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SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549





FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2010

OR



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

For the transition period from
 to

Commission File Number 001-31625



WILLIAM LYON HOMES

(Exact name of registrant as specified in its
charter)



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



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

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

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

None

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

None

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files).    Yes   ̈    No   ̈

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

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act.



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

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

The number of shares of Common Stock outstanding as of March 31, 2011 was 1,000.

DOCUMENTS INCORPORATED BY REFERENCE

None









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WILLIAM LYON HOMES

INDEX



|         |  |                                                                                                              |  |          |    | 
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | -------- | -- | 
|         |  |                                                                                                              |  | Page No. |   
|PART I   | 
|         |  |                                                                                                             
|Item 1.  |  | Business                                                                                                     |  |          | 3  | 
|         |  |                                                                                                             
|Item 1A. |  | Risk Factors                                                                                                 |  |          | 15 | 
|         |  |                                                                                                             
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  |          | 26 | 
|         |  |                                                                                                             
|Item 2.  |  | Properties                                                                                                   |  |          | 26 | 
|         |  |                                                                                                             
|Item 3.  |  | Legal Proceedings                                                                                            |  |          | 26 | 
|         |  |                                                                                                             
|Item 4.  |  | Reserved                                                                                                     |  |          | 26 | 
|        
|PART II  | 
|         |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  |          | 26 | 
|         |  |                                                                                                             
|Item 6.  |  | Selected Financial Data                                                                                      |  |          | 27 | 
|         |  |                                                                                                             
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  |          | 29 | 
|         |  |                                                                                                             
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  |          | 64 | 
|         |  |                                                                                                             
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  |          | 64 | 
|         |  |                                                                                                             
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  |          | 64 | 
|         |  |                                                                                                             
|Item 9A. |  | Controls and Procedures                                                                                      |  |          | 64 | 
|         |  |                                                                                                             
|Item 9B. |  | Other Information                                                                                            |  |          | 65 | 
|        
|PART III | 
|         |  |                                                                                                             
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  |          | 66 | 
|         |  |                                                                                                             
|Item 11. |  | Executive Compensation                                                                                       |  |          | 71 | 
|         |  |                                                                                                             
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  |          | 76 | 
|         |  |                                                                                                             
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  |          | 76 | 
|         |  |                                                                                                             
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  |          | 78 | 
|        
|PART IV  | 
|         |  |                                                                                                             
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  |          | 79 | 
|         |  |                                                                                                             
|         |  | Index to Financial Statements                                                                                |  |          | 83 | 



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NOTE ABOUT FORWARD-LOOKING STATEMENTS

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

Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due
to a number of factors. The principal factors that could cause the Companys actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, worsening in general
economic conditions either nationally or in regions in which the Company operates, worsening in the markets for residential housing, further decline in real estate values resulting in further impairment of the companys real estate assets,
volatility in the banking industry and credit markets, terrorism or other hostilities involving the United States, whether an ownership change occurred which could, under certain circumstances, have resulted in the limitation of the Companys
ability to offset prior years taxable income with net operating losses, changes in home mortgage interest rates, changes in generally accepted accounting principles or interpretations of those principles, changes in prices of homebuilding
materials, labor shortages, adverse weather conditions, the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements, changes in
governmental laws and regulations, inability to comply with financial and other covenants under the Companys debt instruments, whether the Company is able to refinance the outstanding balances of its debt obligations at their maturity,
anticipated tax refunds, the timing of receipt of regulatory approvals and the opening of projects and the availability and cost of land for future growth. These and other risks and uncertainties are more fully described in Item 1A. Risk
Factors. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, those factors or conditions described under
Managements Discussion and Analysis of Financial Condition and Results of Operations. The Companys past performance or past or present economic conditions in the Companys housing markets are not indicative of future
performance or conditions. Investors are urged not to place undue reliance on forward-looking statements. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence
of anticipated or unanticipated events or changes to projections over time unless required by federal securities law.



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PART I



|Item 1. | Business
|------- | --------

General

William Lyon Homes, a Delaware corporation, and subsidiaries (the Company) are primarily engaged in the
design, construction and sale of single family detached and attached homes in California, Arizona and Nevada. Since the founding of the Companys predecessor in 1956, the Company and its joint ventures have sold over 73,000 homes. The Company
conducts its homebuilding operations through four reportable operating segments (Southern California, Northern California, Arizona and Nevada). For 2010, approximately 78% of the home closings of the Company and its joint ventures were derived from
its California operations. For the year ended December 31, 2010, on a consolidated basis the Company had revenues from home sales of $266.9 million and delivered 760 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 first time move-up home buyer markets. At December 31, 2010, the Company marketed its homes through 16 sales locations. In 2010, the average sales price for consolidated
homes delivered was $351,100. Base sales prices for actively selling projects in 2010, including affordable projects, ranged from $118,000 to $700,000.

As of December 31, 2010, the Company and its consolidated joint ventures owned approximately 10,165 lots and had options to purchase an additional 417 lots. As used in this Annual Report on Form
10-K, entitled land has a development agreement and/or vesting tentative map, or a final recorded plat or map from the appropriate county or city government. Development agreements and vesting tentative maps generally provide for the
right to develop the land in accordance with the provisions of the development agreement or vesting tentative map unless an issue arises concerning health, safety or general welfare. The Companys sources of developed lots for its homebuilding
operations are, (1) purchase of smaller projects with shorter life cycles (merchant homebuilding) and (2) development of master-planned communities. The Company estimates that its current inventory of lots owned and controlled is adequate
to supply its homebuilding operations at current operating levels (including future land sales) for approximately three to eight years.

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

The Company had total consolidated
revenues from operations of $294.7 million, $309.2 million and $526.1 million for the years ended December 31, 2010, 2009 and 2008, respectively. Homes closed by the Company, including its joint ventures, were 760, 915 and 1,260 for the years
ended December 31, 2010, 2009 and 2008, respectively. On a consolidated basis, the Companys dollar amount of backlog of homes sold but not closed as of December 31, 2010, was $30.1 million, a 47% decrease from the $56.5 million as of
December 31, 2009. The cancellation rate of buyers who contracted to buy a home but did not close escrow was approximately 19% during 2010 and 21% during 2009.

Since early 2006, the U.S. housing market has been negatively impacted by declined consumer confidence, restrictive
mortgage standards, and large supplies of foreclosure, resale and new homes, among other factors. When combined with a prolonged economic downturn, high unemployment levels, and uncertainty in the U.S. economy, these conditions have contributed to
decreased demand for housing, declining sales prices, and increasing pricing pressure, which hinders the Companys ability to attract new home buyers. As a result, the Company has experienced operating losses each year, beginning in 2007. Such
losses resulted from a combination of reduced homebuilding gross margins, losses on land sales to generate cash flow and significant non-cash impairment losses on real estate inventories. On November 6, 2009, the Worker, Homeownership, and
Business Assistance Act of 2009 (the Act) was enacted into law, which extended and expanded the homebuyer federal tax credit until April 30, 2010. The Act, which was applicable to net new home orders under contract by April 30, 2010
and closed by September 30, 2010, favorably impacted our home sales during the early part of 2010, but also contributed to an industry-wide decline in net new home orders in the latter part of 2010.

During 2010, the Company incurred non-cash impairment losses on real estate assets of $111.9 million. In addition, the
Company incurred non-cash impairment losses on real estate assets of $45.3 million and $135.3 million, respectively, for the years ended December 31, 2009 and 2008. The Company assesses its projects on a quarterly basis, when indicators of
impairment exist. Indicators of impairment include a decrease in demand for housing due to soft market conditions, competitive pricing pressures which reduce the average sales price of homes, which includes sales incentives for home buyers, slow
sales absorption rates, a decrease in the value of the underlying land and a decrease in project cash flows for a particular project. The Company was required to write-down the book



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value of its impaired real estate assets in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (Statement No. 144), now codified as FASB ASC Topic 360, as defined in Note 5 of Notes to Consolidated Financial Statements.

In certain of the Companys projects, in Southern California and Nevada, the Company has experienced stabilized
sales absorption rates, a decrease in sales incentives and an increase in base pricing, which is reflected in year over year new orders per average sales location and cancellation rates.



| |  |  | In Southern California, net new home orders per average sales location increased slightly to 52.7 during the year ended December 31, 2010 from
50.0 for the same period in 2009. The cancellation rate in Southern California remained consistent year over year at 19 %.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Nevada, net new home orders per average sales location increased 71% to 25.7 during the year ended December 31, 2010 from 15.0 for the same
period in 2009. In Nevada, the cancellation rate decreased to 14% in the 2010 period from 30% in the 2009 period.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Northern California, net new home orders per average sales location decreased 11% to 22.8 during the year ended December 31, 2010 from 25.5
for the same period in 2009. In Northern California, the cancellation rate decreased to 23% in the 2010 period from 28% in the 2009 period.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In Arizona, net new home orders per average sales location decreased 39% to 30.0 during the year ended December 31, 2010 from 49.3 for the same
period in 2009. In Arizona, the cancellation rate increased to 15% in 2010 compared to 13% in the 2009 period.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On a consolidated basis, the Companys cancellation rate decreased to 19% in the 2010 period compared to 21% in the 2009 period.

In addition, the Company is experiencing increased homebuilding gross margin percentages of 15.4% in the 2010 period
compared to 13.5% in the 2009 period particularly impacted by Northern California of 22.3% in the 2010 period compared to 13.8% in the 2009 period and Nevada of 19.7% in the 2010 period compared to 12.2% in the 2009 period. In Southern California,
homebuilding gross margin decreased to 14.6% in the 2010 period from 15.6% in the 2009 period and in Arizona, homebuilding gross margin decreased to 4.9% in the 2010 period from 7.0% in the 2009 period

In reaction to the declining market, the Company temporarily suspended the development, sales and marketing activities at
certain of its projects. The Company concluded that this strategy was necessary under the prevailing market conditions at the time and will allow the Company to market the properties at some future time when market conditions may have improved.
During 2010, some of these projects were resumed to generate cash flow. Management will continue to evaluate and analyze the market place to potentially activate the remaining suspended projects in 2011 and beyond.

In response to the declining demand for housing in the homebuilding industry, management of the Company shifted its
strategy to focus on generating positive cash flow, reducing overall debt levels and improving liquidity. Management of the Company has managed cash flow by reducing staff levels, reducing inventory levels for projects near completion, and using
available funds to repurchase senior notes at a discount. In addition, the Company has shifted land acquisition strategy by identifying land opportunities on a finished lot basis, acquiring land in stabilizing markets, or evaluating the
reintroduction of projects to the marketplace that have been temporarily suspended, which would generate cash flow.

Outstanding Debt Obligations

The Companys operations are dependent to a significant extent on debt financing and, to a lesser extent, on joint venture financing. The Companys principal outstanding debt obligations are its
Senior Secured Term Loan due 2014 (Term Loan), 7 5/8% Senior Notes due 2012 (the 7 5/8% Senior Notes), 10 3/4% Senior Notes due 2013 (the 10 3/4% Senior Notes), 7 1/2% Senior Notes due 2014 (the 7 1/2%
Senior Notes and, together with the 7 5/8% Senior Notes and the 10 3/4% Senior Notes, the Senior Notes) and certain construction notes payable. At December 31, 2010, the outstanding principal amount of the Term Loan was $206.0
million, the outstanding principal amount of the 7 5/8% Senior Notes was $66.7 million, the outstanding principal amount of the 10 3/4% Senior Notes was $138.6 million and the outstanding principal amount of the 7 1/2% Senior Notes was $77.9
million.

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

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

Under the
Term Loan, the Company is required to maintain, among other covenants, a minimum tangible net worth of $75.0 million. As of December 31, 2010, the Company calculated its tangible net worth as $13.0 million.

As reported on the Companys current report on Form 8-K dated March 18, 2011, the Company reached an agreement with
the Lenders under the Term Loan Agreement that amended the Term Loan to permit the Companys tangible net worth to fall below $75.0 million for two consecutive quarters. In addition, as reported on the Companys current report on Form 8-K
dated April 21, 2011, the Company reached a subsequent agreement with the Lenders under the Term Loan to waive any non-compliance with the tangible net worth covenant and with certain other technical requirements through July 19, 2011, subject
to certain terms and conditions.

The Senior Notes are senior unsecured obligations of California Lyon and are
unconditionally guaranteed on a senior unsecured basis by the Company, and by all of the Companys existing and certain of its future restricted subsidiaries. The Senior Notes and the guarantees rank senior to all of the Companys and the
guarantors debt that is expressly subordinated to the Senior Notes and the guarantees, but are effectively subordinated to all



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of the Companys and the guarantors senior secured indebtedness to the extent of the value of the assets securing that indebtedness.

Under the indentures respectively governing the Senior Notes (the Senior Note Indentures), if the
Companys consolidated tangible net worth falls below $75.0 million for any two consecutive fiscal quarters, California Lyon will be required to offer to purchase up to 10% of each class of Senior Notes originally issued at a purchase price
equal to 100% of the principal amount, plus accrued and unpaid interest, if any. However, California Lyon may reduce the principal amount of the notes required to be purchased by the aggregate principal amount of all notes previously redeemed.

The Company has determined and calculated that California Lyons redemptions of Senior Notes during the
period from 2008 to 2010 would reduce California Lyons redemption obligations (assuming that the Companys consolidated tangible net worth is less than $75.0 million for the quarter ended March 31, 2011), as follows: California Lyon would
not be obligated to repurchase any of the 7 5/8% Senior Notes, as a result of California Lyons previous redemption of $83.3 million in aggregate principal amount of the 7 5/8% Senior Notes; California Lyon would not be obligated to repurchase
any of the 10 3/4% Senior Notes, as a result of California Lyons previous redemption of $110.7 million in aggregate principal amount of the 10 3/4% Senior Notes; and California Lyon would not be obligated to repurchase any of the 7 1/2% Senior
Notes, until March 13, 2013, at which time the Company would be required to offer to purchase $2.9 million of principal outstanding, as a result of California Lyons previous redemption of $72.1 million in aggregate principal amount of the 7
1/2% Senior Notes.

At December 3, 2010, the Company had two construction notes payable totaling $22.9
million. One of the notes matures in July 2011 and bears interest at rates based on either LIBOR or prime with an interest rate floor of 6.5% and an outstanding principal balance of $13.9 million as of December 31, 2010. Interest is calculated on
the average daily balance and is paid following the end of each month. While the Company was previously required to maintain minimum tangible net worth of $90.0 million under this note, the Company and the lender have amended the note to eliminate
the tangible net worth covenant in exchange for a principal payment of $2.0 million. As a result of the payment of $2.0 million, which was made in April 2011, the outstanding principal balance is $11.9 million. The Company is currently in
negotiations with the lender to extend the maturity of the loan and to modify the covenants.

The other
construction note had a remaining balance at December 31, 2010 of $9.0 million. This note was previously due to mature in July 2010; however, in conjunction with a partial payment of principal of $28.1 million on that loan, the Company and the
lender entered into a new loan agreement in 2010 for $10.0 million, which will mature in May 2015. The new loan pays interest monthly at a fixed rate of 12.5%, with quarterly principal payments of $500,000 which began in July 2010. The interest rate
decreases to 10.0% when the principal balance is reduced to $7.5 million.

The Companys outstanding debt
obligations and sources of financing are more fully described in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation - Financial Condition and Liquidity.



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

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



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The Companys Markets

The Company is currently operating in four reportable operating segments: Southern California, Northern California,
Arizona, and Nevada. Each of the segments has responsibility for the management of the Companys homebuilding and development operations within its geographic boundaries.



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



|                       |  |                         |         |  |      |   |         |      |  |   |         | 
|---------------------- |  | ----------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                       |  | Total Revenue           |        
|                       |  | Year Ended December 31, |        
|                       |  | 2010                    |         |  | 2009 |   |         | 2008 | 
|                       |  | (in thousands)          |        
|                       |  | (note 1)                |        
|Consolidated           |  |                         |         |  |      |   |         |      |  |   |         | 
|Southern California(2) |  | $                       | 206,241 |  |      | $ | 179,282 |      |  | $ | 323,446 | 
|Northern California(3) |  |                         | 56,095  |  |      |   | 43,211  |      |  |   | 95,084  | 
|Arizona(4)             |  |                         | 16,595  |  |      |   | 51,215  |      |  |   | 49,187  | 
|Nevada(5)              |  |                         | 15,767  |  |      |   | 35,535  |      |  |   | 58,361  | 
|                       |  |                         |         |  |      |   |         |      |  |   |         | 
|                       |  | $                       | 294,698 |  |      | $ | 309,243 |      |  | $ | 526,078 | 
|                       |  |                         |         |  |      |   |         |      |  |   |         | 





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



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



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



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



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

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

LAND ACQUISITION AND DEVELOPMENT

As of December 31, 2010, the Company and its consolidated joint ventures owned approximately 10,165 lots and had
options to purchase an additional 417 lots.

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

The Company uses a land acquisition team, which includes members of its senior management, to manage the risks associated
with land ownership and development. It is the Companys policy that land can be purchased or sold only with the prior approval of senior management and the board of directors. The Companys board of directors approves the purchase of raw
unentitled land at any price and entitled land above a purchase price of $3.0 million. The Company does not currently hold any unentitled land. The Companys land acquisition strategy has been to undertake projects with shorter life-cycles in
order to reduce development and market risk while maintaining an inventory of owned lots sufficient for construction of homes over a two-year period. The Companys long-term strategy consists of the following elements:



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



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



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



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



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



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



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



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



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



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

HOMEBUILDING AND MARKET STRATEGY

The Company currently has
a wide variety of product lines which enables it to meet the specific needs of each of its markets. Although the Company primarily emphasizes sales to the entry-level and move-up home markets, it believes that a diversified product strategy enables
it to best serve a wide range of buyers and adapt quickly to a variety of market conditions. In order to reduce exposure to local market conditions, the Companys sales locations are geographically dispersed. At December 31, 2010, the
Company and its joint ventures had 16 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, home styles and sizes vary from project to project. The Companys attached housing ranges in size from 957 to 2,452 square feet,
and the detached housing ranges from 1,157 to 3,245 square feet.

