | $              | 228,868 |              |  | $             | 420,812 |             |  | $            | 68,050 |        |  | $ | (284,021 | )       |   | $ | 433,709 |        
|                                                              |                   |                |         |              |  |               |         |             |  |              |        |        |  |   |          |         |   |   |         |        

51



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2000

(in thousands)


|                                                              |                   |                |         |              |  |               |         |             |  |              |        |       |  |   |          |         |   |   |         |         | 
|------------------------------------------------------------- | ----------------- | -------------- | ------- | ------------ |  | ------------- | ------- | ----------- |  | ------------ | ------ | ----- |  | - | -------- | ------- | - | - | ------- | ------- | 
|                                                              |                   |                |         |              |  |              
|                                                              |                   | Unconsolidated |         |              |  |              
|                                                              |                   |                |         |              |  |              
|                                                              |                   | Delaware       |         | William Lyon |  | Non-Guarantor |         | Eliminating |  | Consolidated
|                                                              |                   | Lyon           |         | Homes, Inc.  |  | Subsidiaries  |         | Entries     |  | Company     
|                                                              |                   |                |         |              |  |               |         |             |  |             
|ASSETS                                                        |                   |                |         |              |  |               |         |             |  |              |        |       |  |   |          |         |   |   |         |        
|                                                             
|Cash and cash equivalents                                     |                   | $              |        |              |  | $             | 12,746  |             |  | $            | 1,965  |       |  | $ |         |         |   | $ | 14,711  |        
|Receivables                                                   |                   |                |        |              |  |               | 7,541   |             |  |              | 10,997 |       |  |   |         |         |   |   | 18,538  |        
|Real estate inventories                                       |                   |                |        |              |  |               | 213,921 |             |  |              | 497    |       |  |   |         |         |   |   | 214,418 |        
|Investments in and advances to unconsolidated
	joint ventures |                   |                |        |              |  |               | 17,008  |             |  |              | 32,958 |       |  |   |         |         |   |   | 49,966  |        
|Property and equipment, net                                   |                   |                |        |              |  |               | 2,564   |             |  |              | 254    |       |  |   |         |         |   |   | 2,818   |        
|Deferred loan costs                                           |                   |                | 181     |              |  |               | 573     |             |  |              |       |       |  |   |         |         |   |   | 754     |        
|Goodwill                                                      |                   |                |        |              |  |               | 7,138   |             |  |              |       |       |  |   |         |         |   |   | 7,138   |        
|Other assets                                                  |                   |                |        |              |  |               | 21,844  |             |  |              | 93     |       |  |   |         |         |   |   | 21,937  |        
|Investments in subsidiaries                                   |                   |                | 98,558  |              |  |               | 34,662  |             |  |              |       |       |  |   | (133,220 | )       |   |   |        |        
|Intercompany receivables                                      |                   |                | 86,194  |              |  |               | 5,220   |             |  |              |       |       |  |   | (91,414  | )       |   |   |        |        
|                                                              |                   |                |         |              |  |               |         |             |  |              |        |       |  |   |          |         |   |   |         |        
|                                                              |                   | $              | 184,933 |              |  | $             | 323,217 |             |  | $            | 46,764 |       |  | $ | (224,634 | )       |   | $ | 330,280 |        
|                                                              |                   |                |         |              |  |               |         |             |  |              |        |       |  |   |          |         |   |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY                          |                   |                |         |              |  |               |         |             |  |              |        |      
|                                                             
|Accounts payable                                              |                   | $              |        |              |  | $             | 25,515  |             |  | $            | 247    |       |  | $ |         |         |   | $ | 25,762  |        
|Accrued expenses                                              |                   |                |        |              |  |               | 33,303  |             |  |              | 1,793  |       |  |   |         |         |   |   | 35,096  |        
|Notes payable                                                 |                   |                |        |              |  |               | 82,546  |             |  |              | 7,163  |       |  |   |         |         |   |   | 89,709  |        
|12 1/2% Senior Notes                                          |                   |                | 77,201  |              |  |               |        |             |  |              |       |       |  |   |         |         |   |   | 77,201  |        
|Intercompany payables                                         |                   |                | 5,220   |              |  |               | 86,194  |             |  |              |       |       |  |   | (91,414  | )       |   |   |        |        
|                                                              |                   |                |         |              |  |               |         |             |  |              |        |       |  |   |          |         |   |   |         |        
|                                                              | Total liabilities |                |         | 82,421       |  |               |         | 227,558     |  |              |        | 9,203 |  |   |          | (91,414 | ) |   |         | 227,768 | 
|Stockholders equity                                          |                   |                | 102,512 |              |  |               | 95,659  |             |  |              | 37,561 |       |  |   | (133,220 | )       |   |   | 102,512 |        
|                                                              |                   |                |         |              |  |               |         |             |  |              |        |       |  |   |          |         |   |   |         |        
|                                                              |                   | $              | 184,933 |              |  | $             | 323,217 |             |  | $            | 46,764 |       |  | $ | (224,634 | )       |   | $ | 330,280 |        
|                                                              |                   |                |         |              |  |               |         |             |  |              |        |       |  |   |          |         |   |   |         |        

52



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2001

(in thousands)


|                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |          |  
|------------------------------------------------- | ----------------------------- | -------------- | ------ | ------------ |  | ------------- | -------- | ----------- | - | ------------ | ------- | ------- | - | - | ------- | - |  | - | -------- | -------- | -
|                                                  |                               |                |        |              |  |              
|                                                  |                               | Unconsolidated |        |              |  |              
|                                                  |                               |                |        |              |  |              
|                                                  |                               | Delaware       |        | William Lyon |  | Non-Guarantor |          | Eliminating |   | Consolidated
|                                                  |                               | Lyon           |        | Homes, Inc.  |  | Subsidiaries  |          | Entries     |   | Company     
|                                                  |                               |                |        |              |  |               |          |             |   |             
|Operating revenue                                 |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                  | Sales                         |                | $      |             |  |               | $        | 413,763     |   |              | $       | 45,293  |   |   | $       |  |  |   | $        | 459,056  |  
|                                                  | Management fees               |                |        |             |  |               |          | 5,466       |   |              |         | 3,661   |   |   |         |  |  |   |          | 9,127    |  
|                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                  |                               |                |       |              |  |               | 419,229  |             |   |              | 48,954  |         |   |   |        |   |  |   | 468,183  |         
|                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                 
|Operating costs                                   |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                  | Cost of sales                 |                |        |             |  |               |          | (346,928    | ) |              |         | (40,838 | ) |   |         |  |  |   |          | (387,766 | )
|                                                  | Sales and marketing           |                |        |             |  |               |          | (15,959     | ) |              |         | (2,190  | ) |   |         |  |  |   |          | (18,149  | )
|                                                  | General and administrative    |                |        |             |  |               |          | (36,872     | ) |              |         | (299    | ) |   |         |  |  |   |          | (37,171  | )
|                                                  | Amortization of goodwill      |                |        |             |  |               |          | (1,242      | ) |              |         |        |   |   |         |  |  |   |          | (1,242   | )
|                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                  |                               |                |       |              |  |               | (401,001 | )           |   |              | (43,327 | )       |   |   |        |   |  |   | (444,328 | )       
|                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Equity in income of unconsolidated joint ventures |                               |                |       |              |  |               | 6,405    |             |   |              | 15,979  |         |   |   |        |   |  |   | 22,384   |         
|                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Income from subsidiaries                          |                               |                | 47,678 |              |  |               | 23,287   |             |   |              |        |         |   |   | (70,965 | ) |  |   |         |         
|                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Operating income                                  |                               |                | 47,678 |              |  |               | 47,920   |             |   |              | 21,606  |         |   |   | (70,965 | ) |  |   | 46,239   |         
|Interest expense, net of amounts capitalized      |                               |                |       |              |  |               | (227     | )           |   |              |        |         |   |   |        |   |  |   | (227     | )       
|Other income (expense), net                       |                               |                |       |              |  |               | 2,369    |             |   |              | 5,144   |         |   |   |        |   |  |   | 7,513    |         
|                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Income before income taxes and extraordinary item |                               |                | 47,678 |              |  |               | 50,062   |             |   |              | 26,750  |         |   |   | (70,965 | ) |  |   | 53,525   |         
|Provision for income taxes                        |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                  | Income taxes  net of benefit |                |        |             |  |               |          | (5,847      | ) |              |         |        |   |   |         |  |  |   |          | (5,847   | )
|                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Net income                                        |                               | $              | 47,678 |              |  | $             | 44,215   |             |   | $            | 26,750  |         |   | $ | (70,965 | ) |  | $ | 47,678   |         
|                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         

53



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 2000

(in thousands)


|                                                                                  |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |          |  
|--------------------------------------------------------------------------------- | --------------------------------------------------- | -------------- | ------ | ------------ |  | ------------- | -------- | ----------- | - | ------------ | ------- | ------- | - | - | ------- | - |  | - | -------- | -------- | -
|                                                                                  |                                                     |                |        |              |  |              
|                                                                                  |                                                     | Unconsolidated |        |              |  |              
|                                                                                  |                                                     |                |        |              |  |              
|                                                                                  |                                                     | Delaware       |        | William Lyon |  | Non-Guarantor |          | Eliminating |   | Consolidated
|                                                                                  |                                                     | Lyon           |        | Homes, Inc.  |  | Subsidiaries  |          | Entries     |   | Company     
|                                                                                  |                                                     |                |        |              |  |               |          |             |   |             
|Operating revenue                                                                 |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                                                  | Sales                                               |                | $      |             |  |               | $        | 368,237     |   |              | $       | 38,629  |   |   | $       |  |  |   | $        | 406,866  |  
|                                                                                  | Management fees                                     |                |        |             |  |               |          | 1,906       |   |              |         | 8,550   |   |   |         |  |  |   |          | 10,456   |  
|                                                                                  |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                                                  |                                                     |                |       |              |  |               | 370,143  |             |   |              | 47,179  |         |   |   |        |   |  |   | 417,322  |         
|                                                                                  |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                                                 
|Operating costs                                                                   |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                                                  | Cost of sales                                       |                |        |             |  |               |          | (305,016    | ) |              |         | (34,253 | ) |   |         |  |  |   |          | (339,269 | )
|                                                                                  | Sales and marketing                                 |                |        |             |  |               |          | (14,618     | ) |              |         | (1,897  | ) |   |         |  |  |   |          | (16,515  | )
|                                                                                  | General and administrative                          |                |        |             |  |               |          | (35,107     | ) |              |         | (241    | ) |   |         |  |  |   |          | (35,348  | )
|                                                                                  | Amortization of goodwill                            |                |        |             |  |               |          | (1,244      | ) |              |         |        |   |   |         |  |  |   |          | (1,244   | )
|                                                                                  |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                                                  |                                                     |                |       |              |  |               | (355,985 | )           |   |              | (36,391 | )       |   |   |        |   |  |   | (392,376 | )       
|                                                                                  |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Equity in income of unconsolidated joint ventures                                 |                                                     |                |       |              |  |               | 3,251    |             |   |              | 21,165  |         |   |   |        |   |  |   | 24,416   |         
|                                                                                  |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Income from subsidiaries                                                          |                                                     |                | 38,772 |              |  |               | 32,826   |             |   |              |        |         |   |   | (71,598 | ) |  |   |         |         
|                                                                                  |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Operating income                                                                  |                                                     |                | 38,772 |              |  |               | 50,235   |             |   |              | 31,953  |         |   |   | (71,598 | ) |  |   | 49,362   |         
|Interest expense, net of amounts capitalized                                      |                                                     |                |       |              |  |               | (5,302   | )           |   |              | (255    | )       |   |   |        |   |  |   | (5,557   | )       
|Other income (expense), net                                                       |                                                     |                |       |              |  |               | 4,434    |             |   |              | 2,890   |         |   |   |        |   |  |   | 7,324    |         
|                                                                                  |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Income before income taxes and extraordinary item                                 |                                                     |                | 38,772 |              |  |               | 49,367   |             |   |              | 34,588  |         |   |   | (71,598 | ) |  |   | 51,129   |         
|Provision for income taxes                                                        |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                                                  | Income taxes  benefit credited to paid-in
	capital |                |        |             |  |               |          | (9,287      | ) |              |         |        |   |   |         |  |  |   |          | (9,287   | )
|                                                                                  | Income taxes  net of benefit                       |                |        |             |  |               |          | (3,070      | ) |              |         |        |   |   |         |  |  |   |          | (3,070   | )
|                                                                                  |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Income before extraordinary item                                                  |                                                     |                | 38,772 |              |  |               | 37,010   |             |   |              | 34,588  |         |   |   | (71,598 | ) |  |   | 38,772   |         
|Extraordinary item  gain from
	retirement of debt net of applicable income taxes |                                                     |                | 496    |              |  |               |         |             |   |              |        |         |   |   |        |   |  |   | 496      |         
|                                                                                  |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Net income                                                                        |                                                     | $              | 39,268 |              |  | $             | 37,010   |             |   | $            | 34,588  |         |   | $ | (71,598 | ) |  | $ | 39,268   |         
|                                                                                  |                                                     |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         

54



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

CONSOLIDATING STATEMENT OF INCOME

Year Ended December 31, 1999

(in thousands)


|                                                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |          |  
|--------------------------------------------------------------------------------- | ----------------------------- | -------------- | ------ | ------------ |  | ------------- | -------- | ----------- | - | ------------ | ------- | ------- | - | - | ------- | - |  | - | -------- | -------- | -
|                                                                                  |                               |                |        |              |  |              
|                                                                                  |                               | Unconsolidated |        |              |  |              
|                                                                                  |                               |                |        |              |  |              
|                                                                                  |                               | Delaware       |        | William Lyon |  | Non-Guarantor |          | Eliminating |   | Consolidated
|                                                                                  |                               | Lyon           |        | Homes, Inc.  |  | Subsidiaries  |          | Entries     |   | Company     
|                                                                                  |                               |                |        |              |  |               |          |             |   |             
|Operating revenue                                                                 |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                                                  | Sales                         |                | $      |             |  |               | $        | 380,160     |   |              | $       | 59,821  |   |   | $       |  |  |   | $        | 439,981  |  
|                                                                                  | Management fees               |                |        |             |  |               |          | 718         |   |              |         | 4,107   |   |   |         |  |  |   |          | 4,825    |  
|                                                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                                                  |                               |                |       |              |  |               | 380,878  |             |   |              | 63,928  |         |   |   |        |   |  |   | 444,806  |         
|                                                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                                                 
|Operating costs                                                                   |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                                                  | Cost of sales                 |                |        |             |  |               |          | (322,929    | ) |              |         | (47,447 | ) |   |         |  |  |   |          | (370,376 | )
|                                                                                  | Sales and marketing           |                |        |             |  |               |          | (16,648     | ) |              |         | (2,739  | ) |   |         |  |  |   |          | (19,387  | )
|                                                                                  | General and administrative    |                |        |             |  |               |          | (23,980     | ) |              |         | (213    | ) |   |         |  |  |   |          | (24,193  | )
|                                                                                  | Amortization of goodwill      |                |        |             |  |               |          | (307        | ) |              |         |        |   |   |         |  |  |   |          | (307     | )
|                                                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                                                  |                               |                |       |              |  |               | (363,864 | )           |   |              | (50,399 | )       |   |   |        |   |  |   | (414,263 | )       
|                                                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Equity in income of unconsolidated joint ventures                                 |                               |                |       |              |  |               | 3,137    |             |   |              | 14,722  |         |   |   |        |   |  |   | 17,859   |         
|                                                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Income from subsidiaries                                                          |                               |                | 45,474 |              |  |               | 27,250   |             |   |              |        |         |   |   | (72,724 | ) |  |   |         |         
|                                                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Operating income                                                                  |                               |                | 45,474 |              |  |               | 47,401   |             |   |              | 28,251  |         |   |   | (72,724 | ) |  |   | 48,402   |         
|Interest expense, net of amounts capitalized                                      |                               |                |       |              |  |               | (3,759   | )           |   |              | (2,394  | )       |   |   |        |   |  |   | (6,153   | )       
|Financial advisory expenses                                                       |                               |                | (2,197 | )            |  |               |         |             |   |              |        |         |   |   |        |   |  |   | (2,197   | )       
|Other income (expense), net                                                       |                               |                |       |              |  |               | 2,131    |             |   |              | 1,314   |         |   |   |        |   |  |   | 3,445    |         
|                                                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Income before income taxes and extraordinary item                                 |                               |                | 43,277 |              |  |               | 45,773   |             |   |              | 27,171  |         |   |   | (72,724 | ) |  |   | 43,497   |         
|                                                                                 
|Provision for income taxes                                                        |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|                                                                                  | Income taxes  net of benefit |                |        |             |  |               |          | (220        | ) |              |         |        |   |   |         |  |  |   |          | (220     | )
|                                                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Income before extraordinary item                                                  |                               |                | 43,277 |              |  |               | 45,553   |             |   |              | 27,171  |         |   |   | (72,724 | ) |  |   | 43,277   |         
|Extraordinary item  gain from
	retirement of debt net of applicable income taxes |                               |                | 4,200  |              |  |               |         |             |   |              |        |         |   |   |        |   |  |   | 4,200    |         
|                                                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         
|Net income                                                                        |                               | $              | 47,477 |              |  | $             | 45,553   |             |   | $            | 27,171  |         |   | $ | (72,724 | ) |  | $ | 47,477   |         
|                                                                                  |                               |                |        |              |  |               |          |             |   |              |         |         |   |   |         |   |  |   |          |         