Due to the Companys product and
geographic diversification strategy, the prices of the Companys homes also vary substantially. During 2010, base sales prices for the Companys attached housing range from approximately $120,000 to $575,000 and base sales prices for
detached housing range from approximately $118,000 to $700,000. On a consolidated basis, the average sales price of homes closed for the year ended December 31, 2010 was $351,100.

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

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

Substantially all
construction work is done by subcontractors with the Company acting as the general contractor. The Company manages subcontractor activities with on-site supervisory employees and management control systems. The Company does not have long-term
contractual commitments with its subcontractors or suppliers; instead it contracts development work by project and where possible by phase size of 8 to 20 home sites. The Company generally has been able to obtain sufficient materials and
subcontractors during times of material shortages. The Company believes its relationships with its suppliers and subcontractors are in good standing.



9



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##### Table of Contents

Description of Projects and Communities Under Development

The Companys homebuilding projects usually take two to five years to develop. The following table presents project
information relating to each of the Companys homebuilding operating segments as of December 31, 2010 and only includes projects with lots owned as of December 31, 2010, lots consolidated in accordance with certain accounting
principles as of December 31, 2010 or homes closed for the year ended December 31, 2010.



|                             |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|---------------------------- |  | -------------------- | ---- |  | --------------------------------------- |  | ----- | ---------------------------------------- |  |  | --------------------------- |  |  | ----------------------------- | -- |  | ----------------------------------------- |  | --- | ------------------- |  |  | --- |  |  | - | ----------------- | 
|Project (County or City)     |  | Year ofFirstDelivery |      |  | EstimatedNumber ofHomes atCompletion(1) |  |       | CumulativeUnits Closedas 
ofDec 31, 2010 |  |  | Backlog atDec 31,2010(2)(3) |  |  | Lots Ownedas
ofDec 31,2010(4) |    |  | Homes Closedfor
theYear EndedDec 31, 2010 |  |     | Sales PriceRange(5) | 
|                            
|SOUTHERN CALIFORNIA          | 
|San Diego County:            |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|San Diego                    |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Pasado Del Sur               |  |                      | 2009 |  |                                         |  | 25    |                                          |  |  | 20                          |  |  |                               | 0  |  |                                           |  | 5   |                     |  |  | 0   |  |  | $ | 515,000 - 560,000 | 
|Pasado Del Sur II            |  |                      | 2010 |  |                                         |  | 64    |                                          |  |  | 46                          |  |  |                               | 9  |  |                                           |  | 18  |                     |  |  | 46  |  |  | $ | 523,000 - 570,000 | 
|Carlsbad                     |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Blossom Grove                |  |                      | 2010 |  |                                         |  | 32    |                                          |  |  | 16                          |  |  |                               | 5  |  |                                           |  | 16  |                     |  |  | 16  |  |  | $ | 530,000 - 590,000 | 
|Mirasol at La Costa Greens   |  |                      | 2010 |  |                                         |  | 71    |                                          |  |  | 17                          |  |  |                               | 1  |  |                                           |  | 54  |                     |  |  | 17  |  |  | $ | 641,000 - 690,000 | 
|San Bernardino County:       |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Fontana                      |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Adelina                      |  |                      | 2008 |  |                                         |  | 109   |                                          |  |  | 109                         |  |  |                               | 0  |  |                                           |  | 0   |                     |  |  | 50  |  |  | $ | 208,000 - 241,000 | 
|Rosabella                    |  |                      | 2007 |  |                                         |  | 114   |                                          |  |  | 113                         |  |  |                               | 0  |  |                                           |  | 1   |                     |  |  | 40  |  |  | $ | 225,000 - 260,000 | 
|Rancho Cucamonga             |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Amador                       |  |                      | 2007 |  |                                         |  | 69    |                                          |  |  | 69                          |  |  |                               | 0  |  |                                           |  | 0   |                     |  |  | 9   |  |  | $ | 214,000 - 258,000 | 
|Amador (Lewis)               |  |                      | 2010 |  |                                         |  | 30    |                                          |  |  | 30                          |  |  |                               | 0  |  |                                           |  | 0   |                     |  |  | 30  |  |  | $ | 214,000 - 256,000 | 
|Vintners Grove              |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Sollara SFD                  |  |                      | 2007 |  |                                         |  | 45    |                                          |  |  | 45                          |  |  |                               | 0  |  |                                           |  | 0   |                     |  |  | 7   |  |  | $ | 358,000 - 408,000 | 
|Canela Triplex               |  |                      | 2007 |  |                                         |  | 63    |                                          |  |  | 63                          |  |  |                               | 0  |  |                                           |  | 0   |                     |  |  | 9   |  |  | $ | 220,000 - 260,000 | 
|Vintners Grove (Lewis)      |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Sollara SFD                  |  |                      | 2009 |  |                                         |  | 33    |                                          |  |  | 33                          |  |  |                               | 0  |  |                                           |  | 0   |                     |  |  | 33  |  |  | $ | 356,000 - 408,000 | 
|Canela Triplex               |  |                      | 2010 |  |                                         |  | 15    |                                          |  |  | 15                          |  |  |                               | 0  |  |                                           |  | 0   |                     |  |  | 15  |  |  | $ | 217,000 - 256,000 | 
|Orange County:               |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Irvine                       |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Ivy                          |  |                      | 2009 |  |                                         |  | 135   |                                          |  |  | 119                         |  |  |                               | 6  |  |                                           |  | 16  |                     |  |  | 99  |  |  | $ | 375,000 - 454,000 | 
|San Carlos II                |  |                      | 2010 |  |                                         |  | 92    |                                          |  |  | 26                          |  |  |                               | 3  |  |                                           |  | 66  |                     |  |  | 26  |  |  | $ | 310,000 - 470,000 | 
|Santa Ana                    |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Canopy Lane                  |  |                      | 2011 |  |                                         |  | 38    |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 38  |                     |  |  | 0   |  |  | $ | 515,000 - 580,000 | 
|Los Angeles County:          |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Glendora                     |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Arboreta at Rainbird Vintage |  |                      | 2008 |  |                                         |  | 87    |                                          |  |  | 87                          |  |  |                               | 0  |  |                                           |  | 0   |                     |  |  | 34  |  |  | $ | 349,000 - 457,000 | 
|Hawthorne                    |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|360 South Bay (6):           |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|The Flats                    |  |                      | 2010 |  |                                         |  | 188   |                                          |  |  | 25                          |  |  |                               | 7  |  |                                           |  | 163 |                     |  |  | 25  |  |  | $ | 350,000 - 530,000 | 
|The Courts                   |  |                      | 2010 |  |                                         |  | 118   |                                          |  |  | 37                          |  |  |                               | 3  |  |                                           |  | 81  |                     |  |  | 37  |  |  | $ | 460,000 - 570,000 | 
|The Rows                     |  |                      | 2011 |  |                                         |  | 94    |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 94  |                     |  |  | 0   |  |  | $ | 700,000 - 810,000 | 
|The Lofts                    |  |                      | 2011 |  |                                         |  | 123   |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 123 |                     |  |  | 0   |  |  | $ | 525,000 - 775,000 | 
|The Gardens                  |  |                      | 2012 |  |                                         |  | 102   |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 102 |                     |  |  | 0   |  |  | $ | 755,000 - 980,000 | 
|Azusa                        |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Rosedale                     |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Gardenia                     |  |                      | 2011 |  |                                         |  | 81    |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 81  |                     |  |  | 0   |  |  | $ | 455,000 - 550,000 | 
|Sage Court                   |  |                      | 2011 |  |                                         |  | 64    |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 64  |                     |  |  | 0   |  |  | $ | 420,000 - 515,000 | 
|                             |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|SOUTHERN CALIFORNIA TOTAL    |  |                      |      |  |                                         |  | 1,792 |                                          |  |  | 870                         |  |  |                               | 34 |  |                                           |  | 922 |                     |  |  | 493 |  |  |   |                   | 
|                             |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|                            
|NORTHERN CALIFORNIA          | 
|Contra Costa County:         |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Pittsburgh                   |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Vista Del Mar                |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Villages                     |  |                      | 2007 |  |                                         |  | 102   |                                          |  |  | 50                          |  |  |                               | 0  |  |                                           |  | 52  |                     |  |  | 0   |  |  | $ | 296,000 - 355,000 | 
|Venue                        |  |                      | 2007 |  |                                         |  | 132   |                                          |  |  | 58                          |  |  |                               | 3  |  |                                           |  | 74  |                     |  |  | 10  |  |  | $ | 330,000 - 365,000 | 
|Victory                      |  |                      | 2008 |  |                                         |  | 25    |                                          |  |  | 14                          |  |  |                               | 0  |  |                                           |  | 11  |                     |  |  | 0   |  |  | $ | 680,000 - 745,000 | 
|Vineyard                     |  |                      | 2007 |  |                                         |  | 29    |                                          |  |  | 29                          |  |  |                               | 0  |  |                                           |  | 0   |                     |  |  | 12  |  |  | $ | 386,000 - 430,000 | 
|Antioch                      |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Waterford                    |  |                      | 2011 |  |                                         |  | 130   |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 130 |                     |  |  | 0   |  |  | $ | 270,000 - 325,000 | 
|Placer County:               |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Whitney Ranch, Rocklin       |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Twin Oaks                    |  |                      | 2006 |  |                                         |  | 92    |                                          |  |  | 90                          |  |  |                               | 1  |  |                                           |  | 2   |                     |  |  | 27  |  |  | $ | 400,000 - 470,000 | 
|Sacramento County:           |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Elk Grove                    |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 
|Big Horn                     |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |     |                     |  |  |     |  |  |   |                   | 



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##### Table of Contents

|                                      |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |       |                     |  |  |     |  |  |   |                   | 
|------------------------------------- |  | -------------------- | ---- |  | --------------------------------------- |  | ----- | ---------------------------------------- |  |  | --------------------------- |  |  | ----------------------------- | -- |  | ----------------------------------------- |  | ----- | ------------------- |  |  | --- |  |  | - | ----------------- | 
|Project (County or City)              |  | Year ofFirstDelivery |      |  | EstimatedNumber ofHomes atCompletion(1) |  |       | CumulativeUnits Closedas 
ofDec 31, 2010 |  |  | Backlog atDec 31,2010(2)(3) |  |  | Lots Ownedas
ofDec 31,2010(4) |    |  | Homes Closedfor
theYear EndedDec 31, 2010 |  |       | Sales PriceRange(5) | 
|Gallery Walk                          |  |                      | 2005 |  |                                         |  | 149   |                                          |  |  | 149                         |  |  |                               | 0  |  |                                           |  | 0     |                     |  |  | 1   |  |  | $ | 180,000 - 230,000 | 
|Magnolia Lane (Maderia)               |  |                      | 2010 |  |                                         |  | 90    |                                          |  |  | 9                           |  |  |                               | 0  |  |                                           |  | 81    |                     |  |  | 9   |  |  | $ | 250,000 - 300,000 | 
|San Joaquin County:                   |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |       |                     |  |  |     |  |  |   |                   | 
|The Ranch @ Mossdale Landing, Lathrop |  |                      | 2010 |  |                                         |  | 168   |                                          |  |  | 22                          |  |  |                               | 3  |  |                                           |  | 146   |                     |  |  | 22  |  |  | $ | 195,000 - 240,000 | 
|Santa Clara County:                   |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |       |                     |  |  |     |  |  |   |                   | 
|The Gardens, San Jose                 |  |                      | 2010 |  |                                         |  | 40    |                                          |  |  | 11                          |  |  |                               | 7  |  |                                           |  | 29    |                     |  |  | 11  |  |  | $ | 580,000 - 595,000 | 
|Solano County:                        |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |       |                     |  |  |     |  |  |   |                   | 
|Enclave at Paradise Valley, Fairfield |  |                      | 2010 |  |                                         |  | 100   |                                          |  |  | 9                           |  |  |                               | 5  |  |                                           |  | 91    |                     |  |  | 9   |  |  | $ | 345,000 - 410,000 | 
|                                      |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |       |                     |  |  |     |  |  |   |                   | 
|NORTHERN CALIFORNIA TOTAL             |  |                      |      |  |                                         |  | 1,057 |                                          |  |  | 441                         |  |  |                               | 19 |  |                                           |  | 616   |                     |  |  | 101 |  |  |   |                   | 
|                                      |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |       |                     |  |  |     |  |  |   |                   | 
|                                     
|ARIZONA                               | 
|Maricopa County:                      |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |       |                     |  |  |     |  |  |   |                   | 
|Lyons Gate, Gilbert                  |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |       |                     |  |  |     |  |  |   |                   | 
|Pride                                 |  |                      | 2006 |  |                                         |  | 650   |                                          |  |  | 479                         |  |  |                               | 5  |  |                                           |  | 171   |                     |  |  | 45  |  |  | $ | 121,000 - 148,000 | 
|Savanna                               |  |                      | 2006 |  |                                         |  | 174   |                                          |  |  | 174                         |  |  |                               | 0  |  |                                           |  | 0     |                     |  |  | 2   |  |  | $ | 172,000 - 215,000 | 
|Sahara                                |  |                      | 2006 |  |                                         |  | 169   |                                          |  |  | 169                         |  |  |                               | 0  |  |                                           |  | 0     |                     |  |  | 3   |  |  | $ | 196,000 - 259,000 | 
|Acacia                                |  |                      | 2007 |  |                                         |  | 365   |                                          |  |  | 180                         |  |  |                               | 1  |  |                                           |  | 185   |                     |  |  | 39  |  |  | $ | 157,000 - 200,000 | 
|Future Products                       |  |                      | 2013 |  |                                         |  | 213   |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 213   |                     |  |  | 0   |  |  |   |                   | 
|Arroyo @ Coldwater Ranch, Peoria      |  |                      | 2009 |  |                                         |  | 20    |                                          |  |  | 18                          |  |  |                               | 2  |  |                                           |  | 2     |                     |  |  | 10  |  |  | $ | 132,000 - 168,000 | 
|Queen Creek                           |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |       |                     |  |  |     |  |  |   |                   | 
|Hastings Property                     |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |       |                     |  |  |     |  |  |   |                   | 
|Villas                                |  |                      | 2013 |  |                                         |  | 337   |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 337   |                     |  |  | 0   |  |  | $ | 113,000 - 137,000 | 
|Manor                                 |  |                      | 2013 |  |                                         |  | 141   |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 141   |                     |  |  | 0   |  |  | $ | 159,000 - 218,000 | 
|Estates                               |  |                      | 2013 |  |                                         |  | 153   |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 153   |                     |  |  | 0   |  |  | $ | 229,000 - 281,000 | 
|Church Farms North                    |  |                      | 2016 |  |                                         |  | 1,820 |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 1,820 |                     |  |  | 0   |  |  | $ | 109,000 - 399,000 | 
|Lehi Crossing, Mesa                   |  |                      | 2013 |  |                                         |  | 914   |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 914   |                     |  |  | 0   |  |  | $ | 199,000 - 464,000 | 
|Rancho Mercado, Phoenix               |  |                      | 2016 |  |                                         |  | 1,900 |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 1,900 |                     |  |  | 0   |  |  | $ | 110,000 -324,000  | 
|                                      |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |       |                     |  |  |     |  |  |   |                   | 
|ARIZONA TOTAL                         |  |                      |      |  |                                         |  | 6,856 |                                          |  |  | 1,020                       |  |  |                               | 8  |  |                                           |  | 5,836 |                     |  |  | 99  |  |  |   |                   | 
|                                      |  |                      |      |  |                                         |  |       |                                          |  |  |                             |  |  |                               |    |  |                                           |  |       |                     |  |  |     |  |  |   |                   | 



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|                            |  |                      |      |  |                                         |  |        |                                          |  |  |                             |  |  |                               |    |  |                                           |  |        |                     |  |  |     |  |  |   |                   | 
|--------------------------- |  | -------------------- | ---- |  | --------------------------------------- |  | ------ | ---------------------------------------- |  |  | --------------------------- |  |  | ----------------------------- | -- |  | ----------------------------------------- |  | ------ | ------------------- |  |  | --- |  |  | - | ----------------- | 
|Project (County or City)    |  | Year ofFirstDelivery |      |  | EstimatedNumber ofHomes atCompletion(1) |  |        | CumulativeUnits Closedas 
ofDec 31, 2010 |  |  | Backlog atDec 31,2010(2)(3) |  |  | Lots Ownedas
ofDec 31,2010(4) |    |  | Homes Closedfor
theYear EndedDec 31, 2010 |  |        | Sales PriceRange(5) | 
|                           
|NEVADA                      | 
|Clark County:               |  |                      |      |  |                                         |  |        |                                          |  |  |                             |  |  |                               |    |  |                                           |  |        |                     |  |  |     |  |  |   |                   | 
|North Las Vegas             |  |                      |      |  |                                         |  |        |                                          |  |  |                             |  |  |                               |    |  |                                           |  |        |                     |  |  |     |  |  |   |                   | 
|The Cottages                |  |                      | 2004 |  |                                         |  | 360    |                                          |  |  | 316                         |  |  |                               | 1  |  |                                           |  | 44     |                     |  |  | 0   |  |  | $ | 115,000 - 135,000 | 
|Serenity Ridge              |  |                      | 2011 |  |                                         |  | 88     |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 88     |                     |  |  | 0   |  |  | $ | 380,000 - 455,000 | 
|Tularosa at Mountains Edge |  |                      | 2011 |  |                                         |  | 140    |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 140    |                     |  |  | 0   |  |  | $ | 184,000 - 234,000 | 
|Las Vegas                   |  |                      |      |  |                                         |  |        |                                          |  |  |                             |  |  |                               |    |  |                                           |  |        |                     |  |  |     |  |  |   |                   | 
|Carson Ranch                |  |                      |      |  |                                         |  |        |                                          |  |  |                             |  |  |                               |    |  |                                           |  |        |                     |  |  |     |  |  |   |                   | 
|West Series I               |  |                      | 2005 |  |                                         |  | 74     |                                          |  |  | 74                          |  |  |                               | 0  |  |                                           |  | 0      |                     |  |  | 7   |  |  | $ | 220,000 - 255,000 | 
|West Series II              |  |                      | 2005 |  |                                         |  | 56     |                                          |  |  | 56                          |  |  |                               | 0  |  |                                           |  | 0      |                     |  |  | 3   |  |  | $ | 406,000 - 503,000 | 
|East Series I               |  |                      | 2006 |  |                                         |  | 116    |                                          |  |  | 115                         |  |  |                               | 0  |  |                                           |  | 1      |                     |  |  | 13  |  |  | $ | 219,000 - 300,000 | 
|East Series II              |  |                      | 2007 |  |                                         |  | 45     |                                          |  |  | 45                          |  |  |                               | 0  |  |                                           |  | 0      |                     |  |  | 8   |  |  | $ | 246,000 - 305,000 | 
|West Park                   |  |                      |      |  |                                         |  |        |                                          |  |  |                             |  |  |                               |    |  |                                           |  |        |                     |  |  |     |  |  |   |                   | 
|Villas                      |  |                      | 2006 |  |                                         |  | 107    |                                          |  |  | 95                          |  |  |                               | 12 |  |                                           |  | 12     |                     |  |  | 4   |  |  | $ | 155,000 - 185,000 | 
|Courtyards                  |  |                      | 2006 |  |                                         |  | 92     |                                          |  |  | 82                          |  |  |                               | 8  |  |                                           |  | 10     |                     |  |  | 3   |  |  | $ | 177,000 - 213,000 | 
|Flagstone                   |  |                      |      |  |                                         |  |        |                                          |  |  |                             |  |  |                               |    |  |                                           |  |        |                     |  |  |     |  |  |   |                   | 
|Crossings                   |  |                      | 2011 |  |                                         |  | 77     |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 77     |                     |  |  | 0   |  |  | $ | 268,000 - 307,000 | 
|Commons                     |  |                      | 2011 |  |                                         |  | 37     |                                          |  |  | 0                           |  |  |                               | 2  |  |                                           |  | 37     |                     |  |  | 0   |  |  | $ | 217,000 - 248,000 | 
|Rhapsody                    |  |                      | 2011 |  |                                         |  | 63     |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 63     |                     |  |  | 0   |  |  | $ | 179,000 - 201,000 | 
|The Fields at Aliente       |  |                      | 2011 |  |                                         |  | 60     |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 60     |                     |  |  | 0   |  |  | $ | 207,000 - 241,000 | 
|Nye County:                 |  |                      |      |  |                                         |  |        |                                          |  |  |                             |  |  |                               |    |  |                                           |  |        |                     |  |  |     |  |  |   |                   | 
|Pahrump                     |  |                      |      |  |                                         |  |        |                                          |  |  |                             |  |  |                               |    |  |                                           |  |        |                     |  |  |     |  |  |   |                   | 
|Mountain Falls              |  |                      |      |  |                                         |  |        |                                          |  |  |                             |  |  |                               |    |  |                                           |  |        |                     |  |  |     |  |  |   |                   | 
|Cascata                     |  |                      | 2005 |  |                                         |  | 142    |                                          |  |  | 142                         |  |  |                               | 0  |  |                                           |  | 0      |                     |  |  | 5   |  |  | $ | 216,000 - 238,000 | 
|Tramonto                    |  |                      | 2005 |  |                                         |  | 181    |                                          |  |  | 181                         |  |  |                               | 0  |  |                                           |  | 0      |                     |  |  | 7   |  |  | $ | 176,000 - 211,000 | 
|Bella Sera                  |  |                      | 2005 |  |                                         |  | 119    |                                          |  |  | 119                         |  |  |                               | 0  |  |                                           |  | 0      |                     |  |  | 9   |  |  | $ | 217,000 - 257,000 | 
|Cascata Ancora              |  |                      | 2007 |  |                                         |  | 80     |                                          |  |  | 80                          |  |  |                               | 0  |  |                                           |  | 0      |                     |  |  | 8   |  |  | $ | 99,000 - 148,000  | 
|Entrata                     |  |                      | 2007 |  |                                         |  | 26     |                                          |  |  | 26                          |  |  |                               | 0  |  |                                           |  | 0      |                     |  |  | 0   |  |  | $ | 142,000 - 164,000 | 
|Series I                    |  |                      | 2011 |  |                                         |  | 116    |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 116    |                     |  |  | 0   |  |  | $ | 117,000 - 150,000 | 
|Series II                   |  |                      | 2012 |  |                                         |  | 218    |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 218    |                     |  |  | 0   |  |  | $ | 169,000 - 200,000 | 
|Future Projects             |  |                      | 2012 |  |                                         |  | 1,925  |                                          |  |  | 0                           |  |  |                               | 0  |  |                                           |  | 1,925  |                     |  |  | 0   |  |  |   |                   | 
|                            |  |                      |      |  |                                         |  |        |                                          |  |  |                             |  |  |                               |    |  |                                           |  |        |                     |  |  |     |  |  |   |                   | 
|NEVADA TOTAL                |  |                      |      |  |                                         |  | 4,122  |                                          |  |  | 1,331                       |  |  |                               | 23 |  |                                           |  | 2,791  |                     |  |  | 67  |  |  |   |                   | 
|                            |  |                      |      |  |                                         |  |        |                                          |  |  |                             |  |  |                               |    |  |                                           |  |        |                     |  |  |     |  |  |   |                   | 
|GRAND TOTALS                |  |                      |      |  |                                         |  | 13,827 |                                          |  |  | 3,662                       |  |  |                               | 84 |  |                                           |  | 10,165 |                     |  |  | 760 |  |  |   |                   | 
|                            |  |                      |      |  |                                         |  |        |                                          |  |  |                             |  |  |                               |    |  |                                           |  |        |                     |  |  |     |  |  |   |                   | 



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



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



|(3) | Of the total homes subject to pending sales contracts as of December 31, 2010, 70 represent homes completed or under construction and 14
represent homes not yet under construction.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Lots owned as of December 31, 2010 include lots in backlog at December 31, 2010.
|--- | --------------------------------------------------------------------------------



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



|(6) | All or a portion of the lots in this project are not owned as of December 31, 2010. The Company consolidated the remaining purchase price of
the lots in accordance with certain accounting principles, and considers the lots owned at December 31, 2010.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 on-line media, newspaper advertisements, brochures,
direct mail and the placement of strategically located sign boards in the immediate areas of its developments. In addition, the Company markets all of its products through the internet via email lists and interest lists, as well as its website at
www.lyonhomes.com. In general, the Companys advertising emphasizes each projects strengths, the quality and value of its products and its reputation in the marketplace.

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

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

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

The Companys
homes are typically sold before or during construction through sales contracts which are usually accompanied by a small cash deposit. Such sales contracts are usually subject to certain contingencies such as the buyers ability to qualify for
financing. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company and its joint ventures projects was approximately 19% during 2010. Cancellation rates are subject to a variety of factors beyond
the Companys control such as the downturn in the homebuilding industry and current economic conditions. The Companys and its joint ventures inventory of completed and unsold homes was 107 homes as of December 31, 2010.

Warranty

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

In connection with the limited warranty covering construction defects, the Company obtained an insurance policy which
expires on December 31, 2013, unless amended or renewed. The Company has been informed by the insurance carrier that this insurance policy will respond to construction defect claims on homes that close during each policy period for the duration
of the Companys legal liability and that the policy will respond, upon satisfaction of the applicable self insured retention, to potential losses relating to construction, including soil subsidence. The insurance policy provides a single
policy of insurance to the Company and the subcontractors enrolled in its insurance program. As a result, the Company is no longer required to obtain proof of insurance from these subcontractors nor be named as an additional insured under their
individual insurance policies. The Company still requires that subcontractors not enrolled in the insurance program provide proof of insurance and name the Company as an additional insured under their insurance policy. Furthermore, the Company
generally requires that its subcontractors provide the Company with an indemnity prior to receiving payment for their work.



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

Sale of Lots and Land

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

Customer Financing  William Lyon Mortgage

The
Company seeks to assist its home buyers in obtaining mortgage financing for qualified buyers. Substantially all home buyers utilize long-term mortgage financing to purchase a home and mortgage lenders will usually make loans only to qualified
borrowers.

In 2009, the Company entered into a joint venture operating agreement with a lending institution,
in which the Company would receive approximately 50% of the earnings of the joint venture. The joint venture was created to service the Companys homebuyers by having access to a larger mortgage portfolio provided by the lending institution.
The lending institution originates conventional, FHA and VA loans. In 2011, the lending institution notified the company that the joint venture operating structure would be dissolved by July 2011.

Therefore, the Company negotiated a Marketing Service Agreement (MSA) with the lending institution where the
Company receives a nominal monthly fee, and the Companys homebuyers have available the same mortgage programs that were available under the joint venture structure.

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 division offices are connected to corporate headquarters through a fully integrated accounting, financial and operational
management information system. Through this system, management regularly evaluates the status of its projects in relation to budgets to determine the cause of any variances and, where appropriate, adjusts the Companys operations to capitalize
on favorable variances or to limit adverse financial impacts.

Regulation

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

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

The Companys wholly-owned subsidiary, William Lyon Homes, Inc., is licensed as a general building contractor in California, Arizona and Nevada. In addition, William Lyon Homes, Inc. holds a
corporate real estate license under the California Real Estate Law.



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Competition

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

Corporate Organization and Personnel

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

As of December 31, 2010, the Company employed 212 full-time and 7 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, golf course operations, sales and marketing activities.

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

Available Information

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



|Item 1A. | Risk Factors
|-------- | ------------

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

MARKET AND ECONOMIC RISKS

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

The homebuilding industry continues to experience uncertainty and
reduced demand for new homes in certain markets, which negatively impacted the Companys financial and operating results during the year ending December 31, 2010. Increased instability in the credit markets has contributed to the decline
in demand for new housing. The conditions experienced during 2010 include, among other things, the subdued emergence from a national recession, increases in unemployment levels, continuing concerns over the effects of asset valuations on the banking
system and credit markets, reduced availability of mortgage loan financing, reduced consumer confidence, the absence of home price stability, and continued declines in the



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##### Table of Contents

value of new homes in certain markets. For the year ending December 31, 2010, net new home orders decreased 25% to 650 from 869 in the 2009 period. The Company experienced a decrease of 29%
in net new home orders of 869 in the 2009 period compared to 1,221 in 2008.

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

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

The residential homebuilding industry
is cyclical and is highly sensitive to changes in general economic conditions such as levels of employment, consumer confidence and income, availability of financing for acquisitions, construction and permanent mortgages, interest rate levels,
inflation, immigration trends and demand for housing. An important segment of the Companys customer base consists of move-up buyers, who often purchase homes subject to contingencies related to the sale of their existing homes. The
difficulties facing these buyers in selling their homes during recessionary periods may adversely affect home sales. Moreover, during such periods, the Company may need to reduce sales prices and offer greater incentives to buyers to compete for
sales that may result in reduced margins. Increases in the rate of inflation could adversely affect gross margins by increasing costs and expenses. In times of high inflation, demand for housing may decline and the Company may be unable to recover
increased costs through higher sales.

Since early 2006, the U.S. housing market has been negatively impacted
by declined consumer confidence, restrictive mortgage standards, and large supplies of foreclosure, resale and new homes, among other factors. When combined with a prolonged economic downturn, high unemployment levels, and uncertainty in the U.S.
economy, these conditions have contributed to decreased demand for housing, declining sales prices, and increasing pricing pressure, which hinders the Companys ability to attract new home buyers. As a result, the Company has experienced
operating losses each year, beginning in 2007. Such losses resulted from a combination of reduced homebuilding gross margins, losses on land sales to generate cash flow and significant non-cash impairment losses on real estate inventories. On
November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was enacted into law, which extended and expanded the homebuyer federal tax credit until April 30, 2010. The Act, which was applicable to net new home orders
under contract by April 30, 2010 and closed by September 30, 2010, favorably impacted our home sales during the early part of 2010, but also contributed to an industry-wide decline in net new home orders in the latter part of 2010.

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

During the years ended December 31, 2010, 2009 and 2008, the Companys
cancellation rates were 19%, 21% and 28%, respectively, which can negatively impact the number of closed homes, net new home orders, home sales revenue and the Companys results of operations, as well as the number of homes in backlog. Home
order cancellations can result from a number of factors, including declines, and/or slow appreciation in the market value of homes, increases in the supply of homes available to be purchased, increased competition, higher mortgage interest rates,
homebuyers inability to sell their existing homes, homebuyers inability to obtain suitable financing, including providing sufficient down payments, and adverse changes in economic conditions. High levels of home order cancellations would
have a negative impact on the Companys home sales revenue and financial and operating results.

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

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

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

In general, housing demand is negatively impacted by increases in interest rates and housing costs and the unavailability of mortgage financing as a result of declining customer credit quality, tightening
of mortgage loan underwriting standards, or other factors. Most buyers finance their home purchases through third-party lenders providing mortgage financing. Over the last several years, many third-party lenders have significantly increased
underwriting standards, and many subprime and other alternate mortgage products are no longer available in the marketplace in spite of a decrease in mortgage rates. If these trends continue and mortgage loans continue to be difficult to obtain, the
ability and willingness of



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prospective buyers to finance home purchases or to sell their existing homes will be adversely affected, which will adversely affect the Companys results of operations through reduced home
sales revenue, gross margin and cash flow.

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

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

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

During 2010, the Company incurred non-cash impairment losses on real estate assets amounting to $111.9 million. In
addition, the Company incurred non-cash impairment losses on real estate assets of $45.3 million and $135.3 million, respectively, for the years ended December 31, 2009 and 2008. The Company assesses its projects on a quarterly basis, when
indicators of impairment exist. Indicators of impairment include a decrease in demand for housing due to soft market conditions, competitive pricing pressures which reduce the average sales price of homes, which includes sales incentives for home
buyers, slow sales absorption rates, a decrease in the value of the underlying land and a decrease in project cash flows for a particular project. The Company was required to write down the book value of its impaired real estate assets in accordance
with FASB ASC 360, as defined in Note 5 of Notes to Consolidated Financial Statements. A continued slump in the housing market could result in additional write-downs, which could have a material adverse effect on the Companys
financial condition and earnings.



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RISKS RELATED TO THE COMPANYS INDEBTEDNESS

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

The Company is highly leveraged and, subject to restrictions, the Company, California Lyon
and their subsidiaries may incur substantial additional indebtedness. The Companys high level of indebtedness could have detrimental consequences, including the following:



| |  |  | a significant portion of the indebtedness of California Lyon is scheduled to mature prior to or during 2014, and California Lyon may not have the
ability to repay its indebtedness as it matures;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability to obtain additional financing as needed for working capital, land acquisition costs, building costs, other capital expenditures, or
general corporate purposes, or to refinance existing indebtedness before its scheduled maturity, may be limited;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company will need to use a substantial portion of cash flow from operations to pay interest and principal on its Senior Secured Term Loan due
2014 (the Term Loan), Senior Notes and other indebtedness, which will reduce the funds available for other purposes;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if the Company or California Lyon is unable to comply with the terms of the agreements governing the indebtedness of California Lyon, the holders of
that indebtedness could accelerate that indebtedness and exercise other rights and remedies against California Lyon, the Company, and the other guarantors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | substantially all of California Lyons actively selling projects are pledged as security for California Lyons Term Loan and a default on
the debt could result in foreclosure on California Lyons assets which could, under certain circumstances, limit or prohibit the ability to operate as a going concern; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company is vulnerable to economic downturns and adverse developments in the business.
| | - |  | -----------------------------------------------------------------------------------------

The Companys ability to meet expenses depends on future performance, which will be affected by financial, business, economic and
other factors. The Company will not be able to control many of these factors, such as economic conditions in the markets where the Company operates and pressure from competitors. The Company cannot be certain that the cash flow will be sufficient to
allow the Company and California Lyon to pay principal and interest on debt, support operations, and meet other obligations. If the Company and California Lyon do not have the resources to meet these and other obligations, California



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Lyon may be required to refinance all or part of the existing debt, including the Senior Notes, sell assets or borrow more money. California Lyon may not be able to do so on acceptable terms, in
a timely manner, or at all. In addition, the terms of existing or future debt instruments limit the ability of California Lyon or the Company to pursue any of these alternatives.

The Company may not be able to comply with the financial covenants contained in the Term Loan.

The Term Loan imposes restrictions on operations, limits the amount of borrowings under its other sources, and requires
California Lyon and the Company to comply with various financial covenants. The financial covenants include a requirement that the Company maintain a minimum tangible net worth of $75 million and certain asset loan-to-value ratios.

As of December 31, 2010, the Companys tangible net worth fell below $75 million due primarily to non-cash
impairment losses on real estate assets realized during 2010. California Lyon has reached an agreement with the lenders under the Term Loan that amended the Term Loan to permit the Companys tangible net worth to fall below $75.0 million for
two consecutive quarters. In addition, California Lyon reached a subsequent agreement with the lenders under the Term Loan to waive any non-compliance with the tangible net worth covenant and other potential defaults through July 19, 2011, subject
to certain terms and conditions.

There can be no assurance that California Lyon will remain in compliance
with the conditions associated with the lenders waiver through July 19, 2011. If California Lyon is unable to comply with any one or more of these financial covenants, and is unable to obtain a waiver for the noncompliance, California Lyon
could be in default under the Term Loan, and California Lyons obligations to repay indebtedness outstanding under the Term Loan could be accelerated. An acceleration of California Lyons obligations under the Term Loan would result in an
event of default under the Senior Notes, which would permit the holders of the Senior Notes to accelerate the Senior Notes. Any such acceleration would result in a default under the Term Loan, and could also result in defaults and acceleration under
California Lyons other debt instruments. Any of these events could severely impact the Companys liquidity and ability to conduct its operations.

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

The homebuilding industry is capital-intensive and requires significant up-front expenditures to acquire land and begin
development. Land acquisition, development and construction activities may be adversely affected by any shortage or increased cost of financing or the unwillingness of third parties to engage in joint ventures. The Companys current financial
position may make it more difficult for the Company to obtain capital for development projects, particularly if the Company has difficulty meeting its current financial covenants. Any difficulty in obtaining sufficient capital for planned
development expenditures could cause project delays and any such delay could result in cost



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increases and may adversely affect the Companys sales and future results of operations and cash flows.