55



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

CONSOLIDATING STATEMENT OF CASH
FLOWS

Year Ended December 31, 2001

(in thousands)


|                                               |                                                                                |                                                   |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |          |         |         |  
|---------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------------------------------- | --------------------------------- | ------------ | ------- | ------------- | ------- | ----------- | ------- | ------------ | ------ | -------- | ------- | ------ | ------- | ------- | ------ | - | ------ | -------- | ------- | ------- | -
|                                               |                                                                                |                                                   |                                   |              |         |              
|                                               |                                                                                | Unconsolidated                                    |                                   |              |         |              
|                                               |                                                                                |                                                   |                                   |              |         |              
|                                               |                                                                                | Delaware                                          |                                   | William Lyon |         | Non-Guarantor |         | Eliminating |         | Consolidated
|                                               |                                                                                | Lyon                                              |                                   | Homes, Inc.  |         | Subsidiaries  |         | Entries     |         | Company     
|                                               |                                                                                |                                                   |                                   |              |         |               |         |             |         |             
|Operating activities:                          |                                                                                |                                                   |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |         
|                                               | Net income                                                                     |                                                   | $                                 | 47,678       |         |               | $       | 44,215      |         |              | $      | 26,750   |         |        | $       | (70,965 | )      |   | $      | 47,678   |        
|                                               | Adjustments to reconcile net income to net cash
	used in operating activities: |                                                   |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |          |        
|                                               |                                                                                | Depreciation and amortization                     |                                   |              |        |               |         |             | 2,399   |              |        |          | 120     |        |         |         |       |   |        |          | 2,519   |        
|                                               |                                                                                | Equity in income of unconsolidated joint ventures |                                   |              |        |               |         |             | (6,405  | )            |        |          | (15,979 | )      |         |         |       |   |        |          | (22,384 | )      
|                                               |                                                                                | Income from subsidiaries                          |                                   |              | (47,678 | )             |         |             | (23,287 | )            |        |          |        |        |         |         | 70,965 |   |        |          |        |        
|                                               |                                                                                | Provision for income taxes                        |                                   |              |        |               |         |             | 5,847   |              |        |          |        |        |         |         |       |   |        |          | 5,847   |        
|                                               |                                                                                | Net changes in operating assets and liabilities:  |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |          |         |        
|                                               |                                                                                |                                                   | Receivables                       |              |         |              |         |             |         | (2,195       | )      |          |         | 4,675  |         |         |        |  |        |          |         | 2,480   |  
|                                               |                                                                                |                                                   | Intercompany receivables/payables |              |         | 1,812         |         |             |         | (1,812       | )      |          |         |       |         |         |        |  |        |          |         |        |  
|                                               |                                                                                |                                                   | Real estate inventories           |              |         |              |         |             |         | (30,904      | )      |          |         | (6,906 | )       |         |        |  |        |          |         | (37,810 | )
|                                               |                                                                                |                                                   | Deferred loan costs               |              |         | (1,812        | )       |             |         | (265         | )      |          |         |       |         |         |        |  |        |          |         | (2,077  | )
|                                               |                                                                                |                                                   | Other assets                      |              |         |              |         |             |         | 6,496        |        |          |         | 36     |         |         |        |  |        |          |         | 6,532   |  
|                                               |                                                                                |                                                   | Accounts payable                  |              |         |              |         |             |         | (6,401       | )      |          |         | (15    | )       |         |        |  |        |          |         | (6,416  | )
|                                               |                                                                                |                                                   | Accrued expenses                  |              |         |              |         |             |         | 590          |        |          |         | 743    |         |         |        |  |        |          |         | 1,333   |  
|                                               |                                                                                |                                                   |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |         
|Net cash used in operating activities          |                                                                                |                                                   |                                  |              |         |               | (11,722 | )           |         |              | 9,424  |          |         |        |        |         |        |   | (2,298 | )       
|                                               |                                                                                |                                                   |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |         
|Investing activities:                          |                                                                                |                                                   |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |         
|                                               | Net change in investments in and advances to
	unconsolidated joint ventures    |                                                   |                                   |             |         |               |         | (846        | )       |              |        | 3,246    |         |        |         |        |        |   |        | 2,400    |        
|                                               | Net change in mortgage notes receivable                                        |                                                   |                                   |             |         |               |         |            |         |              |        | (5,869   | )       |        |         |        |        |   |        | (5,869   | )      
|                                               | Purchases of property and equipment                                            |                                                   |                                   |             |         |               |         | (537        | )       |              |        | (93      | )       |        |         |        |        |   |        | (630     | )      
|                                               | Investment in subsidiaries                                                     |                                                   |                                   |             |         |               |         | 8,775       |         |              |        |         |         |        |         | (8,775  | )      |   |        |         |        
|                                               | Advances to affiliates                                                         |                                                   |                                   | 6,495        |         |               |         |            |         |              |        |         |         |        |         | (6,495  | )      |   |        |         |        
|                                               |                                                                                |                                                   |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |         
|Net cash used in investing activities          |                                                                                |                                                   | 6,495                             |              |         |               | 7,392   |             |         |              | (2,716 | )        |         |        | (15,270 | )       |        |   | (4,099 | )       
|                                               |                                                                                |                                                   |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |         
|Financing activities:                          |                                                                                |                                                   |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |         
|                                               | Proceeds from borrowings on notes payable                                      |                                                   |                                   |             |         |               |         | 468,144     |         |              |        | 219,497  |         |        |         |        |        |   |        | 687,641  |        
|                                               | Principal payments on notes payable                                            |                                                   |                                   |             |         |               |         | (455,072    | )       |              |        | (214,637 | )       |        |         |        |        |   |        | (669,709 | )      
|                                               | Repurchase of 12 1/2% Senior Notes                                             |                                                   |                                   | (51,637      | )       |               |         |            |         |              |        |         |         |        |         |        |        |   |        | (51,637  | )      
|                                               | Reissuance of 12 1/2% Senior Notes                                             |                                                   |                                   | 44,715       |         |               |         |            |         |              |        |         |         |        |         |        |        |   |        | 44,715   |        
|                                               | Distributions to/contributions from shareholders                               |                                                   |                                   |             |         |               |         | 3,608       |         |              |        | (11,052  | )       |        |         | 7,444   |        |   |        |         |        
|                                               | Common Stock issued for exercised options                                      |                                                   |                                   | 427          |         |               |         |            |         |              |        |         |         |        |         |        |        |   |        | 427      |        
|                                               | Advances from affiliates                                                       |                                                   |                                   |              |         |               |         | (7,826      | )       |              |        |         |         |        |         | 7,826   |        |   |        |         |        
|                                               |                                                                                |                                                   |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |         
|Net cash provided by financing activities      |                                                                                |                                                   | (6,495                            | )            |         |               | 8,854   |             |         |              | (6,192 | )        |         |        | 15,270  |         |        |   | 11,437 |         
|                                               |                                                                                |                                                   |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |         
|Net increase in cash and cash equivalents      |                                                                                |                                                   |                                  |              |         |               | 4,524   |             |         |              | 516    |          |         |        |        |         |        |   | 5,040  |         
|Cash and cash equivalents at beginning of year |                                                                                |                                                   |                                  |              |         |               | 12,746  |             |         |              | 1,965  |          |         |        |        |         |        |   | 14,711 |         
|                                               |                                                                                |                                                   |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |         
|Cash and cash equivalents at end of year       |                                                                                | $                                                 |                                  |              |         | $             | 17,270  |             |         | $            | 2,481  |          |         | $      |        |         |        | $ | 19,751 |         
|                                               |                                                                                |                                                   |                                   |              |         |               |         |             |         |              |        |          |         |        |         |         |        |   |        |         

56



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

CONSOLIDATING STATEMENT OF CASH
FLOWS

Year Ended December 31, 2000

(in thousands)


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

57



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

CONSOLIDATING STATEMENT OF CASH
FLOWS

Year Ended December 31, 1999

(in thousands)


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

58



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Revolving Credit
Facilities

The Revolving Credit Facilities have an aggregate
maximum loan commitment of $180,000,000, with various maturities
beginning in June 2002 through September 2004. The collateral
for the loans provided by the Revolving Credit Facilities
includes specific real estate assets funded by such respective
Revolving Credit Facilities. Although the aggregate maximum loan
commitment for these loans is $180,000,000, the credit
facilities have limitations on the amounts which can be borrowed
at any time based on assets which are included in the credit
facilities and the specified borrowings permitted under
borrowing base calculations. The undrawn availability at
December 31, 2001 was $44,836,000 and the principal
outstanding under the Revolving Credit Facilities at
December 31, 2001 was $76,053,000.

Pursuant to the terms of the Revolving Credit
Facilities, outstanding advances bear interest at various rates
which approximate the prime rate. The Revolving Credit
Facilities include financial covenants which may limit the
amount which may be borrowed thereunder.

Unsecured
Revolving Line

Effective March 8, 2001, the Company
obtained 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, 2001, $8,000,000 was outstanding under the
Unsecured Revolving Line.

Construction
Notes Payable

At December 31, 2001, the Company had
construction notes payable amounting to $21,795,000 related to
various real estate projects. The notes are due as units close
or at various dates on or before June 11, 2004 and bear
interest at rates of prime plus 0.25% to 19%.

Seller
Financing

Another source of financing available to the
Company is seller-provided financing for land acquired by the
Company. At December 31, 2001, the Company had various
notes payable outstanding related to land acquisitions for which
seller financing was provided in the amount of $34,358,000. The
notes are due at various dates through December 31, 2003
and bear interest at rates ranging from prime plus 2.0% to 12%.

Revolving
Mortgage Warehouse Credit Facility

The Company has a $15,000,000 revolving mortgage
warehouse credit facility with a bank to fund its mortgage
origination operations. Mortgage loans are generally held for a
short period of time and are typically sold to investors within
7 to 15 days following funding. Borrowings are secured by the
related mortgage loans held for sale. At December 31, 2001
the outstanding balance was $10,985,000. The facility, which has
a current maturity date of May 31, 2002, also contains a
financial covenant requiring the Company to maintain cash and/or
marketable securities on the books of account of its subsidiary,
Duxford Financial, Inc., a California corporation
(Duxford) in an amount equal to no less than
$1,000,000 and a financial covenant requiring the Company to
maintain total assets net of total liabilities and net of
amounts receivable from the Company and/or affiliates on the
books of account of Duxford in an amount equal to no less than
$1,000,000.

Prime
Interest Rates

The prime interest rates at December 31,
2001 and 2000 were 4.75% and 9.50%, respectively. The
weighted-average prime interest rates for each of the three
years ended December 31, 2001, 2000 and 1999 were 6.91%,
9.23% and 8.00%, respectively.

59



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 9  Stock Options and
Incentive Compensation Plans

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 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  33 1/3%; two years from date of
grant  33 1/3%; and three years from date of
grant  33 1/3%.

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 2001,
options were exercised 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. As of December 31, 2001, 40,000 options have been
forfeited and 570,824 options remain unexercised. The
unexercised options are as follows: 538,324 options priced at
$8.6875, 12,500 options priced at $9.1000, and 20,000 options
priced at $13.0000. All unexercised options expire on
May 9, 2010.

Effective on May 12, 2000 and August 21,
2000, certain officers exercised options to purchase 48,334 and
82,754 shares, respectively, of the Companys common stock
at a price of $5.00 per share in accordance with the
Companys 1991 Stock Option Plan, as amended. As of
December 31, 2001, outstanding options to purchase common
stock under the Companys 1991 Stock Option Plan are as
follows: 13,912 options priced at $5.00 and
8,000 options priced at $14.375.

Pursuant to the provisions of Financial
Accounting Standards Board Statement of Financial Accounting
Standards No. 123, Accounting and Disclosure of
Stock-Based Compensation(Statement
No. 123), issued in October 1995, the Company has
elected to continue applying the methodology prescribed by APB
Opinion 25 and related interpretations to account for
outstanding stock options. Accordingly, no compensation cost has
been recognized in the financial statements related to stock
options awarded to officers, directors and employees under the
Plan. As required by Statement No. 123, for disclosure
purposes only, the Company has measured the amount of
compensation cost which would have been recognized related to
stock options had the fair value of the options at the date of
grant been used for accounting purposes. Based on such
calculations, pro forma net income and earnings per share
amounts for the years ended December 31, 2001 and 2000
would be $46,762,000 and $4.35 per share and $38,692,000 and
$3.68 per share, respectively. The Company estimated the fair
value of the stock options issued in 2000 at the date of grant
using a Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest rate of 4.83%;
a dividend yield of 0.00%; a volatility factor for the market
price of the Companys common stock of 0.645; and a
weighted average expected life of seven years for the stock
options. 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.

60



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 other employees. Under the terms of this
plan, bonus targets for the CEO, COO and CFO are based upon
specified percentages of the Companys pretax, pre-bonus
income. Bonus targets for Division Presidents are based on
Division performance, as compared to the Divisions Annual
Business Plan. For all other participants, the plan stipulates
annual setting of individual bonus targets, expressed as a
percent of each participants salary, with awards based on
performance against goals pertaining to each participants
operating area.

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

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 10  Income
Taxes

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

|                                                            |         |                         |        |        |   |      |         |        |   |   |      |      |  
|----------------------------------------------------------- | ------- | ----------------------- | ------ | ------ | - | ---- | ------- | ------ | - | - | ---- | ---- | -
|                                                            |         |                        
|                                                            |         | Year Ended December 31,
|                                                            |         |                        
|                                                            |         | 2001                    |        | 2000   |   | 1999
|                                                            |         |                         |        |        |   |     
|Current                                                     |         |                         |        |        |   |      |         |        |   |   |      |     
|                                                            | Federal |                         | $      | 2,467  |   |      | $       | (1,063 | ) |   | $    | (189 | )
|                                                            | State   |                         |        | (3,318 | ) |      |         | (2,033 | ) |   |      | (56  | )
|                                                            |         |                         |        |        |   |      |         |        |   |   |      |     
|                                                            |         |                         | (851   | )      |   |      | (3,096  | )      |   |   | (245 | )   
|                                                            |         |                         |        |        |   |      |         |        |   |   |      |     
|Deferred                                                    |         |                         |        |        |   |      |         |        |   |   |      |     
|                                                            | Federal |                         |        | (3,989 | ) |      |         |       |   |   |      |     |  
|                                                            | State   |                         |        | (1,007 | ) |      |         |       |   |   |      |     |  
|                                                            |         |                         |        |        |   |      |         |        |   |   |      |     
|                                                            |         |                         | (4,996 | )      |   |      |        |        |   |   |     |     
|                                                            |         |                         |        |        |   |      |         |        |   |   |      |     
|Income tax benefits credited to additional
	paid-in capital |         |                         |       |        |   |      | (9,287  | )      |   |   |     |     
|                                                            |         |                         |        |        |   |      |         |        |   |   |      |     
|                                                            |         | $                       | (5,847 | )      |   | $    | (12,383 | )      |   | $ | (245 | )   
|                                                            |         |                         |        |        |   |      |         |        |   |   |      |     
|Provision for income taxes before
	extraordinary item       |         | $                       | (5,847 | )      |   | $    | (12,357 | )      |   | $ | (220 | )   
|Provision for income taxes on extraordinary item            |         |                         |       |        |   |      | (26     | )      |   |   | (25  | )   
|                                                            |         |                         |        |        |   |      |         |        |   |   |      |     
|                                                            |         | $                       | (5,847 | )      |   | $    | (12,383 | )      |   | $ | (245 | )   
|                                                            |         |                         |        |        |   |      |         |        |   |   |      |     

61



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

|                                                                               |  |                         |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                               |  |                        
|                                                                               |  | Year Ended December 31,
|                                                                               |  |                        
|                                                                               |  | 2001                    |         | 2000 |  | 1999
|                                                                               |  |                         |         |      |  |     
|Provision for Federal income taxes at the
	statutory rate                      |  | $                       | (18,734 | )    |  | $    | (17,895 | ) |  | $ | (13,516 | )
|(Provision) credit for state income taxes, net of
	Federal income tax benefits |  |                         | (2,811  | )    |  |      | (1,321  | ) |  |   | 1,516   |  
|Extraordinary item  gain from
	retirement of debt                             |  |                         |        |      |  |      | (183    | ) |  |   | (1,437  | )
|Valuation allowance for deferred tax asset                                     |  |                         | 15,490  |      |  |      | 7,650   |   |  |   | 13,305  |  
|Other                                                                          |  |                         | 208     |      |  |      | (634    | ) |  |   | (113    | )
|                                                                               |  |                         |         |      |  |      |         |   |  |   |         |  
|                                                                               |  | $                       | (5,847  | )    |  | $    | (12,383 | ) |  | $ | (245    | )
|                                                                               |  |                         |         |      |  |      |         |   |  |   |         |  