The Term Loan Agreement and the Senior Notes Indentures and the Companys Term Loan impose significant operating and financial restrictions, which may prevent the Company and its subsidiaries from
capitalizing on business opportunities and taking some corporate actions.

The Senior Notes Indentures and
the credit agreement governing the Term Loan impose significant operating and financial restrictions. These restrictions limit the ability of the Company and its subsidiaries, among other things, to:



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



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



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



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



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



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



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



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

California Lyons other debt instruments contain additional restrictions. In addition, the Company or its
subsidiaries may in the future enter into other agreements refinancing or otherwise governing indebtedness which impose yet additional restrictions. These restrictions may adversely affect the Companys and its subsidiaries ability to
finance future operations or capital needs or to pursue available business opportunities. A breach of any of these covenants could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to
declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that indebtedness. A default under any of the Senior Notes could cause defaults under our other
Senior Notes and our Term Loan, which could in turn permit the lenders or holders of Senior Notes to accelerate the obligations of California Lyon, the Company and the other guarantors, and to exercise other rights and remedies.

California Lyon may not be able to satisfy its obligations upon a change of control.

Upon the occurrence of a change of control, as defined in the indentures respectively governing the Senior
Notes Indentures, each holder of the Senior Notes will have the right to require California Lyon to purchase the Senior Notes at a price equal to 101% of the principal amount, together with any accrued and unpaid interest, to the date of purchase.
California Lyons failure to purchase, or give notice of purchase of, the Senior Notes would be a default under the applicable indenture, which would cause a default under the Term Loan and could also cause defaults and/or accelerations under
California Lyons other indebtedness. Any of these events could severely impact the Companys liquidity and ability to conduct its operations.

If this event occurs, the holders of California Lyons indebtedness could accelerate the indebtedness, and California Lyon may not have enough assets to satisfy all obligations under the Term Loan,
the Senior Notes Indentures and any other accelerated indebtedness. In order to satisfy the obligations, California Lyon could seek to refinance the indebtedness under the Senior Notes and any other indebtedness or obtain waivers from the holders of
the indebtedness. California Lyon may not be able to obtain a waiver or refinance the indebtedness on acceptable terms in a timely manner, or at all.

In addition, the definition of change of control in the Senior Notes Indentures includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of all or substantially
all of the assets of the Company and the restricted subsidiaries. Although there is a developing body of case law interpreting the phrase substantially all, there is no precise established definition of the phrase under applicable
law.

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



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Potential future downgrades of our credit ratings could adversely affect our access to
capital and could otherwise have a material adverse effect on us.

Over the past few years, the rating
agencies had downgraded the Companys corporate credit rating and ratings on the Senior Notes due to the deterioration in our homebuilding operations, credit metrics, other earnings-based metrics and the significant decrease in our tangible net
worth. These ratings and our current credit condition affect, among other things, our ability to access new capital, especially debt, and negative changes in these ratings may result in more stringent covenants and higher interest rates under the
terms of any new debt. Our credit ratings could be further lowered or rating agencies could issue adverse commentaries in the future, which could have a material adverse effect on our business, results of operations, financial condition and
liquidity. In particular, a weakening of our financial condition, including a significant increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, result in a credit
rating downgrade or change in outlook, or otherwise increase our cost of borrowing.

OPERATIONAL RISKS

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

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



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and the time the Company begins selling homes, the Companys home sales revenue and results of operations could be negatively impacted and/or the Company could be required to scale back the
Companys operations in a given market.

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

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

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

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

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

The Company generates over 85% it its revenue and a significant amount of its profits from, and holds approximately
one-half of the dollar value of real estate inventory in, California. Over the last several years, land values, the demand for new homes and home prices have declined substantially in the state, negatively impacting the Companys profitability
and financial position. In addition, the state of California is experiencing severe budget shortfalls and is considering raising taxes and increasing fees to offset the deficit. There can be no assurance that the profitability and financial position
of the Company will not be further impacted if the challenging conditions in California continue or worsen.

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

The homebuilding
industry is highly competitive. Homebuilders compete for, among other things, homebuying customers, desirable properties, financing, raw materials and skilled labor. The Company competes both with large homebuilding companies, some of which have
greater financial, marketing and sales resources than the Company, and with smaller local builders. Our competitors may independently develop land and construct housing units that are substantially similar to our products. Many of these competitors
also have longstanding relationships with subcontractors and suppliers in the markets in which we operate. We currently build in several of the top markets in the nation and, therefore, we expect to continue to face additional competition from new
entrants into our markets. The Company also competes for sales with individual resales of existing homes and with available rental housing.

The Companys operating results are variable.

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



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



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



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



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



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



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



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



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



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

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

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

The Companys success is dependent upon the efforts and abilities of its executive officers and other key employees, many of whom have significant experience in the homebuilding industry and in the
Companys divisional markets. In particular, the Company is dependent upon the services of General William Lyon, Chairman of the Board and Chief Executive Officer, and William H. Lyon, President and Chief Operating Officer, as well as the
services of the division presidents and division management teams and personnel in the corporate office. The loss of the services of any of these executives or key personnel, for any reason, could have a material adverse effect upon the
Companys business, operating results and financial condition.

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

As a homebuilder, we have been, and continue to be, subject to construction defect, product liability and home warranty claims, including moisture intrusion and related claims, arising in the ordinary
course of business. These claims are common to the homebuilding industry and can be costly.

California law
provides that consumers can seek redress for patent (i.e., observable) defects in new homes within three or four years (depending on the type of claim asserted) from when the defect is discovered or should have been discovered. If the defect
is latent (i.e., non-observable), consumers must still seek redress within three or four years from the date when the defect is discovered or should have been discovered, but in no event later than ten years after the date of substantial
completion of the work on the construction. Consumers purchasing homes in Arizona and Nevada may also be able to obtain redress under state laws for either patent or latent defects in their new homes.

With respect to certain general liability exposures, including construction defect claims, product liability claims and
related claims, assessment of claims and the related liability and reserve estimation process is highly judgmental due to the complex nature of these exposures, with each exposure exhibiting unique circumstances. Furthermore, once claims are
asserted for construction defects, it can be difficult to determine the extent to which the assertion of these claims will expand. Although we have obtained insurance for construction defect claims subject to applicable self-insurance retentions,
such policies may not be available or adequate to cover liability for damages, the cost of repairs, and/or the expense of litigation surrounding current claims, and future claims may arise out of events or circumstances not covered by insurance and
not subject to effective indemnification agreements with our subcontractors.

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

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

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

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



23



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

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

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

We conduct
certain of our operations through unconsolidated joint ventures with independent third parties in which we do not have a controlling interest and we can be adversely impacted by joint venture partners failure to fulfill their obligations.

We participate in land development joint ventures (JVs) in which we have less than a controlling interest.
We have entered into JVs in order to acquire attractive land positions, to manage our risk profile and to leverage our capital base. Our JVs are typically entered into with developers, other homebuilders and financial partners to develop finished
lots for sale to the joint ventures members and other third parties.

Our joint venture investments are
generally very illiquid, due to a lack a controlling interest in the JVs. Our lack of a controlling interest also results in the risk that the JV will take actions that we disagree with, or fail to take actions that we desire, including actions
regarding the sale of the underlying property.

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

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

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

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

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

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

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

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



24



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REGULATORY RISKS

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

The Company is subject to numerous local, state, federal and other statutes,
ordinances, rules and regulations concerning zoning, development, building design, construction and similar matters which impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within
the boundaries of a particular area. Projects that are not entitled may be subjected to periodic delays, changes in use, less intensive development or elimination of development in certain specific areas due to government regulations. The Company
may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or slow-growth or no-growth initiatives that could be implemented in the future in the
states in which the Company operates. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. Projects for which the Company has received land use and development
entitlements or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety, and welfare issues, which can further delay these
projects or prevent their development. As a result, home sales could decline and costs increase, which could negatively affect the Companys results of operations.

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

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

OTHER RISKS

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

At December 31, 2010, the Company had gross federal and state net operating loss carry forwards totaling approximately $115.5 million and $386.3 million, respectively. Federal net operating loss
carry forwards begin to expire in 2028; state net operating loss carry forwards begin to expire in 2013. The Company will only receive tax benefits for the NOL carry forwards if there is future taxable income before the applicable NOL expiration
period. The Company has fully reserved against all of its deferred tax assets, including the NOL carry forward that was carried on the Companys financial statements, due to the possibility that the Company may not have taxable income. However,
these deferred tax assets will be available to the Company if there is sufficient future taxable income.

Future terrorist
attacks against the United States or increased domestic or international instability could have an adverse effect on our operations.

Adverse developments in the war on terrorism, future terrorist attacks against the United States, or any outbreak or escalation of hostilities between the United States and any foreign power, including
the armed conflicts in Iraq and



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##### Table of Contents

Afghanistan, may cause disruption to the economy, our Company, our employees and our customers, which could adversely affect our revenues, operating expenses, and financial condition.



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

None.



|Item 2. | Properties
|------- | ----------

Headquarters

The Companys corporate headquarters are
located at 4490 Von Karman Avenue, Newport Beach, California, which it leases from a trust of which William H. Lyon, a director of the Company, is the sole beneficiary. The Company leases or owns properties for its division offices, but none of
these properties is material to the operation of the Companys business. For information about properties owned by the Company for use in its homebuilding activities, see Item 1.



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

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



|Item 4. | Reserved
|------- | --------

PART II



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

The Company is a privately held company. See Note 8 of Notes to Consolidated
Financial Statements.

The Company has not paid any cash dividends on its Common Stock during the last
three fiscal years and expects that for the foreseeable future it will follow a policy of retaining earnings in order to help finance its business. Payment of dividends is within the discretion of the Companys Board of Directors and will
depend upon the earnings, capital requirements, general economic conditions, restrictions in debt instruments and operating and financial condition of the Company, among other factors. See Managements Discussion and Analysis of Financial
Condition and Results of Operations  Financial Condition and Liquidity and Note 8 of Notes to Consolidated Financial Statements.



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##### Table of Contents

|Item 6. | Selected Financial Data
|------- | -----------------------

The following table sets forth certain of the Companys historical financial data. The selected historical
consolidated financial data as of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008 have been derived from the Companys audited consolidated financial statements and the related notes included
elsewhere herein. The selected historical consolidated financial data as of December 31, 2008, 2007 and 2006 and for the years ended December 31, 2007 and 2006, has been derived from the Companys audited financial statements for such
years, which are not included herein. The selected historical consolidated financial data set forth below are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under the heading
Managements Discussion and Analysis of Financial Condition and Results of Operations, and the historical consolidated financial statements and accompanying notes included elsewhere herein.



|                                                                    |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|------------------------------------------------------------------- |  | ----------------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | --------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                    |  | As of and for the Year Ended December 31, |         
|                                                                    |  | 2010                                      |          |   | 2009 |   |          | 2008 |  |   | 2007      |   |  | 2006 |           
|                                                                    |  | (dollars in thousands)                    |         
|                                                                    |  | (note 1)                                  |         
|Statement of Operations Data:                                       |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|Operating revenue                                                   |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|Home sales                                                          |  | $                                         | 266,865  |   |      | $ | 253,874  |      |  | $ | 468,452   |   |  | $    | 1,002,549  |   |  | $ | 1,478,694  |  
|Lots, land and other sales(2)                                       |  |                                           | 17,204   |   |      |   | 21,220   |      |  |   | 39,512    |   |  |      | 102,808    |   |  |   | 13,527     |  
|Construction services(3)                                            |  |                                           | 10,629   |   |      |   | 34,149   |      |  |   | 18,114    |   |  |      |           |   |  |   |           |  
|                                                                    |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|                                                                    |  |                                           | 294,698  |   |      |   | 309,243  |      |  |   | 526,078   |   |  |      | 1,105,357  |   |  |   | 1,492,221  |  
|                                                                    |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|Operating costs                                                     |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|Cost of saleshomes                                                 |  |                                           | (225,751 | ) |      |   | (219,486 | )    |  |   | (439,276  | ) |  |      | (873,228   | ) |  |   | (1,160,614 | )
|Cost of saleslots, land and other(2)                               |  |                                           | (20,426  | ) |      |   | (131,640 | )    |  |   | (47,599   | ) |  |      | (205,603   | ) |  |   | (16,524    | )
|Impairment loss on real estate assets(4)                            |  |                                           | (111,860 | ) |      |   | (45,269  | )    |  |   | (135,311  | ) |  |      | (231,120   | ) |  |   | (39,895    | )
|Impairment loss on goodwill(5)                                      |  |                                           |         |   |      |   |         |      |  |   | (5,896    | ) |  |      |           |   |  |   |           |  
|Construction services(3)                                            |  |                                           | (7,805   | ) |      |   | (28,486  | )    |  |   | (15,431   | ) |  |      |           |   |  |   |           |  
|Sales and marketing                                                 |  |                                           | (19,746  | ) |      |   | (17,636  | )    |  |   | (40,441   | ) |  |      | (66,703    | ) |  |   | (72,349    | )
|General and administrative                                          |  |                                           | (25,129  | ) |      |   | (21,027  | )    |  |   | (27,645   | ) |  |      | (37,472    | ) |  |   | (61,390    | )
|Other                                                               |  |                                           | (2,740   | ) |      |   | (6,580   | )    |  |   | (4,461    | ) |  |      | (903       | ) |  |   | (6,502     | )
|                                                                    |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|                                                                    |  |                                           | (413,457 | ) |      |   | (470,124 | )    |  |   | (716,060  | ) |  |      | (1,415,029 | ) |  |   | (1,357,274 | )
|                                                                    |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|Equity in (loss) income of unconsolidated joint ventures            |  |                                           | 916      |   |      |   | (420     | )    |  |   | (3,877    | ) |  |      | 304        |   |  |   | 3,242      |  
|Operating (loss) income                                             |  |                                           | (117,843 | ) |      |   | (161,301 | )    |  |   | (193,859  | ) |  |      | (309,368   | ) |  |   | 138,189    |  
|Gain on retirement of debt(6)                                       |  |                                           | 5,572    |   |      |   | 78,144   |      |  |   | 54,044    |   |  |      |           |   |  |   |           |  
|Interest expense, net of amounts capitalized(7)                     |  |                                           | (23,653  | ) |      |   | (35,902  | )    |  |   | (24,440   | ) |  |      |           |   |  |   |           |  
|Financial advisory expenses                                         |  |                                           |         |   |      |   |         |      |  |   |          |   |  |      |           |   |  |   | (3,165     | )
|Other (expense) income, net                                         |  |                                           | 57       |   |      |   | (3,802   | )    |  |   | 579       |   |  |      | 3,744      |   |  |   | 5,599      |  
|                                                                    |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|(Loss) income before benefit (provision) for income taxes           |  |                                           | (135,867 | ) |      |   | (122,861 | )    |  |   | (163,676  | ) |  |      | (305,624   | ) |  |   | 140,623    |  
|Benefit (provision) for income taxes                                |  |                                           | 412      |   |      |   | 101,908  |      |  |   | 41,592    |   |  |      | (32,658    | ) |  |   | (48,931    | )
|                                                                    |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|Consolidated net (loss) income                                      |  |                                           | (135,455 | ) |      |   | (20,953  | )    |  |   | (122,084  | ) |  |      | (338,282   | ) |  |   | 91,692     |  
|Less: net (income) loss  non-controlling interest                  |  |                                           | (1,331   | ) |      |   | 428      |      |  |   | 10,446    |   |  |      | (11,126    | ) |  |   | (16,914    | )
|                                                                    |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|Net (loss) income                                                   |  | $                                         | (136,786 | ) |      | $ | (20,525  | )    |  | $ | (111,638  | ) |  | $    | (349,408   | ) |  | $ | 74,778     |  
|                                                                    |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|Balance Sheet Data:                                                 |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|Cash and cash equivalents                                           |  | $                                         | 71,286   |   |      | $ | 117,587  |      |  | $ | 67,017    |   |  | $    | 73,197     |   |  | $ | 38,732     |  
|Real estate inventories                                             |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|Owned(4)                                                            |  |                                           | 488,906  |   |      |   | 523,336  |      |  |   | 754,489   |   |  |      | 1,061,660  |   |  |   | 1,431,753  |  
|Not owned                                                           |  |                                           | 55,270   |   |      |   | 55,270   |      |  |   | 107,763   |   |  |      | 144,265    |   |  |   | 200,667    |  
|Total assets                                                        |  |                                           | 649,004  |   |      |   | 860,099  |      |  |   | 1,044,843 |   |  |      | 1,375,328  |   |  |   | 1,878,595  |  
|Total debt                                                          |  |                                           | 519,731  |   |      |   | 590,290  |      |  |   | 670,905   |   |  |      | 814,485    |   |  |   | 851,314    |  
|Equity                                                              |  |                                           | 25,377   |   |      |   | 158,199  |      |  |   | 241,541   |   |  |      | 338,772    |   |  |   | 735,254    |  
|Operating Data (including consolidated joint ventures) (unaudited): |  |                                           |          |   |      |   |          |      |  |   |           |   |  |      |            |   |  |   |            |  
|Number of net new home orders                                       |  |                                           | 650      |   |      |   | 869      |      |  |   | 1,221     |   |  |      | 1,855      |   |  |   | 2,202      |  
|Number of homes closed                                              |  |                                           | 760      |   |      |   | 915      |      |  |   | 1,260     |   |  |      | 2,182      |   |  |   | 2,887      |  
|Average sales price of homes closed                                 |  | $                                         | 351      |   |      | $ | 278      |      |  | $ | 372       |   |  | $    | 460        |   |  | $ | 512        |  
|Cancellation rates                                                  |  |                                           | 19       | % |      |   | 21       | %    |  |   | 28        | % |  |      | 33         | % |  |   | 33         | %
|Backlog at end of period, number of homes(8)                        |  |                                           | 84       |   |      |   | 194      |      |  |   | 240       |   |  |      | 279        |   |  |   | 606        |  
|Backlog at end of period, aggregate sales value(8)                  |  | $                                         | 30,077   |   |      | $ | 56,472   |      |  | $ | 80,750    |   |  | $    | 107,893    |   |  | $ | 295,505    |  



|(1) | The FASB issued guidance now codified as FASB ASC Topic 810, Consolidation, which addresses the consolidation of variable interest entities
(VIEs). Under this guidance, arrangements that are not controlled through voting or similar rights are accounted for as VIEs. An enterprise is required to consolidate a VIE if it is the primary beneficiary of the VIE. Accordingly, the
assets, liabilities and operations of these joint ventures have been consolidated with the Companys financial statements for the periods presented. The adoption of this guidance has not affected the Companys consolidated net income.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | In June 2010, the Company sold certain land in Santa Clara County, California for $17.2 million.
|--- | ------------------------------------------------------------------------------------------------

In 2009, the Company consummated the sale of certain real property for an aggregate sales price of $13.6 million. The book
value of these properties on the closing date as reflected on the consolidated balance sheet of the Company and its subsidiaries was approximately $84.2 million. The Company entered into these transactions to generate cash flow, to reduce overall
debt and to re-invest the cash by purchasing land in certain of its improving markets. The



27



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##### Table of Contents

best economic value to the Company of these lots was to sell them in their current condition as opposed to holding the lots and eventually building and selling homes. The Company continues to
evaluate land values to determine whether to hold for development or to sell at current prices.