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

|                         |                                                                                                |              |        |        |   |   |     |         |  
|------------------------ | ---------------------------------------------------------------------------------------------- | ------------ | ------ | ------ | - | - | --- | ------- | -
|                         |                                                                                                |             
|                         |                                                                                                | December 31,
|                         |                                                                                                |             
|                         |                                                                                                | 2001         |        | 2000  
|                         |                                                                                                |              |        |       
|Deferred tax assets      |                                                                                                |              |        |        |   |   |     |        
|                         | Reserves deducted for financial reporting
	purposes not allowable for tax purposes             |              | $      | 3,102  |   |   | $   | 3,695   |  
|                         | Compensation deductible for tax purposes when paid                                             |              |        | 2,082  |   |   |     | 2,348   |  
|                         | Interest expensed for financial reporting
	purposes and capped for tax purposes                |              |        | 256    |   |   |     |        |  
|                         | Net operating loss and alternative minimum tax
	credit carryovers                              |              |        | 2,963  |   |   |     | 19,056  |  
|                         | State income tax provisions deductible when paid
	for Federal tax purposes                     |              |        | 816    |   |   |     | 7       |  
|                         | Effect of book/tax differences for joint ventures                                              |              |        | 750    |   |   |     | 900     |  
|                         | Valuation allowance                                                                            |              |        | (9,969 | ) |   |     | (25,980 | )
|                         |                                                                                                |              |        |        |   |   |     |        
|                         |                                                                                                |              |       |        |   |   | 16  |        
|Deferred tax liabilities |                                                                                                |              |        |        |   |   |     |        
|                         | Interest capitalized for financial reporting
	purposes and deducted currently for tax purposes |              |        |       |   |   |     | (16     | )
|                         | Effect of book/tax differences for joint ventures                                              |              |        | (4,996 | ) |   |     |        |  
|                         |                                                                                                |              |        |        |   |   |     |        
|                         |                                                                                                |              | (4,996 | )      |   |   | (16 | )      
|                         |                                                                                                |              |        |        |   |   |     |        
|                         |                                                                                                | $            | (4,996 | )      |   | $ |    |        
|                         |                                                                                                |              |        |        |   |   |     |        

As discussed in Note 4, the Company
implemented a quasi-reorganization effective January 1,
1994. Income tax benefits resulting from the utilization of net
operating loss and other carryforwards existing at
January 1, 1994 and temporary differences existing prior to
the quasi-reorganization, are excluded from results of
operations and credited to additional paid-in capital. For the
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 resulting in income tax expense of
$3,096,000.

At December 31, 2001 the Company has net
operating loss carryforwards for Federal tax purposes of
approximately $8,466,000 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

62



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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.

Note 11  Gain from Retirement
of Debt

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

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

Note 12  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 12 1/2%
Senior Notes as described in Note 8.

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

The Company purchased real estate projects for a
total purchase price of $8,468,000 and $680,000 during the years
ended December 31, 2000 and 1999, respectively, 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. As of
December 31, 2001, $1,770,000 was due to the seller in
accordance with this agreement; such payment was made in
January 2002.

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 year ended December 31,
2001, the Company purchased 143 lots under this agreement for a
total purchase price of $2,777,000. This land acquisition
qualifies as an affiliate transaction under the Companys
12 1/2% 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.

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

For the year ended December 31, 2001, the
Company incurred reimbursable on-site labor costs of $175,000
for providing customer service to real estate projects developed
by entities controlled by William Lyon and William H. Lyon,
of which $21,000 was due to the Company at December 31,
2001. In addition, the

63



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Company earned fees of $108,000 for tax and
accounting services performed for entities controlled by William
Lyon and William H. Lyon.

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

For the years ended December 31, 2001, 2000 and
1999, the Company incurred charges of $729,000, $717,000 and
$145,500, respectively, related to rent on its corporate office,
from a trust of which William H. Lyon is the sole beneficiary.

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

Note 13  Commitments and
Contingencies

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

The Company has entered into land banking
arrangements for two projects totaling 204 lots for a
purchase price of $8,700,000. As of December 31, 2001, the
balance of the lots still under option and unclosed was
141 lots for a purchase price of $5,800,000. The Company is
under no obligation to purchase the balance of the lots, but, as
of December 31, 2001, would forfeit $3,117,000 in penalties
if the lots were not purchased.

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

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

64



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 14  Unaudited Pro Forma
Financial Information

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

|                                                  |  |                           |         |      |  |   |         | 
|------------------------------------------------- |  | ------------------------- | ------- | ---- |  | - | ------- | 
|                                                  |  |                          
|                                                  |  | Year Ended December 31,  
|                                                  |  |                          
|                                                  |  | 1999                      |         | 1998
|                                                  |  |                           |         |     
|                                                  |  |                          
|                                                  |  | (in thousands, except per
|                                                  |  | common share amounts)    
|Sales                                             |  | $                         | 533,952 |      |  | $ | 436,041 | 
|Operating income                                  |  | $                         | 47,637  |      |  | $ | 15,413  | 
|Income before income taxes and extraordinary item |  | $                         | 43,098  |      |  | $ | 9,519   | 
|Net income                                        |  | $                         | 47,078  |      |  | $ | 10,899  | 
|Basic and diluted earnings per common share(1)    |  | $                         | 4.51    |      |  | $ | 1.04    | 



---

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

Note 15  Unaudited Summarized
Quarterly Financial Information

Summarized quarterly financial information for
the years ended December 31, 2001, 2000 and 1999 is as
follows (in thousands except per common share amounts):

|                                                  |  |                    |         |          |  |               |         |              |  |   |         |   |  |   |          |  
|------------------------------------------------- |  | ------------------ | ------- | -------- |  | ------------- | ------- | ------------ |  | - | ------- | - |  | - | -------- | -
|                                                  |  |                   
|                                                  |  | Three Months Ended
|                                                  |  |                   
|                                                  |  | March 31,          |         | June 30, |  | September 30, |         | December 31,
|                                                  |  | 2001               |         | 2001     |  | 2001          |         | 2001        
|                                                  |  |                    |         |          |  |               |         |             
|Sales                                             |  | $                  | 72,455  |          |  | $             | 105,222 |              |  | $ | 107,629 |   |  | $ | 173,750  |  
|Other income, costs and expenses, net             |  |                    | (65,662 | )        |  |               | (94,467 | )            |  |   | (94,483 | ) |  |   | (150,919 | )
|                                                  |  |                    |         |          |  |               |         |              |  |   |         |   |  |   |          |  
|Income before income taxes and extraordinary item |  |                    | 6,793   |          |  |               | 10,755  |              |  |   | 13,146  |   |  |   | 22,831   |  
|Provision for income taxes                        |  |                    | (712    | )        |  |               | (1,137  | )            |  |   | (1,468  | ) |  |   | (2,530   | )
|                                                  |  |                    |         |          |  |               |         |              |  |   |         |   |  |   |          |  
|Net income                                        |  | $                  | 6,081   |          |  | $             | 9,618   |              |  | $ | 11,678  |   |  | $ | 20,301   |  
|                                                  |  |                    |         |          |  |               |         |              |  |   |         |   |  |   |          |  
|Basic earnings per common share 
	Note 1         |  | $                  | 0.58    |          |  | $             | 0.91    |              |  | $ | 1.10    |   |  | $ | 1.91     |  
|                                                  |  |                    |         |          |  |               |         |              |  |   |         |   |  |   |          |  
|Diluted earnings per common share 
	Note 1       |  | $                  | 0.57    |          |  | $             | 0.90    |              |  | $ | 1.08    |   |  | $ | 1.89     |  
|                                                  |  |                    |         |          |  |               |         |              |  |   |         |   |  |   |          |  

65



---



##### 



WILLIAM LYON HOMES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |      | 
|---------------------------------------------------------------------------------- | ------------------------- | ------------------ | ------- | -------- |  | ------------- | ------- | ------------ |  | - | ------- | ---- |  | - | -------- | ---- | 
|                                                                                   |                           |                   
|                                                                                   |                           | Three Months Ended
|                                                                                   |                           |                   
|                                                                                   |                           | March 31,          |         | June 30, |  | September 30, |         | December 31,
|                                                                                   |                           | 2000               |         | 2000     |  | 2000          |         | 2000        
|                                                                                   |                           |                    |         |          |  |               |         |             
|Sales                                                                              |                           | $                  | 65,373  |          |  | $             | 94,345  |              |  | $ | 88,716  |      |  | $ | 158,432  |     
|Other income, costs and expenses, net                                              |                           |                    | (57,341 | )        |  |               | (82,903 | )            |  |   | (79,820 | )    |  |   | (135,673 | )   
|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     
|Income before income taxes and extraordinary item                                  |                           |                    | 8,032   |          |  |               | 11,442  |              |  |   | 8,896   |      |  |   | 22,759   |     
|Provision for income taxes                                                         |                           |                    | (393    | )        |  |               | (4,271  | )            |  |   | (1,332  | )    |  |   | (6,361   | )   
|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     
|Income before extraordinary item                                                   |                           |                    | 7,639   |          |  |               | 7,171   |              |  |   | 7,564   |      |  |   | 16,398   |     
|Extraordinary item  gain from
	retirement of debt, net of applicable income taxes |                           |                    |        |          |  |               | 496     |              |  |   |        |      |  |   |         |     
|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     
|Net income                                                                         |                           | $                  | 7,639   |          |  | $             | 7,667   |              |  | $ | 7,564   |      |  | $ | 16,398   |     
|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     
|Basic and diluted earnings per
	common share  Note 1                              |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     
|                                                                                   | Before extraordinary item |                    | $       | 0.73     |  |               | $       | 0.68         |  |   | $       | 0.72 |  |   | $        | 1.56 | 
|                                                                                   | Extraordinary item        |                    |         |         |  |               |         | 0.05         |  |   |         |     |  |   |          |     | 
|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     
|                                                                                   | After extraordinary item  |                    | $       | 0.73     |  |               | $       | 0.73         |  |   | $       | 0.72 |  |   | $        | 1.56 | 
|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     

|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |      | 
|---------------------------------------------------------------------------------- | ------------------------- | ------------------ | ------- | -------- |  | ------------- | ------- | ------------ |  | - | ------- | ---- |  | - | -------- | ---- | 
|                                                                                   |                           |                   
|                                                                                   |                           | Three Months Ended
|                                                                                   |                           |                   
|                                                                                   |                           | March 31,          |         | June 30, |  | September 30, |         | December 31,
|                                                                                   |                           | 1999               |         | 1999     |  | 1999          |         | 1999(1)     
|                                                                                   |                           |                    |         |          |  |               |         |             
|Sales                                                                              |                           | $                  | 82,297  |          |  | $             | 95,715  |              |  | $ | 88,363  |      |  | $ | 173,606  |     
|Other income, costs and expenses, net                                              |                           |                    | (75,996 | )        |  |               | (86,741 | )            |  |   | (75,846 | )    |  |   | (157,901 | )   
|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     
|Income before income taxes and extraordinary item                                  |                           |                    | 6,301   |          |  |               | 8,974   |              |  |   | 12,517  |      |  |   | 15,705   |     
|Benefit (provision) for income taxes                                               |                           |                    | (905    | )        |  |               | (1,286  | )            |  |   | (1,797  | )    |  |   | 3,768    |     
|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     
|Income before extraordinary item                                                   |                           |                    | 5,396   |          |  |               | 7,688   |              |  |   | 10,720  |      |  |   | 19,473   |     
|Extraordinary item  gain from
	retirement of debt, net of applicable income taxes |                           |                    |        |          |  |               | 1,789   |              |  |   |        |      |  |   | 2,411    |     
|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     
|Net income                                                                         |                           | $                  | 5,396   |          |  | $             | 9,477   |              |  | $ | 10,720  |      |  | $ | 21,884   |     
|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     
|Basic and diluted earnings per
	common share  Note 1                              |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     
|                                                                                   | Before extraordinary item |                    | $       | 0.51     |  |               | $       | 0.74         |  |   | $       | 1.03 |  |   | $        | 1.87 | 
|                                                                                   | Extraordinary item        |                    |         |         |  |               |         | 0.17         |  |   |         |     |  |   |          | 0.23 | 
|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     
|                                                                                   | After extraordinary item  |                    | $       | 0.51     |  |               | $       | 0.91         |  |   | $       | 1.03 |  |   | $        | 2.10 | 
|                                                                                   |                           |                    |         |          |  |               |         |              |  |   |         |      |  |   |          |     



---



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

66



---



##### 



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 2000, and
the related combined statements of income, members capital
and cash flows for each of the three 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 audit.

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

In our opinion, the combined financial statements
referred to above present fairly, in all material respects, the
combined financial position of the Significant Subsidiaries of
William Lyon Homes at December 31, 2001 and 2000, and the
combined results of their operations and their cash flows for
each of the three 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


67



---



##### 



SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON
HOMES

COMBINED BALANCE SHEETS

(in thousands)


ASSETS

|                                         |  |              |         |      |  |   |         | 
|---------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                         |  |             
|                                         |  | December 31,
|                                         |  |             
|                                         |  | 2001         |         | 2000
|                                         |  |              |         |     
|Cash                                     |  | $            | 3,797   |      |  | $ | 6,097   | 
|Receivables                              |  |              | 4,555   |      |  |   | 955     | 
|Real estate inventories  Note 2         |  |              | 153,182 |      |  |   | 142,189 | 
|Other assets                             |  |              |        |      |  |   | 250     | 
|                                         |  |              |         |      |  |   |         | 
|                                         |  | $            | 161,534 |      |  | $ | 149,491 | 
|                                         |  |              |         |      |  |   |         | 
|LIABILITIES AND MEMBERS CAPITAL        
|                                        
|Accounts payable and accrued liabilities |  | $            | 12,150  |      |  | $ | 14,185  | 
|Amount due to member  Note 4            |  |              | 2,407   |      |  |   | 2,439   | 
|Notes payable  Note 3                   |  |              |        |      |  |   | 9,860   | 
|                                         |  |              |         |      |  |   |         | 
|                                         |  |              | 14,557  |      |  |   | 26,484  | 
|Commitments and
	contingencies  Note 5  |  |              |         |      |  |   |         | 
|                                        
|Members capital                         |  |              | 146,977 |      |  |   | 123,007 | 
|                                         |  |              |         |      |  |   |         | 
|                                         |  | $            | 161,534 |      |  | $ | 149,491 | 
|                                         |  |              |         |      |  |   |         | 

See accompanying notes.

68



---



##### 



SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON
HOMES

COMBINED STATEMENTS OF INCOME

(in thousands)


|                                             |  |                         |         |      |  |      |         |  |  |   |         | 
|-------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                             |  |                        
|                                             |  | Year Ended December 31,
|                                             |  |                        
|                                             |  | 2001                    |         | 2000 |  | 1999
|                                             |  |                         |         |      |  |     
|REVENUES                                     |  |                         |         |      |  |      |         |  |  |   |         | 
|Sales of homes                               |  | $                       | 189,349 |      |  | $    | 270,226 |  |  | $ | 114,109 | 
|Interest and other income                    |  |                         | 91      |      |  |      | 786     |  |  |   | 526     | 
|                                             |  |                         |         |      |  |      |         |  |  |   |         | 
|                                             |  |                         | 189,440 |      |  |      | 271,012 |  |  |   | 114,635 | 
|                                             |  |                         |         |      |  |      |         |  |  |   |         | 
|COSTS AND EXPENSES                           |  |                         |         |      |  |      |         |  |  |   |         | 
|Cost of homes sold                           |  |                         | 151,838 |      |  |      | 220,726 |  |  |   | 85,583  | 
|Sales, marketing and administrative expenses |  |                         | 6,138   |      |  |      | 8,470   |  |  |   | 4,212   | 
|                                             |  |                         |         |      |  |      |         |  |  |   |         | 
|                                             |  |                         | 157,976 |      |  |      | 229,196 |  |  |   | 89,795  | 
|                                             |  |                         |         |      |  |      |         |  |  |   |         | 
|NET INCOME                                   |  | $                       | 31,464  |      |  | $    | 41,816  |  |  | $ | 24,840  | 
|                                             |  |                         |         |      |  |      |         |  |  |   |         | 

See accompanying notes.