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

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



|(3) | The Company accounts for construction management agreements using the Percentage of Completion Method in accordance with FASB ASC Topic 605
Revenue Recognition. Under ASC 605, the Company records revenues and expenses as work on a contract progresses, and based on the percentage of costs incurred to date compared to the total estimated costs of the contract. Based on the
provisions of ASC 605, the Company has recorded construction services revenues and expenses of $10.6 million and $7.8 million, respectively for the year ended December 31, 2010, $34.1 million and $28.5 million, respectively for the year ended
December 31, 2009, and $18.1 million and $15.4 million, respectively, for the year ended December 31, 2008, in the accompanying consolidated statement of operations. The Company entered into construction management agreements to build and
market homes. For such services, the Company will receive fees (generally 3 to 5 percent of the sales price, as defined) and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | The results of operations for the years ended December 31, 2010, 2009, 2008, 2007 and 2006, include non-cash charges of $111.9 million, $45.3
million, $135.3 million, $231.1 million and $39.9 million to record non-cash impairment losses on real estate assets held by the Company at certain of its homebuilding projects. The Company assesses its real estate assets for impairment, on a
quarterly basis, when indicators of impairment exist. Indicators of impairment include a decrease in demand for housing due to soft market conditions, competitive pricing pressures which reduce the average sales price of homes, which includes sales
incentives for home buyers, slow sales absorption rates, a decrease in the value of the underlying land and a decrease in project cash flows for a particular project. As a result, the future undiscounted cash flows estimated to be generated were
determined to be less than the carrying amount of the assets. Accordingly, the related real estate assets were written down to their estimated fair value. The non-cash charges are reflected as impairment loss on real estate assets in the
accompanying consolidated statements of operations. The Company accounts for its real estate inventories under FASB ASC Topic 360, Property, Plant and Equipment,which is described more fully below in the section entitled Impairment on
Real Estate Inventories.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | The amount paid for business acquisitions over the net fair value of assets acquired and liabilities assumed is reflected as goodwill, which is
subject to FASB ASC Topic 350, IntangiblesGoodwill and Other.Evaluating goodwill for impairment involves the determination of the fair value of the Companys reporting units in which the Company has recorded goodwill. A reporting
unit is a component of an operating segment for which discrete financial information is available and reviewed by the Companys management on a regular basis. Inherent in the determination of fair value are judgments and assumptions, including
the interpretation of current economic conditions and market valuations. Due to deterioration in market conditions at the time, the Company recorded an impairment charge on goodwill of $5.9 million during the year ended December 31, 2008. The
Company did not incur impairment charges on goodwill during the years ended December 31, 2010, 2009, 2007 and 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | During 2010, the Company redeemed, in privately negotiated transactions, a total of $37.3 million principal amount of its outstanding Senior Notes
at a cost of $31.4 million, plus accrued interest. The net gain resulting from the redemptions, after giving effect to amortization of related deferred loan costs, was $5.6 million.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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



|(7) | During the years ended December 31, 2010, 2009 and 2008, the Company reported interest expense, due to a decrease in real estate assets which
qualify for interest capitalization during the 2010, 2009 and 2008 periods.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | Backlog consists of homes sold under pending sales contracts that have not yet closed, some of which are subject to contingencies, including
mortgage loan approval and the sale of existing homes by customers. There can be no assurance that homes sold under pending sales contracts will close. Of the total homes sold subject to pending sales contracts as of December 31, 2010, 70
represent homes completed or under construction and 14 represent homes not yet under construction. Backlog as of all dates is unaudited.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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

The following discussion of results of operations and financial condition should be read
in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto and other financial information appearing elsewhere in this Annual Report on Form 10-K. As used herein, on a combined basis means
the total of operations in wholly-owned projects and in consolidated joint venture projects.

The Company is
primarily engaged in the design, construction and sale of single family detached and attached homes in California, Arizona and Nevada. Since the founding of its predecessor in 1956, on a combined basis the Company has sold over 73,000 homes.
The Company conducts its homebuilding operations through four reportable operating segments: Southern California, Northern California, Arizona and Nevada. For the year ended December 31, 2010, on a consolidated basis the Company had revenues
from home sales of $266.9 million and delivered 760 homes, which includes $3.6 million of revenue and 10 homes delivered from consolidated joint ventures.

During 2010, the Company incurred non-cash impairment losses on real estate assets of $111.9 million. In addition, the Company incurred non-cash impairment losses on real estate assets of $45.3 million
and $135.3 million, respectively, for the years ended December 31, 2009 and 2008. The Company assesses its projects for impairment on a quarterly basis, when indicators of impairment exist. Indicators of impairment include a decrease in demand
for housing due to soft market conditions, competitive pricing pressures which reduce the average sales price of homes, which includes sales incentives for home buyers, slow sales absorption rates, a decrease in the value of the underlying land and
a decrease in project cash flows for a particular project. The Company was required to write-down the book value of its impaired real estate assets in accordance with FASB ASC 360, as defined in Note 5 of Notes to Consolidated Financial
Statements.

Comparing the 2010 period to the 2009 period, homebuilding revenues increased 5% to $266.9
million in the 2010 period from $253.9 million in the 2009 period, the average sales price for homes closed increased 27% to $351,100 in the 2010 period from $277,500 in the 2009 period and net new home orders decreased 25% to 650 in the 2010 period
from 869 in the 2009 period. During 2010, the Company recorded non-cash impairment losses on real estate assets of $111.9 million. If the Company continues to experience reduced absorption rates and reduced sales prices, the potential for additional
inventory impairment will increase.

Results of Operations

Since early 2006, the U.S. housing market has been negatively impacted by declined consumer confidence, restrictive
mortgage standards, and large supplies of foreclosure, resale and new homes, among other factors. When combined with a prolonged economic downturn, high unemployment levels, and uncertainty in the U.S. economy, these conditions have contributed to
decreased demand for housing, declining sales prices, and increasing pricing pressure, which hinders the Companys ability to attract new home buyers. As a result, the Company has experienced operating losses each year, beginning in 2007. Such
losses resulted from a combination of reduced homebuilding gross margins, losses on land sales to generate cash flow and significant non-cash impairment losses on real estate assets. On November 6, 2009, the Worker, Homeownership, and Business
Assistance Act of 2009 (the Act) was enacted into law, which extended and expanded the homebuyer federal tax credit until April 30, 2010. The Act, which was applicable to net new home orders under contract by April 30, 2010 and
closed by September 30, 2010, favorably impacted our home sales during the early part of 2010, but also contributed to an industry-wide decline in net new home orders in the latter part of 2010.

The U.S. housing market and broader economy remain in a period of uncertainty; however, there are signs of stabilization
in certain of our local markets, though at near historically low levels.

Entering 2011, there are indications
that certain aforementioned negative trends may be slowing or improving. However, there are also a number of factors that may further worsen market conditions or delay a recovery in the homebuilding industry, including, but not limited to: (i) high
levels of unemployment, which correlates to low levels of consumer confidence; (ii) continued foreclosure activity with immeasurable shadow inventory; (iii) upward trending mortgage rates, as the current level of low mortgage rates is not expected
to remain in the long-term; (iv) increased costs and standards related to FHA loans, which continue to be a significant source of homebuyer financing; and (v) increase in the cost of building materials.

The Company continues to operate with the assumption that difficult market conditions will continue at least during 2011.
The Company continues to review acquisitions of select land positions where it makes strategic and economic sense to do so, targeting finished lots in core coastal markets, near high employment job centers or transportation corridors. Management
also continues to evaluate owned lots and land parcels to determine if values support holding the parcels for future projects or selling.

In Southern California, net new home orders per average sales location increased to 52.7 during the year ended December 31, 2010 from 50.0 for the same period in 2009. In Arizona, net new home orders
per average sales location decreased to 30.0 during the year ended December 31, 2010 from 49.3 for the same period in 2009. In addition, the Companys cancellation rate decreased to 19% in the 2010 period compared to 21% in the 2009
period, particularly impacted by Northern Californias cancellation rate of 23% in the 2010 period compared to 28% in the 2009 period and Nevadas cancellation rate of 14% in the 2010 period compared to 30% in the 2009 period. In addition,
the Company is experiencing increased homebuilding gross margin percentages of 15.4% in the 2010 period compared to 13.5% in the 2009 period particularly impacted by Northern Californias cancellation rate of 22.3% in the 2010 period compared
to 13.8% in the 2009 period and Nevadas cancellation rate of 19.7% in the 2010 period compared to 12.2% in the 2009 period.



29



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##### Table of Contents

Comparisons of Years Ended December 31, 2010 and 2009

On a combined basis, the number of net new home orders for the year ended December 31, 2010 decreased 25% to 650
homes from 869 homes for the year ended December 31, 2009. The number of homes closed on a combined basis for the year ended December 31, 2010 decreased 17% to 760 homes from 915 homes for the year ended December 31, 2009. The
cancellation rate of buyers who contracted to buy a home but did not close escrow at the Companys projects was approximately 19% during 2010 and 21% during 2009. The inventory of completed and unsold homes was 107 homes as of December 31,
2010, compared to 39 homes as of December 31, 2009.

On a combined basis, the backlog of homes sold but
not closed as of December 31, 2010 was 84 homes, down 57% from 194 homes as of December 31, 2009. Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed on a combined
basis as of December 31, 2010 was $30.1 million, down 47% from $56.4 million as of December 31, 2009.

The Companys average number of sales locations decreased for the year ended December 31, 2010 to 18, down 28%
from 25 for the year ended December 31, 2009. In addition, the Company temporarily suspended the development of certain projects, which will be re-opened when management believes the surrounding markets stabilize. The Companys number of
new home orders per average sales location increased from 34.8 for the year ended December 31, 2009 to 36.1 for the year ended December 31, 2010.



|                              |  |                        |     |   |                     |  |     |        |  |  |      |    |  |  |     |   
|----------------------------- |  | ---------------------- | --- | - | ------------------- |  | --- | ------ |  |  | ---- | -- |  |  | --- | --
|                              |  | Year EndedDecember 31, |     |   | Increase (Decrease) | 
|                              |  | 2010                   |     |   | 2009                |  |     | Amount |  |  | %    |   
|Number of Net New Home Orders |  |                        |     |   |                     |  |     |        |  |  |      |    |  |  |     |   
|Southern California           |  |                        | 369 |   |                     |  | 450 |        |  |  | (81  | )  |  |  | (18 | )%
|Northern California           |  |                        | 114 |   |                     |  | 102 |        |  |  | 12   |    |  |  | 12  | % 
|Arizona                       |  |                        | 90  |   |                     |  | 197 |        |  |  | (107 | )  |  |  | (54 | )%
|Nevada                        |  |                        | 77  |   |                     |  | 120 |        |  |  | (43  | )  |  |  | (36 | )%
|                              |  |                        |     |   |                     |  |     |        |  |  |      |    |  |  |     |   
|Total                         |  |                        | 650 |   |                     |  | 869 |        |  |  | (219 | )  |  |  | (25 | )%
|                              |  |                        |     |   |                     |  |     |        |  |  |      |    |  |  |     |   
|Cancellation Rate             |  |                        | 19  | % |                     |  | 21  | %      |  |  | (2   | )% |  |  |     |   
|                              |  |                        |     |   |                     |  |     |        |  |  |      |    |  |  |     |   

Three of the Companys homebuilding segments experienced declines in net new
home orders during the year ended December 31, 2010, primarily attributable to a decrease in the average number of sales locations. However, the Companys Northern California segment experienced a slight increase in new home orders during
this same period, due to an increase in the average number of sales locations.

Cancellation rates during the
year ended December 31, 2010 decreased to 19% in the 2010 period from 21% during the 2009 period. The decline resulted from a decrease in the cancellation rate in two of the Companys homebuilding segments. Southern California remained
consistent at 19% in the 2010 period compared to 19% in the 2009 period, Northern California decreased to 23% in the 2010 period from 28% in the 2009 period, Arizona increased to 15% in the 2010 period from 13% in the 2009 period and Nevada
decreased to 14% in the 2010 period from 30% in the 2009 period. The decrease in cancellation rates, period over period, could result in future stabilization in certain of the homebuilding markets in which the Company operates.



|                                  |  |                        |    |  |                     |  |    |        |  |  |    |   |  |  |     |   
|--------------------------------- |  | ---------------------- | -- |  | ------------------- |  | -- | ------ |  |  | -- | - |  |  | --- | --
|                                  |  | Year EndedDecember 31, |    |  | Increase (Decrease) | 
|                                  |  | 2010                   |    |  | 2009                |  |    | Amount |  |  | %  |  
|Average Number of Sales Locations |  |                        |    |  |                     |  |    |        |  |  |    |   |  |  |     |   
|Southern California               |  |                        | 7  |  |                     |  | 9  |        |  |  | (2 | ) |  |  | (22 | )%
|Northern California               |  |                        | 5  |  |                     |  | 4  |        |  |  | 1  |   |  |  | 25  | % 
|Arizona                           |  |                        | 3  |  |                     |  | 4  |        |  |  | (1 | ) |  |  | (25 | )%
|Nevada                            |  |                        | 3  |  |                     |  | 8  |        |  |  | (5 | ) |  |  | (63 | )%
|                                  |  |                        |    |  |                     |  |    |        |  |  |    |   |  |  |     |   
|Total                             |  |                        | 18 |  |                     |  | 25 |        |  |  | (7 | ) |  |  | (28 | )%
|                                  |  |                        |    |  |                     |  |    |        |  |  |    |   |  |  |     |   



30



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##### Table of Contents

The average number of sales locations decreased in each homebuilding
segment, except for Northern California, during the year ended December 31, 2010, primarily due to (i) final deliveries in certain projects, (ii) suspended projects throughout the Company, offset by (iii) the addition of newly acquired projects
during the year.



|                    |  |              |    |  |                     |  |     |        |  |  |      |   |  |  |     |   
|------------------- |  | ------------ | -- |  | ------------------- |  | --- | ------ |  |  | ---- | - |  |  | --- | --
|                    |  | December 31, |    |  | Increase (Decrease) | 
|                    |  | 2010         |    |  | 2009                |  |     | Amount |  |  | %    |  
|Backlog (units)     |  |              |    |  |                     |  |     |        |  |  |      |   |  |  |     |   
|Southern California |  |              | 34 |  |                     |  | 158 |        |  |  | (124 | ) |  |  | (78 | )%
|Northern California |  |              | 19 |  |                     |  | 6   |        |  |  | 13   |   |  |  | 217 | % 
|Arizona             |  |              | 8  |  |                     |  | 17  |        |  |  | (9   | ) |  |  | (53 | )%
|Nevada              |  |              | 23 |  |                     |  | 13  |        |  |  | 10   |   |  |  | 77  | % 
|                    |  |              |    |  |                     |  |     |        |  |  |      |   |  |  |     |   
|Total               |  |              | 84 |  |                     |  | 194 |        |  |  | (110 | ) |  |  | (57 | )%
|                    |  |              |    |  |                     |  |     |        |  |  |      |   |  |  |     |   

The Companys backlog at December 31, 2010 decreased 57% from levels at
December 31, 2009, primarily resulting from a decrease in the average number of sales locations, and a decrease in the number of net new home orders. The decrease in backlog during this period reflects a decrease in net new order activity of
25% to 650 homes in the 2010 period compared to 869 homes in the 2009 period and a decrease in number of homes closed by 17% to 760 in the 2010 period from 915 in the 2009 period.



|                    |  |                        |        |  |                     |   |        |        |  |   |         |   |  |  |     |   
|------------------- |  | ---------------------- | ------ |  | ------------------- | - | ------ | ------ |  | - | ------- | - |  |  | --- | --
|                    |  | December 31,           |        |  | Increase (Decrease) |  
|                    |  | 2010                   |        |  | 2009                |   |        | Amount |  |   | %       |  
|                    |  | (Dollars in thousands) |        |  |                     |  
|Backlog (dollars)   |  |                        |        |  |                     |   |        |        |  |   |         |   |  |  |     |   
|Southern California |  | $                      | 16,726 |  |                     | $ | 48,681 |        |  | $ | (31,955 | ) |  |  | (66 | )%
|Northern California |  |                        | 8,184  |  |                     |   | 2,479  |        |  |   | 5,705   |   |  |  | 230 | % 
|Arizona             |  |                        | 995    |  |                     |   | 2,716  |        |  |   | (1,721  | ) |  |  | (63 | )%
|Nevada              |  |                        | 4,172  |  |                     |   | 2,596  |        |  |   | 1,576   |   |  |  | 61  | % 
|                    |  |                        |        |  |                     |   |        |        |  |   |         |   |  |  |     |   
|Total               |  | $                      | 30,077 |  |                     | $ | 56,472 |        |  | $ | (26,395 | ) |  |  | (47 | )%
|                    |  |                        |        |  |                     |   |        |        |  |   |         |   |  |  |     |   

The dollar amount of backlog of homes sold but not closed on a combined basis as
of December 31, 2010 was $30.1 million, down 47% from $56.5 million as of December 31, 2009. The decrease in backlog during this period reflects a decrease in net new order activity of 25% to 650 homes in the 2010 period compared to 869
homes in the 2009 period. The significant decrease in unit backlog of 57% was slightly offset by an increase of 23% in the average sales price of homes in backlog to $358,100 as of December 31, 2010 compared to $291,100 as of December 31,
2009. The product mix at the Companys projects has shifted in 2010. There are 28 homes or 33% of total homes in backlog greater than $500,000 per unit at December 31, 2010, compared to no homes in backlog greater than $500,000 per unit at
December 31, 2009.

In Southern California, the dollar amount of backlog decreased 66% to $16.7 million
as of December 31, 2010 from $48.7 million as of December 31, 2009, which is attributable to an 18% decrease in net new home orders in Southern California to 369 homes in the 2010 period compared to 450 homes in the 2009 period in addition
to an increase in the number of closings from 426 in the 2009 period to 493 in the 2010 period. In Southern California, the cancellation rate remained consistent at 19% for the period ended December 31, 2010 compared to 19% for the period ended
December 31, 2009.

In Northern California, the dollar amount of backlog increased 230% to $8.2 million
as of December 31, 2010 from $2.5 million as of December 31, 2009, which is attributable to a 12% increase in net new home orders in Northern California to 114 homes in the 2010 period compared to 102 homes in the 2009 period, and an
increase in homes in backlog to 19 homes at December 31, 2010 from 6 homes at December 31, 2009. The increase in homes in backlog is due to an increase in the number of open projects at the end of the current period. At December 31,
2010, Northern California had 9 open projects compared to 2 open projects in the 2009 period. In addition, the average sales price of homes in backlog increased 4% to $430,700 as of December 31, 2010 compared to $413,800 as of December 31,
2009, which is primarily due to product mix. In Northern California the cancellation rate decreased to 23% for the period ended December 31, 2010 from 28% for the period ended December 31, 2009.



31



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##### Table of Contents

In Arizona, the dollar amount of backlog decreased 63% to $1.0 million as of
December 31, 2010 from $2.7 million as of December 31, 2009, which is attributable to a 53% decrease in homes in backlog to 8 homes at December 31, 2010 from 17 homes at December 31, 2009 and to a 22% decrease in the average
sales price of homes in backlog to $124,400 as of December 31, 2010 compared to $159,800 as of December 31, 2009. In Arizona, the cancellation rate increased to 15% for the period ended December 31, 2010 from 13% for the period ended
December 31, 2009.

In Nevada, the dollar amount of backlog increased 61% to $4.2 million as of
December 31, 2010 from $2.6 million as of December 31, 2009, which is attributable to a 77% increase in homes in backlog to 23 homes at December 31, 2010 from 13 homes at December 31, 2009 slightly offset by a 9% decrease in the
average sales price of homes in backlog to $181,400 as of December 31, 2010 compared to $199,700 as of December 31, 2009. In Nevada, the cancellation rate decreased to 14% for the period ended December 31, 2010 from 30% for the period
ended December 31, 2009.

The decrease in the dollar amount of backlog of homes sold but not closed as
described above generally results in a reduction in operating revenues in the subsequent period as compared to the previous period. Revenue from sales of homes increased 5% to $266.9 million during the period ended December 31, 2010 from $253.9
million during the period ended December 31, 2009. A decrease in homebuilding revenues on a project basis is a potential indicator for impairment. If market prices and home values decrease in certain of the Companys projects and
cancellation rates increase in the future, the Companys revenue and liquidity would likely be negatively impacted.



|                       |  |                        |     |  |                     |  |     |        |  |  |      |   |  |  |     |   
|---------------------- |  | ---------------------- | --- |  | ------------------- |  | --- | ------ |  |  | ---- | - |  |  | --- | --
|                       |  | Year EndedDecember 31, |     |  | Increase (Decrease) | 
|                       |  | 2010                   |     |  | 2009                |  |     | Amount |  |  | %    |  
|Number of Homes Closed |  |                        |     |  |                     |  |     |        |  |  |      |   |  |  |     |   
|Southern California    |  |                        | 493 |  |                     |  | 426 |        |  |  | 67   |   |  |  | 16  | % 
|Northern California    |  |                        | 101 |  |                     |  | 144 |        |  |  | (43  | ) |  |  | (30 | )%
|Arizona                |  |                        | 99  |  |                     |  | 214 |        |  |  | (115 | ) |  |  | (54 | )%
|Nevada                 |  |                        | 67  |  |                     |  | 131 |        |  |  | (64  | ) |  |  | (49 | )%
|                       |  |                        |     |  |                     |  |     |        |  |  |      |   |  |  |     |   
|Total                  |  |                        | 760 |  |                     |  | 915 |        |  |  | (155 | ) |  |  | (17 | )%
|                       |  |                        |     |  |                     |  |     |        |  |  |      |   |  |  |     |   

During the year ended December 31, 2010, the number of homes closed decreased
17%. The decrease was primarily driven by a decrease in the average number of sales locations to 17 in 2010 from 25 in the 2009 period. In addition, the completion of The Worker, Homeownership and Business Assistance Act of 2009, which was
applicable to net new home orders under contract by April 30, 2010 and closed by September 30, 2010, favorably impacted our home sales during the early part of 2010, but also contributed to an industry-wide decline in net new home orders in the
latter part of 2010.



|                    |  |                        |         |  |                     |   |         |        |  |   |         |   |  |  |     |   
|------------------- |  | ---------------------- | ------- |  | ------------------- | - | ------- | ------ |  | - | ------- | - |  |  | --- | --
|                    |  | Year EndedDecember 31, |         |  | Increase (Decrease) |  
|                    |  | 2010                   |         |  | 2009                |   |         | Amount |  |   | %       |  
|                    |  | (Dollars in thousands) |         |  |                     |  
|Home Sales Revenue  |  |                        |         |  |                     |   |         |        |  |   |         |   |  |  |     |   
|Southern California |  | $                      | 195,613 |  |                     | $ | 141,884 |        |  | $ | 53,729  |   |  |  | 38  | % 
|Northern California |  |                        | 38,891  |  |                     |   | 43,211  |        |  |   | (4,320  | ) |  |  | (10 | )%
|Arizona             |  |                        | 16,595  |  |                     |   | 39,619  |        |  |   | (23,024 | ) |  |  | (58 | )%
|Nevada              |  |                        | 15,766  |  |                     |   | 29,160  |        |  |   | (13,394 | ) |  |  | (46 | )%
|                    |  |                        |         |  |                     |   |         |        |  |   |         |   |  |  |     |   
|Total               |  | $                      | 266,865 |  |                     | $ | 253,874 |        |  | $ | 12,991  |   |  |  | 5   | % 
|                    |  |                        |         |  |                     |   |         |        |  |   |         |   |  |  |     |   



32



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##### Table of Contents

The increase in homebuilding revenue of 5% to $266.9 million during the year
ended December 31, 2010 from $253.9 million during the year ended December 31, 2009 is attributable to an increase in the average sales price of homes closed to $351,100 during the 2010 period from $277,500 during the 2009 period due to a
change in the product mix, offset by a decrease in the number of homes closed to 760 in the 2010 period compared to 915 in the 2009 period.



|                                    |  |                        |         |  |                     |   |         |        |  |   |         |   |  |  |    |   
|----------------------------------- |  | ---------------------- | ------- |  | ------------------- | - | ------- | ------ |  | - | ------- | - |  |  | -- | --
|                                    |  | Year EndedDecember 31, |         |  | Increase (Decrease) |  
|                                    |  | 2010                   |         |  | 2009                |   |         | Amount |  |   | %       |  
|Average Sales Price of Homes Closed |  |                        |         |  |                     |   |         |        |  |   |         |   |  |  |    |   
|Southern California                 |  | $                      | 396,800 |  |                     | $ | 333,100 |        |  | $ | 63,700  |   |  |  | 19 | % 
|Northern California                 |  |                        | 385,100 |  |                     |   | 300,100 |        |  |   | 85,000  |   |  |  | 28 | % 
|Arizona                             |  |                        | 167,600 |  |                     |   | 185,100 |        |  |   | (17,500 | ) |  |  | (9 | )%
|Nevada                              |  |                        | 235,300 |  |                     |   | 222,600 |        |  |   | 12,700  |   |  |  | 6  | % 
|                                    |  |                        |         |  |                     |   |         |        |  |   |         |   |  |  |    |   
|Total                               |  | $                      | 351,100 |  |                     | $ | 277,500 |        |  | $ | 73,600  |   |  |  | 27 | % 
|                                    |  |                        |         |  |                     |   |         |        |  |   |         |   |  |  |    |   

The average sales price of homes closed during the year ending December 31,
2010 increased 27% to $351,100 compared to $277,500 in 2009. The increase in average sales price per home is primarily due to a change in product mix. In Southern and Northern California, the Company delivered a higher percentage of homes at higher
prices due to the opening of several new communities in highly desirable locations and delivered fewer homes at lower prices as those communities closed their final units in 2009. In Arizona, average sales prices decreased based on market
conditions, and declined consumer demand, and competition from foreclosure homes in the Phoenix market. These conditions attributed to the $22.4 million of impairment loss on real estate assets recorded during 2010, with no comparable amount in
2009.



|                                            |      |                        |      |      |                    |  |      |   |  |  |      |   
|------------------------------------------- | ---- | ---------------------- | ---- | ---- | ------------------ |  | ---- | - |  |  | ---- | --
|                                            |      | Year EndedDecember 31, |      |      | Increase(Decrease) | 
|                                            | 2010 |                        |      | 2009 |                    | 
|Homebuilding Gross Margin (Loss) Percentage |      |                        |      |      |                    |  |      |   |  |  |      |   
|Southern California                         |      |                        | 14.6 | %    |                    |  | 15.6 | % |  |  | (1.0 | )%
|Northern California                         |      |                        | 22.3 | %    |                    |  | 13.8 | % |  |  | 8.5  | % 
|Arizona                                     |      |                        | 4.9  | %    |                    |  | 7.0  | % |  |  | (2.1 | )%
|Nevada                                      |      |                        | 19.7 | %    |                    |  | 12.2 | % |  |  | 7.5  | % 
|                                            |      |                        |      |      |                    |  |      |   |  |  |      |   
|Total                                       |      |                        | 15.4 | %    |                    |  | 13.5 | % |  |  | 1.9  | % 
|                                            |      |                        |      |      |                    |  |      |   |  |  |      |   

Homebuilding gross margin (loss) percentage during the year ended December 31, 2010
increased to 15.4% from 13.5% during the year ended December 31, 2009, which is primarily attributable to an increase in the average sales price of homes closed of 27% from $277,500 in the 2009 period to $351,100 in the 2010 period offset by an
increase in the average cost of homes closed of 24% from $239,900 in the 2009 period to $297,000 in the 2010 period.

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

Lots, Land and Other

Land sales revenue was $17.2 million during the year ended December 31, 2010, compared with $21.2 million for the
year ended December 31, 2009. As part of an opportunistic land sale, in June 2010, the Company sold land in Santa Clara County and generated a net profit of $2.9 million. During 2009 and 2008, in response to the slow-down in the homebuilding
industry, the Company entered into certain land sale transactions to improve its liquidity and to reduce its overall debt. On December 24, 2009, the Company consummated the sale of certain real property for an aggregate sales price of $13.6
million. The aggregate book value of these properties on the closing date as reflected on the consolidated balance sheet of the Company and its subsidiaries was approximately $84.2 million. The Company entered into these land sale transactions to
generate cash flow, to reduce overall debt and to re-invest the cash by purchasing land in certain of its improving markets. The Company determined that the best economic value to the Company of these lots was to sell them in their current condition
as opposed to holding the lots and eventually building and selling homes. The Company continues to evaluate its options and the marketplace with respect to developing lots.



33



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##### Table of Contents

During the year ended December 31, 2010 the Company recorded a loss
related to land sales of $3.2 million compared to a loss of $110.4 million during the 2009 period. Included in these amounts are the write-off of land deposits and pre-acquisition costs of $6.0 million and $37.9 million, respectively. The write-off
of land deposits and pre-acquisition costs of $6.0 million in 2010 are attributable to projects where the value of the land was less than the contracted price. In 2009, the write-off of land deposits and pre-acquisition costs of $37.9 million are
attributable to projects held in three of its land banking arrangements. In the fourth quarter of 2009, for one of these land banking arrangements, the Company subsequently purchased the remaining 51 lots for the contracted price after the Company
had written off the deposits that would have been included in the land basis of these lots. Management of the Company determined that the remaining purchase prices of the lots in the arrangements were priced above current market values.

Construction Services Revenue

Construction services revenue, which is all recognized in Southern California, was $10.6 million during the year ended
December 31, 2010, compared with $34.1 million in the 2009 period. See Note 1 to Notes to Consolidated Financial Statements for further discussion.



|                                                                  |      |                        |         |      |                    |   |        |  |  |   |        |  
|----------------------------------------------------------------- | ---- | ---------------------- | ------- | ---- | ------------------ | - | ------ |  |  | - | ------ | -
|                                                                  |      | Year EndedDecember 31, |         |      | Increase(Decrease) |  
|                                                                  | 2010 |                        |         | 2009 |                    |  
|                                                                  |      | (in thousands)         |        
|Impairment Loss on Real Estate Assets                             |      |                        |         |      |                    |   |        |  |  |   |        |  
|Land under development and homes completed and under construction |      |                        |         |      |                    |   |        |  |  |   |        |  
|Southern California                                               |      | $                      | 70,801  |      |                    | $ | 19,518 |  |  | $ | 51,283 |  
|Northern California                                               |      |                        | 3,103   |      |                    |   | 6,144  |  |  |   | (3,041 | )
|Arizona                                                           |      |                        | 6,293   |      |                    |   |       |  |  |   | 6,293  |  
|Nevada                                                            |      |                        |        |      |                    |   | 6,254  |  |  |   | (6,254 | )
|                                                                  |      |                        |         |      |                    |   |        |  |  |   |        |  
|Total                                                             |      | $                      | 80,197  |      |                    | $ | 31,916 |  |  | $ | 48,281 |  
|                                                                  |      |                        |         |      |                    |   |        |  |  |   |        |  
|Land held-for-sale or sold                                        |      |                        |         |      |                    |   |        |  |  |   |        |  
|Southern California                                               |      | $                      |        |      |                    | $ |       |  |  | $ |       |  
|Northern California                                               |      |                        |        |      |                    |   |       |  |  |   |       |  
|Arizona                                                           |      |                        | 16,116  |      |                    |   |       |  |  |   | 16,116 |  
|Nevada                                                            |      |                        | 15,547  |      |                    |   | 13,353 |  |  |   | 2,194  |  
|                                                                  |      |                        |         |      |                    |   |        |  |  |   |        |  
|Total                                                             |      |                        | 31,663  |      |                    |   | 13,353 |  |  |   | 18,310 |  
|                                                                  |      |                        |         |      |                    |   |        |  |  |   |        |  
|Total Impairment Loss on Real Estate Assets                       |      | $                      | 111,860 |      |                    | $ | 45,269 |  |  | $ | 66,591 |  
|                                                                  |      |                        |         |      |                    |   |        |  |  |   |        |  

The impairment loss related to land under development and homes completed and under
construction incurred during the year ended December 31, 2010, resulted from (i) in certain projects, a decrease in home sales prices related to increased incentives, (ii) in certain projects, increased future costs for outside broker expense and
sales and marketing expense, (iii) in certain projects, the decision by the Company to cancel certain land option agreements to purchase lots in projects where sales were deteriorating and the underlying value of the land to be purchased was less
than the purchase price using a residual land value approach, (iv) in certain projects, the needs to preserve the liquidity of the Company and, therefore, canceling certain land option agreements, and (v) in certain other projects, the
renegotiations of the land purchase schedule for land under option, to delay the required purchases, to allow markets to recover, and reduce the amount of lots to be purchased over time. The extended time of the project increased carrying costs that
lead to the future undiscounted cash flows of the project being less than the current book value of the land.

The impairment loss related to land held for sale or sold incurred during the year ended December 31, 2010, resulted from
the reduced value of the land in the project. The Company values land held for sale using (i) projected cash flows with the strategy of selling the land on a finished or unfinished basis, or building out the project, (ii) considering recent,
legitimate offers received, (iii) prices for land in recent comparable sales transactions, and other factors. In addition, the Company may use appraisals to best determine the as-is value. During the 2010 period, the Company increased discount rates
to a range of 21% to 29%. These rates resulted from a full year of interest incurred on the Senior Secured Term Loan due 2014 (Term Loan) of 14%. During the 2009 period, the Company increased the discount rates used in the estimated
discounted cash flow assessments to a range of 19% to 27%. These rates resulted from an increase in the leverage component of our discount rate related to the interest cost on the Term Loan and a decrease in risk-related discount rates in California
projects due to improving market conditions, including: (i) a decrease in the cancellation rate for the Company at 19% in the 2010 period compared to 21% in the 2009 period, (ii) an increase of 1.9% in the Company gross margin percentage
and (iii) an increase in the number of net home orders per sale location from 34.8 in the 2009 period to 36.1 in the 2010 period.