69



---



##### 



SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON
HOMES

COMBINED STATEMENTS OF MEMBERS
CAPITAL

For the Years Ended December 31, 2001,
2000 and 1999

(in thousands)


|                            |  |         |         |              |  |          |          |   |  |   |          |  
|--------------------------- |  | ------- | ------- | ------------ |  | -------- | -------- | - |  | - | -------- | -
|                            |  |         |         | Common       |  | Total   
|                            |  | Lyon    |         | Unaffiliated |  | Members
|                            |  | Members |         | Members      |  | Capital 
|                            |  |         |         |              |  |         
|BALANCE  January 1, 1999   |  | $       | 19,078  |              |  | $        | 64,104   |   |  | $ | 83,182   |  
|Contributions               |  |         | 10,737  |              |  |          | 115,471  |   |  |   | 126,208  |  
|Distributions               |  |         | (8,242  | )            |  |          | (97,023  | ) |  |   | (105,265 | )
|Net income                  |  |         | 14,046  |              |  |          | 10,794   |   |  |   | 24,840   |  
|                            |  |         |         |              |  |          |          |   |  |   |          |  
|BALANCE  December 31, 1999 |  |         | 35,619  |              |  |          | 93,346   |   |  |   | 128,965  |  
|Contributions               |  |         | 11,472  |              |  |          | 145,489  |   |  |   | 156,961  |  
|Distributions               |  |         | (36,815 | )            |  |          | (167,920 | ) |  |   | (204,735 | )
|Net income                  |  |         | 21,491  |              |  |          | 20,325   |   |  |   | 41,816   |  
|                            |  |         |         |              |  |          |          |   |  |   |          |  
|BALANCE  December 31, 2000 |  |         | 31,767  |              |  |          | 91,240   |   |  |   | 123,007  |  
|Contributions               |  |         | 15,555  |              |  |          | 141,543  |   |  |   | 157,098  |  
|Distributions               |  |         | (21,510 | )            |  |          | (143,082 | ) |  |   | (164,592 | )
|Net income                  |  |         | 15,009  |              |  |          | 16,455   |   |  |   | 31,464   |  
|                            |  |         |         |              |  |          |          |   |  |   |          |  
|BALANCE  December 31, 2001 |  | $       | 40,821  |              |  |          | 106,156  |   |  | $ | 146,977  |  
|                            |  |         |         |              |  |          |          |   |  |   |          |  

See accompanying notes.

70



---



##### 



SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON
HOMES

COMBINED STATEMENTS OF CASH FLOWS

(in thousands)


|                                                                                             |                                                  |                                          |          |      |         |      |          |   |        |   |          |   |         |  
|-------------------------------------------------------------------------------------------- | ------------------------------------------------ | ---------------------------------------- | -------- | ---- | ------- | ---- | -------- | - | ------ | - | -------- | - | ------- | -
|                                                                                             |                                                  |                                         
|                                                                                             |                                                  | Year Ended December 31,                 
|                                                                                             |                                                  |                                         
|                                                                                             |                                                  | 2001                                     |          | 2000 |         | 1999
|                                                                                             |                                                  |                                          |          |      |         |     
|Operating activities                                                                         |                                                  |                                          |          |      |         |      |          |   |        |   |          |  
|Net income                                                                                   |                                                  | $                                        | 31,464   |      |         | $    | 41,816   |   |        | $ | 24,840   |  
|Adjustments to reconcile net income to net cash
	provided by (used in) operating activities: |                                                  |                                          |          |      |         |      |          |   |        |   |          |  
|                                                                                             | Net changes in operating assets and liabilities: |                                          |          |      |         |      |          |   |        |   |          |   |        
|                                                                                             |                                                  | Receivables                              |          |      | (3,600  | )    |          |   | 214    |   |          |   | (385    | )
|                                                                                             |                                                  | Real estate inventories                  |          |      | (10,993 | )    |          |   | 28,382 |   |          |   | (32,319 | )
|                                                                                             |                                                  | Other assets                             |          |      | 250     |      |          |   | (100   | ) |          |   | (150    | )
|                                                                                             |                                                  | Accounts payable and accrued liabilities |          |      | (2,035  | )    |          |   | 6,315  |   |          |   | 2,084   |  
|                                                                                             |                                                  | Amount due member                        |          |      | (32     | )    |          |   | 1,603  |   |          |   | 426     |  
|                                                                                             |                                                  |                                          |          |      |         |      |          |   |        |   |          |  
|Net cash provided by (used in) operating
	activities                                         |                                                  |                                          | 15,054   |      |         |      | 78,230   |   |        |   | (5,504   | )
|                                                                                             |                                                  |                                          |          |      |         |      |          |   |        |   |          |  
|                                                                                            
|Financing activities                                                                         |                                                  |                                          |          |      |         |      |          |   |        |   |          |  
|Contributions from members                                                                   |                                                  |                                          | 157,098  |      |         |      | 154,212  |   |        |   | 124,363  |  
|Distributions to members                                                                     |                                                  |                                          | (164,592 | )    |         |      | (204,735 | ) |        |   | (105,265 | )
|Proceeds from notes payable                                                                  |                                                  |                                          | 2,401    |      |         |      | 23,977   |   |        |   | 4,122    |  
|Repayment of notes payable                                                                   |                                                  |                                          | (12,261  | )    |         |      | (49,836  | ) |        |   | (13,841  | )
|                                                                                             |                                                  |                                          |          |      |         |      |          |   |        |   |          |  
|Net cash (used in) provided by financing
	activities                                         |                                                  |                                          | (17,354  | )    |         |      | (76,382  | ) |        |   | 9,379    |  
|                                                                                             |                                                  |                                          |          |      |         |      |          |   |        |   |          |  
|                                                                                            
|Net (decrease) increase in cash                                                              |                                                  |                                          | (2,300   | )    |         |      | 1,848    |   |        |   | 3,875    |  
|Cash  beginning of year                                                                     |                                                  |                                          | 6,097    |      |         |      | 4,249    |   |        |   | 374      |  
|                                                                                             |                                                  |                                          |          |      |         |      |          |   |        |   |          |  
|Cash  end of year                                                                           |                                                  | $                                        | 3,797    |      |         | $    | 6,097    |   |        | $ | 4,249    |  
|                                                                                             |                                                  |                                          |          |      |         |      |          |   |        |   |          |  
|                                                                                            
|Supplemental disclosures of cash flow and
	non-cash activities                               |                                                  |                                          |          |      |         |      |          |   |        |   |          |  
|Cash paid for interest                                                                       |                                                  | $                                        | 156      |      |         | $    | 685      |   |        | $ | 1,376    |  
|                                                                                             |                                                  |                                          |          |      |         |      |          |   |        |   |          |  
|Debt assumed by joint venture in connection with
	contribution of land to joint venture      |                                                  | $                                        |         |      |         | $    | 2,401    |   |        | $ | 33,662   |  
|                                                                                             |                                                  |                                          |          |      |         |      |          |   |        |   |          |  
|Contribution of land, net of assumed debt                                                    |                                                  | $                                        |         |      |         | $    | 2,749    |   |        | $ | 1,845    |  
|                                                                                             |                                                  |                                          |          |      |         |      |          |   |        |   |          |  

See accompanying notes.

71



---



##### 



SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON
HOMES

NOTES TO COMBINED FINANCIAL
STATEMENTS

December 31, 2001 and 2000

1. Organization and Summary of
Significant Accounting Policies

Basis
of Presentation

The combined financial statements are presented
in accordance with Rule 3-09 of SEC Regulation S-X
(Rule 3-09) and represent the combined
financial position, results of operations and cash flows of the
subsidiaries which are accounted for using the equity method by
William Lyon Homes (Lyon, formerly The Presley
Companies) which have a common unaffiliated member and are
deemed significant when aggregated for purposes of
Rule 3-09 (collectively, the Significant Subsidiaries
of William Lyon Homes) as of December 31, 2001 and
2000.

Organization

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

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

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

The Agreements provide among other things that
the Unaffiliated Member is entitled to receive a construction
loan equivalent return consisting of a rate that ranges from
prime (4.75% and 9.50% as of December 31, 2001 and 2000,
respectively) plus 1% to prime plus 4.75% on between 100% and
70% of the Unaffiliated Members unrecovered capital which
is payable by the companies in all events in accordance with the
Agreements. Additionally, the Unaffiliated Member is entitled to
receive a preferred return consisting of a rate that ranges from
prime plus 1% to prime plus 4.75% on between 0% and 30% of the
Unaffiliated Members unrecovered capital. The Lyon Member
is entitled to receive a preferred return consisting of a rate
of interest that ranges from prime plus 1% to prime plus 4.75%
on the Lyon Members unrecovered capital.

The following is a summary of the Unaffiliated
Members construction loan equivalent returns and preferred
returns and the Lyon Members preferred returns through
December 31, 2001 (in thousands):

|                                                         |  |                       |        |                       |  |                   |         |   |  |   |        |  
|-------------------------------------------------------- |  | --------------------- | ------ | --------------------- |  | ----------------- | ------- | - |  | - | ------ | -
|                                                         |  | Unaffiliated Members |        |                       |  |                  
|                                                         |  | Construction Loan     |        | Unaffiliated Members |  | Lyon Members    
|                                                         |  | Equivalent Returns    |        | Preferred Returns     |  | Preferred Returns
|                                                         |  |                       |        |                       |  |                  
|Cumulative returns on unrecovered capital                |  | $                     | 19,179 |                       |  | $                 | 17,723  |   |  | $ | 8,130  |  
|Cumulative return distributions                          |  |                       | (9,418 | )                     |  |                   | (17,013 | ) |  |   | (3,484 | )
|                                                         |  |                       |        |                       |  |                   |         |   |  |   |        |  
|Remaining undistributed returns as of
	December 31, 2001 |  | $                     | 9,761  |                       |  | $                 | 710     |   |  | $ | 4,646  |  
|                                                         |  |                       |        |                       |  |                   |         |   |  |   |        |  

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.