34



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##### Table of Contents

|                            |  |                        |        |  |                     |   |        |        |  |   |        |   |  |  |     |   
|--------------------------- |  | ---------------------- | ------ |  | ------------------- | - | ------ | ------ |  | - | ------ | - |  |  | --- | --
|                            |  | Year EndedDecember 31, |        |  | Increase (Decrease) |  
|                            |  | 2010                   |        |  | 2009                |   |        | Amount |  |   | %      |  
|                            |  | (Dollars in thousands) |        |  |                     |  
|Sales and Marketing Expense |  |                        |        |  |                     |   |        |        |  |   |        |   |  |  |     |   
|Homebuilding                |  |                        |        |  |                     |   |        |        |  |   |        |   |  |  |     |   
|Southern California         |  | $                      | 12,582 |  |                     | $ | 9,537  |        |  | $ | 3,045  |   |  |  | 32  | % 
|Northern California         |  |                        | 4,247  |  |                     |   | 3,499  |        |  |   | 748    |   |  |  | 21  | % 
|Arizona                     |  |                        | 1,207  |  |                     |   | 2,350  |        |  |   | (1,143 | ) |  |  | (49 | )%
|Nevada                      |  |                        | 1,710  |  |                     |   | 2,250  |        |  |   | (540   | ) |  |  | (24 | )%
|                            |  |                        |        |  |                     |   |        |        |  |   |        |   |  |  |     |   
|Total                       |  | $                      | 19,746 |  |                     | $ | 17,636 |        |  | $ | 2,110  |   |  |  | 12  | % 
|                            |  |                        |        |  |                     |   |        |        |  |   |        |   |  |  |     |   

Sales and marketing expense increased $2.1 million to $19.7 million in the 2010
period from $17.6 million in the 2009 period primarily due to an increase of $3.6 million in advertising, due to opening new model complexes and the re-introduction of projects where development was temporarily suspended. In addition, direct selling
expenses decreased approximately $1.2 million, including a decrease of $.08 million in commissions paid to outside brokers in 2010 as compared to 2009, and a decrease of $0.5 million in seller closing costs and referral fees in 2010 as compared to
2009 due to the decrease in units closed in 2010 as compared to 2009.



|                                    |  |                        |        |  |                     |   |        |        |  |   |       |  |  |  |    |  
|----------------------------------- |  | ---------------------- | ------ |  | ------------------- | - | ------ | ------ |  | - | ----- |  |  |  | -- | -
|                                    |  | Year EndedDecember 31, |        |  | Increase (Decrease) |  
|                                    |  | 2010                   |        |  | 2009                |   |        | Amount |  |   | %     | 
|                                    |  | (Dollars in thousands) |        |  |                     |  
|General and Administrative Expenses |  |                        |        |  |                     |   |        |        |  |   |       |  |  |  |    |  
|Homebuilding                        |  |                        |        |  |                     |   |        |        |  |   |       |  |  |  |    |  
|Southern California                 |  | $                      | 5,093  |  |                     | $ | 3,982  |        |  | $ | 1,111 |  |  |  | 28 | %
|Northern California                 |  |                        | 2,960  |  |                     |   | 2,317  |        |  |   | 643   |  |  |  | 28 | %
|Arizona                             |  |                        | 2,568  |  |                     |   | 2,358  |        |  |   | 210   |  |  |  | 9  | %
|Nevada                              |  |                        | 2,651  |  |                     |   | 2,558  |        |  |   | 93    |  |  |  | 4  | %
|Corporate                           |  |                        | 11,857 |  |                     |   | 9,812  |        |  |   | 2,045 |  |  |  | 21 | %
|                                    |  |                        |        |  |                     |   |        |        |  |   |       |  |  |  |    |  
|Total                               |  | $                      | 25,129 |  |                     | $ | 21,027 |        |  | $ | 4,102 |  |  |  | 20 | %
|                                    |  |                        |        |  |                     |   |        |        |  |   |       |  |  |  |    |  

General and administrative expenses increased $4.1 million, or 20%, in the 2010
period to $25.1 million from $21.0 million in the 2009 period primarily as a result of an increase in outside services expense of $2.1 million incurred in association with the Term Loan as well as $2.0 million relating to an easement payment
relating to land sold to a third party in December 2009. Additionally, as the number of active projects increased, the Company increased staffing levels to support operations to 212 full time employees by the end of 2010 from 194 at the end of 2009.
The bonus expense incurred in the 2009 and 2010 periods was a decision by management to award bonuses to employees in order to encourage employee retention and reward individual employee performance.

Other Items

Other operating costs decreased to $2.7 million in the 2010 period compared to $6.6 million in the 2009 period. The decline is due to the decrease in property tax expense incurred as a period expense on
projects in which development was temporarily suspended. The Company received $1.6 million in the 2010 period, compared with $5.4 million in the 2009 period. This decrease was primarily driven by projects restarted during the year ended
December 31, 2010, in which costs are capitalized to the projects. In addition, operating losses realized by golf course operations decreased to $1.1 million in the 2010 period from $1.2 million in the 2009 period.



35



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##### Table of Contents

Equity in income from unconsolidated joint ventures increased from a loss
of $(0.4) million in the 2009 period to income of $0.9 million in the 2010 period, primarily due to an increase in income from the mortgage joint venture as well as an increase in other joint venture activity.

As described previously, during 2010, the Company redeemed $37.3 million principal amount of its outstanding Senior Notes
at a cost of $31.3 million, plus accrued interest. The net gain resulting from the redemptions, after giving effect to amortization of related deferred loan costs, was $5.6 million. During 2009, the Company redeemed $156.9 million principal
amount of its outstanding Senior Notes at a cost of $77.0 million, plus accrued interest. The net gain resulting from the redemptions, after giving effect to amortization of related deferred loan costs, was $78.1 million.

During the year ended December 31, 2010, the Company incurred interest related to its outstanding debt of $62.8
million and capitalized $39.1 million, resulting in net interest expense of $23.7 million. During the year ended December 31, 2009, the Company incurred interest related to its outstanding debt of $48.8 million and capitalized $12.9 million,
resulting in net interest expense of $35.9 million. The year over year decrease in net interest expense is due to an increase in real estate assets which qualify for interest capitalization during the 2010 period.

Other income primarily consists of construction management income slightly offset by mortgage company expense during the
2010 period compared to loss of $3.0 million in the 2009 period due to the loss on the sale of a fixed asset relating to the sale of the Companys aircraft as described more fully in Note 7 of Notes to Consolidated Financial
Statements.

Income from non-controlling interest of consolidated entities increased to $1.3 million in
the 2010 period compared to a loss of $(0.4) million in the 2009 period, primarily due to a decrease in joint venture costs and an increase in gross margins.



|                                                          |  |                        |          |   |                     |   |          |        |  |   |         |   |  |  |      |   
|--------------------------------------------------------- |  | ---------------------- | -------- | - | ------------------- | - | -------- | ------ |  | - | ------- | - |  |  | ---- | --
|                                                          |  | Year
EndedDecember 31, |          |   | Increase (Decrease) |  
|                                                          |  | 2010                   |          |   | 2009                |   |          | Amount |  |   | %       |  
|                                                          |  | (Dollars in thousands) |          |   |                     |  
|(Loss) Income Before Benefit (Provision) for Income Taxes |  |                        |          |   |                     |   |          |        |  |   |         |   |  |  |      |   
|Homebuilding                                              |  |                        |          |   |                     |   |          |        |  |   |         |   |  |  |      |   
|Southern California                                       |  | $                      | (83,176  | ) |                     | $ | (57,716  | )      |  | $ | (25,460 | ) |  |  | 44   | % 
|Northern California                                       |  |                        | (41      | ) |                     |   | (37,853  | )      |  |   | 37,812  |   |  |  | (100 | )%
|Arizona                                                   |  |                        | (26,887  | ) |                     |   | (21,451  | )      |  |   | (5,436  | ) |  |  | 25   | % 
|Nevada                                                    |  |                        | (21,449  | ) |                     |   | (70,915  | )      |  |   | 49,466  |   |  |  | (70  | )%
|Corporate                                                 |  |                        | (4,314   | ) |                     |   | 65,074   |        |  |   | (69,388 | ) |  |  | (107 | )%
|                                                          |  |                        |          |   |                     |   |          |        |  |   |         |   |  |  |      |   
|Total                                                     |  | $                      | (135,867 | ) |                     | $ | (122,861 | )      |  | $ | (13,006 | ) |  |  | 11   | % 
|                                                          |  |                        |          |   |                     |   |          |        |  |   |         |   |  |  |      |   

In Southern California, (loss) before benefit for income taxes increased 44% to
$(83.2) million in the 2010 period from $(57.7) million in the 2009 period. The increase in loss is primarily attributable to (i) an increase in impairment loss on real estate assets to $70.8 million in the 2010 period, from $19.5 million in
the 2009 period, (ii) offset by loss on land sales of $24.0 million in the 2009 period with no comparable amount in the 2010 period, and (iii) a $6.4 million increase in homebuilding gross profit in the 2010 period.

In Northern California, (loss) before benefit for income taxes of $(37.9) million in the 2009 period decreased 100% in
the 2010 period. The decrease in loss is primarily attributable to (i) an increase in gain on land sales of $2.9 million in the 2010 period from a loss on land sales of $(29.4) million in the 2009 period, (ii) a decrease in impairment loss
on real estate assets to $3.1 million in the 2010 period from $6.1 million in the 2009 period and (iii) an increase in homebuilding gross profit to $8.7 million in the 2010 period from $6.0 million in the 2009 period.

In Arizona, (loss) before benefit for income taxes increased to a loss of $(26.9) million in the 2010 period from a loss
of $(21.5) million in the 2009 period. The change is primarily attributable to (i) an increase in impairment loss on real estate assets to $22.4 million in the 2010 period with no comparable amount in the 2009 period, offset by (ii) a
decrease in homebuilding gross profit to $0.8 million in the 2010 period from $2.8 million in the 2009 period and (iii) a decrease in the loss on land sales of $14.0 million in the 2009 period with no comparable loss on land sales in the 2010
period.

In Nevada, (loss) before benefit for income taxes decreased 70% to $(21.4) million in the 2010 period
from $(70.9) million in the 2009 period. The decrease in loss is primarily attributable to a loss on land sales of $43.0 million in the 2009



36



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##### Table of Contents

period with no comparable amount in the 2010 period along with a decrease in impairment loss on real estate assets to $15.5 million in the 2010 period from $19.6 million in the 2009 period.

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

Income Taxes

On November 6, 2009, an expanded carry
back election was signed into law as part of the Worker, Homeownership, and Business Assistance Act of 2009. As a result of this legislation, the Company elected to carry back for five years the taxable losses generated in 2009. As of
December 31, 2009, The Company recorded an income tax refund receivable and the related income tax benefit of $101.8 million. The Company received the tax refund during the first quarter of 2010. As of December 31, 2010, the Company
received an additional refund related to the 2009 loss carry back of $347,000 and recorded the related income tax benefit as of December 31, 2010.

Net Loss

As a result of the foregoing factors, net loss
for the year ended December 31, 2010 was $136.8 million compared to net loss for the year ended December 31, 2009 of $20.5 million.



|                                |  |              |        |  |                     |  |        |        |  |  |       |   |  |  |      |   
|------------------------------- |  | ------------ | ------ |  | ------------------- |  | ------ | ------ |  |  | ----- | - |  |  | ---- | --
|                                |  | December 31, |        |  | Increase (Decrease) | 
|                                |  | 2010         |        |  | 2009                |  |        | Amount |  |  | %     |  
|Lots Owned and Controlled       |  |              |        |  |                     |  |        |        |  |  |       |   |  |  |      |   
|Lots Owned                      |  |              |        |  |                     |  |        |        |  |  |       |   |  |  |      |   
|Southern California             |  |              | 922    |  |                     |  | 1,139  |        |  |  | (217  | ) |  |  | (19  | )%
|Northern California             |  |              | 616    |  |                     |  | 478    |        |  |  | 138   |   |  |  | 29   | % 
|Arizona                         |  |              | 5,836  |  |                     |  | 4,985  |        |  |  | 851   |   |  |  | 17   | % 
|Nevada                          |  |              | 2,791  |  |                     |  | 2,522  |        |  |  | 269   |   |  |  | 11   | % 
|                                |  |              |        |  |                     |  |        |        |  |  |       |   |  |  |      |   
|Total                           |  |              | 10,165 |  |                     |  | 9,124  |        |  |  | 1,041 |   |  |  | 11   | % 
|                                |  |              |        |  |                     |  |        |        |  |  |       |   |  |  |      |   
|Lots Controlled(1)              |  |              |        |  |                     |  |        |        |  |  |       |   |  |  |      |   
|Southern California             |  |              | 114    |  |                     |  | 439    |        |  |  | (325  | ) |  |  | (74  | )%
|Northern California             |  |              | 303    |  |                     |  |       |        |  |  | 303   |   |  |  | 100  | % 
|Arizona                         |  |              |       |  |                     |  | 767    |        |  |  | (767  | ) |  |  | (100 | )%
|                                |  |              |        |  |                     |  |        |        |  |  |       |   |  |  |      |   
|Total                           |  |              | 417    |  |                     |  | 1,206  |        |  |  | (789  | ) |  |  | (65  | )%
|                                |  |              |        |  |                     |  |        |        |  |  |       |   |  |  |      |   
|Total Lots Owned and Controlled |  |              | 10,582 |  |                     |  | 10,330 |        |  |  | 252   |   |  |  | 2    | % 
|                                |  |              |        |  |                     |  |        |        |  |  |       |   |  |  |      |   



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

Total lots owned and controlled has increased 2% to 10,582 lots owned and controlled at
December 31, 2010 from 10,330 lots at December 31, 2009. The increase is primarily due to certain lot acquisitions during the period, offset by the closing of 750 homes during the 2010 period and cancelation of certain lot option
contracts.



37



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##### Table of Contents

Comparisons of Years Ended December 31, 2009 and 2008

On a combined basis, the number of net new home orders for the year ended December 31, 2009 decreased 29% to 869
homes from 1,221 homes for the year ended December 31, 2008. The number of homes closed on a combined basis for the year ended December 31, 2009 decreased 27% to 915 homes from 1,260 homes for the year ended December 31, 2008. The
cancellation rate of buyers who contracted to buy a home but did not close escrow at the Companys projects was approximately 21% during 2009 and 28% during 2008. The inventory of completed and unsold homes was 39 homes as of December 31,
2009, compared to 80 homes as of December 31, 2008.

On a combined basis, the backlog of homes sold but
not closed as of December 31, 2009 was 194 homes, down 19% from 240 homes as of December 31, 2008. Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed on a combined
basis as of December 31, 2009 was $56.5 million, down 30% from $80.8 million as of December 31, 2008.

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



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

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

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



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



38



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##### Table of Contents

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



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

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



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

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

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

In Northern California, the dollar amount of backlog decreased 82% to $2.5 million as of December 31, 2009 from $13.7 million as of December 31, 2008, which is attributable to a 57% decrease in
net new home orders in Northern California to 102 homes in the 2009 period compared to 238 homes in the 2008 period, and a decrease in homes in backlog to 6 homes at December 31, 2009 from 48 homes at December 31, 2008. The decrease in
homes in backlog is due to a lack of open projects in the division. At December 31, 2009, Northern California had 2 open projects with 42 homes to sell. These decreases were offset by an increase of 45% in the average sales price of homes in
backlog to $413,200 as of December 31, 2009 compared to $284,800 as of December 31, 2008, which is primarily due to product mix of remaining projects. In Northern California the cancellation rate decreased slightly to 28% for the period
ended December 31, 2009 from 29% for the period ended December 31, 2008.



39



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##### Table of Contents

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

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

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



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

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



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



40



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##### Table of Contents

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



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

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



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

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

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

Lots, Land and Other

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



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

Construction Services Revenue

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



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

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



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



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

Sales and marketing expense decreased $22.8 million to $17.6 million in the 2009
period from $40.4 million in the 2008 period primarily due to (i) a decrease of $3.6 million in sales model operating costs and (ii) a decrease of $9.3 million in advertising, due to the decrease in the average number of sales locations to
25 in the 2009 period from 44 in the 2008 period. In addition, direct selling expenses decreased approximately $9.6 million, including $4.9 million in sales commissions due to the reduction in units closed and reduction in revenue from home sales in
2009 as compared to 2008, a decrease of $4.0 million in commissions paid to outside brokers in 2009 as compared to 2008, and a decrease of $0.8 million in seller closing costs in 2009 as compared to 2008.



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

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

Other Items

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



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

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

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

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

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



|                                                          |  |                        |          |   |                     |   |          |        |  |   |         |   |  |  |     |   
|--------------------------------------------------------- |  | ---------------------- | -------- | - | ------------------- | - | -------- | ------ |  | - | ------- | - |  |  | --- | --
|                                                          |  | Year
EndedDecember 31, |          |   | Increase (Decrease) |  
|                                                          |  | 2009                   |          |   | 2008                |   |          | Amount |  |   | %       |  
|                                                          |  | (Dollars in thousands) |          |   |                     |  
|(Loss) Income Before Benefit (Provision) for Income Taxes |  |                        |          |   |                     |   |          |        |  |   |         |   |  |  |     |   
|Homebuilding                                              |  |                        |          |   |                     |   |          |        |  |   |         |   |  |  |     |   
|Southern California                                       |  | $                      | (57,716  | ) |                     | $ | (74,908  | )      |  | $ | 17,192  |   |  |  | (23 | )%
|Northern California                                       |  |                        | (37,853  | ) |                     |   | (68,913  | )      |  |   | 31,060  |   |  |  | (45 | )%
|Arizona                                                   |  |                        | (21,451  | ) |                     |   | (17,846  | )      |  |   | (3,605  | ) |  |  | 20  | % 
|Nevada                                                    |  |                        | (70,915  | ) |                     |   | (37,265  | )      |  |   | (33,650 | ) |  |  | 90  | % 
|Corporate                                                 |  |                        | 65,074   |   |                     |   | 35,256   |        |  |   | 29,818  |   |  |  | 58  | % 
|                                                          |  |                        |          |   |                     |   |          |        |  |   |         |   |  |  |     |   
|Total                                                     |  | $                      | (122,861 | ) |                     | $ | (163,676 | )      |  | $ | 40,815  |   |  |  | 25  | % 
|                                                          |  |                        |          |   |                     |   |          |        |  |   |         |   |  |  |     |   

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

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

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



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$39.6 million in the 2009 period from $49.2 million in the 2008 period and (iii) a decrease in sales and marketing expense to $2.4 million in the 2009 period from $3.3 million in the 2008
period.

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

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

Income Taxes

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

Net Loss

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



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



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

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



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##### Table of Contents

Financial Condition and Liquidity

Since early 2006, the U.S. housing market has been negatively impacted by declined consumer confidence, restrictive
mortgage standards, and large supplies of foreclosure, resale and new homes, among other factors. When combined with a prolonged economic downturn, high unemployment levels, and uncertainty in the U.S. economy, these conditions have contributed to
decreased demand for housing, declining sales prices, and increasing pricing pressure, which hinders the Companys ability to attract new home buyers. As a result, the Company has experienced operating losses each year, beginning in 2007. Such
losses resulted from a combination of reduced homebuilding gross margins, losses on land sales to generate cash flow and significant impairment losses on real estate inventories.