72



---



##### 



SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON
HOMES


NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)

Use
of Estimates

The preparation of the Significant Subsidiaries
of William Lyon Homes combined financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of December 31, 2001 and 2000 and the
revenues and expenses for each of the three years in the period
ended December 31, 2001. 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. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of(Statement No. 121). Statement
No. 121 requires impairment losses to be recorded on assets
to be held and used by the Significant Subsidiaries of William
Lyon Homes when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of the assets. Under
Statement No. 121, when an asset to be held and used by the
Significant Subsidiaries of William Lyon Homes is determined to
be impaired, the related carrying amount of the asset is
adjusted to its estimated fair value.

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

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), effective for fiscal years beginning after
December 15, 2001. Statement No. 144 supersedes
Statement No. 121. The Significant Subsidiaries of William
Lyon Homes do not believe Statement 144 will have a
significant impact on the earnings or financial position of the
Significant Subsidiaries of William Lyon Homes upon adoption.

Management has evaluated the projects and
determined that no indicators of impairment are present as of
December 31, 2001 and 2000.

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

73



---



##### 



SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON
HOMES


NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)

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, 2001 and 2000, 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.

Income
Taxes

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

2. Real Estate Inventories

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

|                                            |  |      |         |      |  |   |         | 
|------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                            |  | 2001 |         | 2000
|                                            |  |      |         |     
|Land under development                      |  | $    | 122,796 |      |  | $ | 85,275  | 
|Construction in process and completed homes |  |      | 30,386  |      |  |   | 56,914  | 
|                                            |  |      |         |      |  |   |         | 
|                                            |  | $    | 153,182 |      |  | $ | 142,189 | 
|                                            |  |      |         |      |  |   |         | 

3. Notes Payable

During the years ended December 31, 2001 and
2000, the Significant Subsidiaries of William Lyon Homes
incurred $94,000 and $645,000, respectively, of interest cost,
all of which was capitalized to the real estate inventories.

4. Related Party Transactions

The Agreements provide for builder overhead fees
to be paid to the Lyon Member 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):

|                                |  |      |        |      |  |      |        |  |  |   |       | 
|------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ----- | 
|                                |  | 2001 |        | 2000 |  | 1999
|                                |  |      |        |      |  |     
|Lyon Member fees                |  | $    | 5,432  |      |  | $    | 7,421  |  |  | $ | 3,060 | 
|Lyon Member cost reimbursements |  |      | 4,071  |      |  |      | 4,569  |  |  |   | 867   | 
|Unaffiliated Member fees        |  |      | 1,745  |      |  |      | 2,783  |  |  |   | 2,277 | 
|                                |  |      |        |      |  |      |        |  |  |   |       | 
|                                |  | $    | 11,248 |      |  | $    | 14,773 |  |  | $ | 6,204 | 
|                                |  |      |        |      |  |      |        |  |  |   |       | 

74



---



##### 



SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON
HOMES


NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)

As of December 31, 2001, 2000 and 1999,
$2,407,000 and $2,439,000 and $836,000, 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.

75



---



##### 



EXHIBIT INDEX

|        |          |             |  |                                                                                                                                                                                                                                                                       |  |  |  | 
|------- | -------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|        |          |             |  | Sequentially                                                                                                                                                                                                                                                         
|Exhibit |          |             |  | Numbered                                                                                                                                                                                                                                                             
|Number  |          | Description |  | File                                                                                                                                                                                                                                                                 
|        |          |             |  |                                                                                                                                                                                                                                                                      
|        | 2.1(1)   |             |  | Certificate of Ownership and Merger                                                                                                                                                                                                                                   |  |  |  | 
|        | 3.1(2)   |             |  | Certificate of Incorporation of the Company.                                                                                                                                                                                                                          |  |  |  | 
|        | 3.3(2)   |             |  | Bylaws of the Company.                                                                                                                                                                                                                                                |  |  |  | 
|        | 4.1(2)   |             |  | Specimen certificate of Common Stock.                                                                                                                                                                                                                                 |  |  |  | 
|        | 4.2(3)   |             |  | Indenture dated June 29, 1994, between
	American Bank & Trust Company, as Trustee, and The Presley
	Companies and Presley Homes.                                                                                                                                      |  |  |  | 
|        | 10.1(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(7)  |             |  | Amended and Restated 1991 Stock Option Plan of
	The Presley Companies, a Delaware corporation.                                                                                                                                                                        |  |  |  | 
|        | 10.4(4)  |             |  | Forms of Stock Option Agreements, dated as of
	May 20, 1994, between the Company and Wade H. Cable.                                                                                                                                                                   |  |  |  | 
|        | 10.5(4)  |             |  | Form of Stock Option Agreement, dated as of
	May 20, 1994, between the Company and Nancy M. Harlan.                                                                                                                                                                   |  |  |  | 
|        | 10.6(4)  |             |  | Form of Stock Option Agreement, dated as of
	May 20, 1994, between the Company and Linda L. Foster.                                                                                                                                                                   |  |  |  | 
|        | 10.7(4)  |             |  | Form of Stock Option Agreement, dated as of
	May 20, 1994, between the Company and W. Douglass
	Harris.                                                                                                                                                               |  |  |  | 
|        | 10.8(4)  |             |  | Form of Stock Option Agreement, dated as of
	May 20, 1994, between the Company and C. Dean Stewart.                                                                                                                                                                   |  |  |  | 
|        | 10.9(4)  |             |  | Form of Stock Option Agreement, dated as of
	May 20, 1994, between the Company and Alan Uman.                                                                                                                                                                         |  |  |  | 
|        | 10.10(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.                                                         |  |  |  | 
|        | 10.11(5) |             |  | Mortgage Company Agreement between Presley
	Mortgage Company, a California corporation and Duxford Financial
	Services, Inc., executed as of November 5, 1999.                                                                                                        |  |  |  | 
|        | 10.12(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.                                                                              |  |  |  | 
|        | 10.13(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.                                                                   |  |  |  | 
|        | 10.14(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). |  |  |  | 



---



##### 



|        |           |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  |  | 
|------- | --------- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|        |           |             |  | Sequentially                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Exhibit |           |             |  | Numbered                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Number  |           | Description |  | File                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |           |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 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(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.                                                                                                                                                                                                                                                                    |  |  |  | 
|        | 10.17(7)  |             |  | William Lyon Homes 2000 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  | 
|        | 10.18(8)  |             |  | Form of Stock Option Agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  | 
|        | 10.19(8)  |             |  | William Lyon Homes, Inc. 2000 Cash Bonus Plan.                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  | 
|        | 10.20(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.                                                                                                                                                                                                                                                                                                              |  |  |  | 
|        | 10.21(8)  |             |  | Mortgage Warehouse Loan and Security Agreement
	effective as of July 28, 2000 by and between Duxford
	Financial Inc., a California corporation (Borrower)
	and First Tennessee Bank (Bank).                                                                                                                                                                                                                                                                        |  |  |  | 
|        | 10.22(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). |  |  |  | 
|        | 10.23(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) |             |  | Agreement for First Modification of Deeds of
	Trust and Other Loan Instruments (this First
	Modification) dated as of June 8, 2001 by and between
	William Lyon Homes, Inc., a California Corporation
	(Borrower) and Guaranty Bank, a federal savings bank
	organized and existing under the laws of the United States
	(formerly known as Guaranty Federal Bank, F.S.B.)
	(Lender).                                                                          |  |  |  | 
|        | 10.25(10) |             |  | Mortgage Warehouse Loan and Security Agreement
	dated as of May 31, 2001, by and between Duxford Financial,
	Inc., and/or Bayport Mortgage, L.P., a California Corporation
	(Borrower) and First Tennessee Bank
	(Bank).                                                                                                                                                                                                                                           |  |  |  | 
|        | 10.26(11) |             |  | William Lyon Homes Executive Deferred
	Compensation Plan effective as of February 11, 2002.                                                                                                                                                                                                                                                                                                                                                                            |  |  |  | 
|        | 10.27     |             |  | William Lyon Homes Outside Directors Deferred
	Compensation Plan effective as of February 11, 2002.                                                                                                                                                                                                                                                                                                                                                                    |  |  |  | 
|        | 21.1      |             |  | List of Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |  | 
|        | 23.1      |             |  | Consent of Independent Auditors.                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  | 




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