The U.S. housing market and broader economy remain in a period of uncertainty; however, there are signs of stabilization
in certain of our local markets, though at near historically low levels.

Entering 2011, there are indications
that certain aforementioned negative trends may be slowing or improving. However, there are also a number of factors that may further worsen market conditions or delay a recovery in the homebuilding industry, including, but not limited to: (i) high
levels of unemployment, which correlates to low levels of consumer confidence; (ii) continued foreclosure activity with immeasurable shadow inventory; (iii) upward trending mortgage rates, as the current level of low mortgage rates is not
expected to remain in the long-term; (iv) increased costs and standards related to FHA loans, which continue to be a significant source of homebuyer financing; and (v) increase in the cost of building materials.

The Company continues to operate with the assumption that difficult market conditions will continue at least during 2011.
The Company continues to review acquisitions of select land positions where it makes strategic and economic sense to do so, targeting finished lots in core coastal markets, near high employment job centers or transportation corridors. Management
also continues to evaluate owned lots and land parcels to determine if values support holding the parcel for future projects or selling.

In Southern California, net new home orders per average sales location increased to 52.7 during the year ended December 31, 2010 from 50.0 for the same period in 2009. In Arizona, net new home orders per
average sales location decreased to 30.0 during the year ended December 31, 2010 from 49.3 for the same period in 2009. In addition, the Companys cancellation rate decreased to 19% in the 2010 period compared to 21% in the 2009 period,
particularly impacted by Northern Californias cancellation rate of 23% in the 2010 period compared to 28% in the 2009 period and Nevadas cancellation rate of 14% in the 2010 period compared to 30% in the 2009 period. In addition, the
Company is experiencing increased homebuilding gross margin percentages of 14.8% in the 2010 period compared to 13.5% in the 2009 period, particularly impacted by Northern Californias cancellation rate of 18.4% in the 2010 period compared to
13.8% in the 2009 period, and Nevadas cancellation rate of 19.7% in the 2010 period compared to 12.2% in the 2009 period.

For the year ended December 31, 2010, the Company experienced an increase in homebuilding revenues of 5% from the prior year due to a 27% increase in the average price of homes closed, offset by a 17%
decrease in the number of homes closed. In response



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##### Table of Contents

to the declining demand for housing in the homebuilding industry, the management of the Company continues to focus on generating positive cash flow, reducing overall debt levels and improving
liquidity. Management of the Company intends to manage cash flow by reducing inventory levels and expenditures for temporarily suspended projects. For the year ended December 31, 2010, the Company generated $134.7 million of cash flows from
operations and reinvested $110.6 million in opportunistic land acquisitions. In addition, the Company repaid a net $52.8 million principal amount of notes payable and redeemed $37.3 million principal amount of outstanding Senior Notes for a net
redemption price of $31.3 million, plus accrued interest. The net gain resulting from the redemption, after giving effect to amortization of related deferred loan costs was $5.6 million. This redemption will reduce future interest payments by
approximately $3.8 million per year.

In reaction to the declining market, the Company temporarily suspended
the development, sales and marketing activities at certain of its projects which are in the early stages of development. The Company has concluded that this strategy was necessary under the prevailing market conditions at the time and believes that
it will allow the Company to market the properties at some future time when market conditions may have improved. As of December 31, 2010, two of these projects have been restarted and, as markets continue to improve, management continues to evaluate
and analyze the market place to potentially activate the remaining suspended projects in 2011 and beyond.

The
Company provides for its ongoing cash requirements principally from internally generated funds from the sales of real estate, outside borrowings and by forming new joint ventures with venture partners that provide a substantial portion of the
capital required for certain projects. California Lyon currently has outstanding 7 5/8% Senior Notes due 2012, 10 3/4% Senior Notes due 2013, 7 1/2% Senior Notes due 2014, and a 14% Term Loan due 2014. The Company, California Lyon and their
subsidiaries have financed, and may in the future finance, certain projects and land acquisitions with construction loans secured by real estate inventories, seller-provided financing and land banking transactions.

Under the Term Loan, the Senior Notes and the Companys other debt obligations, the Company and its subsidiaries are
subject to a number of covenants, including financial covenants. The Companys recent financial performance (including the $111.9 million non-cash impairment write-down for 2010), has made it more difficult for the Company to comply with these
covenants. If the Company is unable to comply with its covenants and obligations under any of these instruments, and is not able to enter into amendments eliminating the covenants or obtain waivers from the holders of the instruments, the holders of
one or more of the debt instruments could cause the acceleration of the debt instruments and require the Company to repay all principal and interest owing under the debt instruments. In addition, the acceleration of maturity under one debt
instrument could result in the holders of other debt instruments having the right to accelerate the maturity of those debt instruments.

The ability of the Company to meet its obligations on its indebtedness will depend to a large degree on its future performance which in turn will be subject, in part, to factors beyond its control, such
as prevailing economic conditions, either nationally or in regions in which the Company operates, the outbreak of war or other hostilities involving the United States, mortgage and other interest rates, changes in prices of homebuilding materials,



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weather, the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements,
availability of labor and homebuilding materials, changes in governmental laws and regulations, the timing of receipt of regulatory approvals and the opening of projects, and the availability and cost of land for future development. The Company
cannot be certain that its cash flow will be sufficient to allow it to pay principal and interest on its debt, support its operations and meet its other obligations. If the Company is not able to meet those obligations, it may be required to
refinance all or part of its existing debt, sell assets or borrow more money. The Company may not be able to do so on terms acceptable to it, if at all. There is no assurance, however, that future cash flows will be sufficient to meet the
Companys future capital needs. In addition, the amount and types of indebtedness that the Company may incur may be limited by the terms of the indentures and credit or other agreements governing the Companys Senior Notes obligations,
Term Loan and other indebtedness. In addition, the terms of existing or future indentures and credit or other agreements governing the Companys Senior Note obligations, revolving credit facilities and other indebtedness may restrict the
Company from pursuing any of these alternatives.

Term Loan

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

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

California Lyon received the
first installment of $131.0 million in October 2009, and its second installment of $75.0 million in December 2009. Under the Term Loan Agreement, California Lyon is restricted from future borrowings, and, if necessary, will be required to repay
existing borrowings in order to maintain required loan-to-value ratios such that: (i) the aggregate amount of outstanding loans under the Term Loan Agreement may not exceed 60% of the aggregate value of the properties securing the facility,
with valuation based on the lower of appraised value (if any) and discounted net present value of the cash flows, and (ii) the aggregate amount of secured debt may not exceed 60% of the aggregate value of the properties owned by California Lyon
and its subsidiaries, with valuation based on the lower of appraised value (if any) and discounted net present value of the cash flows. California Lyon is currently in compliance with the above requirements. The net proceeds to the Company from the
first installment of the Term Loan, after giving effect to attorney fees, loan fees and other miscellaneous costs associated with the loan transaction, and repayment of the revolving credit facilities and redemption of the Senior Notes as described
in Note 6 to Notes to Consolidated Financial Statements, were $34.6 million. A portion of the $75.0 million proceeds from the second installment was used to fund additional land acquisitions in 2009 and 2010.



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

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

Upon any prepayment of any portion of the Term Loan prior to its scheduled maturity (other than any prepayment required
in connection with a payment of all or any portion of the outstanding principal balance of any of the Indentures), the Term Loan Agreement provides that California Lyon make a make whole payment equal to an amount, if positive, of the
present value of all future payments of interest which would become due with respect to such prepaid amount from the date of prepayment thereof through and including the maturity date, discounted at a rate of 14%.

The Term Loan is scheduled to mature on October 20, 2014; however, in the event that any portion of the outstanding
principal amounts (the Repaid Senior Note Principal) of the Senior Notes is repaid (whether or not at maturity), the Lenders may elect to require California Lyon to repay that portion of the outstanding loan as bears the same ratio to
the entire Term Loan outstanding as the Repaid Senior Note Principal bears to the entire amounts then outstanding under all of the indentures governing the Senior Notes. All or a portion of the Term Loan may also be accelerated upon certain other
events described in the Term Loan Agreement. The lenders waived the requirement for such repayment in connection with the Senior Note redemptions which occurred from 2008 to 2010 and which are described below.

The Term Loan Agreement requires that the Companys Minimum Tangible Net Worth (as defined therein) not fall below
$75.0 million at the end of any two consecutive fiscal quarters. The Term Loan Agreement also contains covenants that limit the ability of California Lyon and the Company to, without prior approval from Lenders, among other things: (i) incur
liens; (ii) incur additional indebtedness; (iii) transfer or dispose of assets; (iv) merge, consolidate or alter their line of business; (v) guarantee obligations; (vi) engage in affiliated party transactions;
(vii) declare or pay dividends or make other distributions or repurchase stock; (viii) make advances, loans or investments; (ix) repurchase debt (including under the indentures governing the Senior Notes); and (x) engage in
change-of-control transactions.

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

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



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



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



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



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

The Companys covenant compliance for the Term Loan at December 31, 2010 is detailed in the table set forth below (dollars in millions):



|                                                           |  |                           |      |   |                                         |  |         | 
|---------------------------------------------------------- |  | ------------------------- | ---- | - | --------------------------------------- |  | ------- | 
|Covenant and Other Requirements                            |  | Actual atDecember 31,2010 |      |   | CovenantRequirements atDecember 31,2010 | 
|Tangible Net Worth (1)                                     |  | $                         | 13.0 |   |                                         |  | 3 $75.0 | 
|Ratio of Term Loan to Borrowing Base                       |  |                           | 49.6 | % |                                         |  | £ 60%   | 
|Secured Indebtedness (as a percentage of collateral value) |  |                           | 59.9 | % |                                         |  | £ 60%   | 
|Excluded Assets                                            |  | $                         | 6.9  |   |                                         |  | £ $25.0 | 



|(1) | Tangible Net Worth was calculated based on the stated amount of equity less intangible assets of $12.4 million as of December 31, 2010. The Company
did not meet this covenant requirement at December 31, 2010, due to impairments of $111.9 million. This covenant was subsequently amended as described below.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The management of the Company, with the approval of the board of directors, has retained the services of an outside
consulting firm to institute and implement all required programs to accomplish managements objectives and to work with management in the analysis and process of renegotiating, refinancing, repaying or restructuring debt maturities and loan
terms, including covenants. In addition, the Company is currently working through the process of requesting a financing proposal from the investment banking community. The Company has requested proposals for a debt financing to use in some
combination of debt refinance or capital restructuring of the Term Loan and the Senior Notes.

The Company
believes the debt markets are a viable option due to the growing demand for high yield paper in 2011 as evidenced by $105.8 billion in high yield paper issued through April 2011 in the US Market; 16% more than had been placed through the same time
period in 2010. For the year ended December 31, 2010, high yield paper saw a record $259.3 billion placed in the US Market. Additionally, high yield mutual funds have reported year to date 2011 inflows of $9.0 billion after 2010 inflows of $12.2
billion. The Company has also identified other competitors that received financing to repay or extend existing maturities.

Management of the Company has analyzed its liquidity through April 2012 based on its current capital structure and existing cash forecast as well as factoring in the potential of acceleration of the Term
Loan. Management believes it has adequate sources of liquidity to fund the Company and meet its obligations for at least the next year, from the date of this filing.

As reported on the Companys current report on Form 8-K dated March 18, 2011, the Company reached an agreement with
the Lenders under the Term Loan that amended the Term Loan to permit the Companys tangible net worth to fall below $75.0 million for two consecutive quarters. In addition, as reported on the Companys current report on Form 8-K dated
April 21, 2011, the Company reached a subsequent agreement with the Lenders under the Term Loan to waive any non-compliance with the tangible net worth covenant and with certain other technical requirements through July 19, 2011, subject to
certain terms and conditions.

Except as noted above, as of and for the year ending December 31, 2010, the
Company is not in default with the covenants under the Term Loan.



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

The foregoing summary is not a complete description of the Term Loan and is qualified in its entirety by reference to the Term Loan Agreement.

Senior Notes

During the year ended December 31, 2010, California Lyon redeemed, in privately negotiated transactions (i) $30.0 million principal amount of its outstanding 10 3/4% Senior Notes at a cost of $25.9 million plus accrued interest,
(ii) $0.5 million principal amount of its outstanding 7 5/8% Senior Notes at a cost of $0.4 million plus accrued interest, and (iii) $6.8 million principal amount of its outstanding 7 1/2% Senior Notes at a cost of $5.1 million plus accrued interest.
The Lenders under the Term Loan consented to these redemptions and waived their right to require any prepayment of the Term Loan in connection therewith. The net gain resulting from these redemptions, after giving effect to amortization of related
deferred loan costs and other fees, was approximately $5.6 million.

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



|                                          |  |                  |         | 
|----------------------------------------- |  | ---------------- | ------- | 
|                                          |  | December 31,2010 |        
|7 5/8% Senior Notes due December 15, 2012 |  | $                | 66,704  | 
|10 3⁄4% Senior Notes due April 1, 2013      |  |                  | 138,619 | 
|7 1/2% Senior Notes due February 15, 2014 |  |                  | 77,867  | 
|                                          |  |                  |         | 
|                                          |  | $                | 283,190 | 
|                                          |  |                  |         | 

7 5/8% Senior Notes

On November 22, 2004, California Lyon issued $150.0 million principal amount of the 7 5/8% Senior Notes, resulting in net proceeds to the
Company of approximately $148.5 million. Of the initial $150.0 million, $66.7 million in aggregate principal amount remained outstanding as of December 31, 2010 and the date hereof. In August 2010, the Company redeemed, in a privately negotiated
transaction, $0.5 principal amount of its outstanding 7 5/8% Senior Notes at a cost of $0.4 million plus accrued interest.

Interest on the 7 5/8% Senior Notes is payable semi-annually on December 15 and June 15 of each year. Based on the current outstanding principal amount of the 7 5/8% Senior Notes, the Companys semi-annual interest payments are
$2.5 million.



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The 7 5/8% Senior Notes are redeemable at the option of California Lyon, in
whole or in part, at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest, if any.

10 3/4% Senior Notes

On March 17,
2003, California Lyon issued $250.0 million of the 10 3/4% Senior Notes at a price of 98.493% to the public, resulting in net proceeds to the Company of approximately $246.2 million. The redemption price reflected a discount to yield 11% under the effective
interest method, and the notes have been reflected net of the unamortized discount in the consolidated balance sheet. Of the initial $250.0 million, $138.6 million aggregate principal amount remained outstanding as of December 31, 2010 and the
date hereof. In July 2010, the Company redeemed, in a privately negotiated transaction, $10.5 million principal amount of its outstanding 10 3/4% Senior Notes at a cost of $9.0 million plus accrued interest. In August 2010, the Company redeemed, in privately negotiated transactions, $19.5 million
principal amount of its outstanding 10 3/4% Senior
Notes at a cost of $16.9 million plus accrued interest.

Interest on
the 10 3/4% Senior Notes is payable on April 1 and
October 1 of each year. Based on the current outstanding principal amount of the 10 3/4% Senior Notes, the Companys semi-annual interest payments are $7.4 million.

The 10
3/4% Senior Notes are redeemable at the option of
California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest, if any.

7 1/2% Senior Notes

On February 6,
2004, California Lyon issued $150.0 million principal amount of the 7 1/2% Senior Notes, resulting in net proceeds to the Company of approximately $147.6 million. Of the initial $150.0 million, $77.9 million aggregate principal amount remained outstanding as of December
31, 2010 and the date hereof. In August 2010, the Company redeemed, in a privately negotiated transaction, $6.8 million principal amount of its outstanding 7
1/2% Senior Notes at a cost of $5.1 million
plus accrued interest.

Interest on the 7 1/2% Senior Notes is payable on February 15 and August 15 of each year.
Based on the current outstanding principal amount of 7 1/2% Senior Notes, the Companys semi-annual interest payments are $2.9 million.

The 7
1/2% Senior Notes are redeemable at the option of
California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.

General Terms of the Senior Notes

The Senior Notes are senior unsecured obligations of California Lyon and are unconditionally
guaranteed on a senior unsecured basis by the Company, and by all of



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the Companys existing and certain of its future restricted subsidiaries. The Senior Notes and the guarantees rank senior to all of the Companys and the guarantors debt that is
expressly subordinated to the Senior Notes and the guarantees, but are effectively subordinated to all of the Companys and the guarantors senior secured indebtedness to the extent of the value of the assets securing that indebtedness.

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

Under the Senior Notes Indentures, if the Companys consolidated tangible net worth falls below $75.0 million for
any two consecutive fiscal quarters, California Lyon will be required to make an offer to purchase up to 10% of each class of Senior Notes originally issued at a purchase price equal to 100% of the principal amount, plus accrued and unpaid interest,
if any. Any such offer to purchase must be made within 65 days after the second quarter ended for which the Companys tangible net worth is less than $75.0 million. However, California Lyon may reduce the principal amount of the notes to be
purchased by the aggregate principal amount of all notes previously redeemed.

The Company
has determined and calculated that California Lyons redemptions of Senior Notes during the period from 2008 to 2010 would reduce California Lyons repurchase obligations (assuming that the Companys consolidated tangible net worth is
less than $75.0 million for the quarter ended March 31, 2011), as follows: California Lyon would not be obligated to repurchase any of the 7 5/8% Senior Notes, as a result of California Lyons previous redemption of $83.3 million in aggregate principal amount of the 7 5/8% Senior Notes; California Lyon would not be obligated to repurchase
any of the 10 3/4% Senior Notes, as a result of
California Lyons previous redemption of $110.7 million in aggregate principal amount of the 10
3/4% Senior Notes; and California Lyon would not be
obligated to repurchase any of the 7 1/2%
Senior Notes, until March 13, 2013, at which time the Company would be required to offer to purchase $2.9 million of principal outstanding, as a result of California Lyons previous redemption of $72.1 million in aggregate principal amount of
the 7 1/2% Senior Notes.

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

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



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As of and for the year ending December 31, 2010, the Company was in
compliance with the Senior Notes covenants.

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

Prior Redemptions of the Senior
Notes

During the year ended December 31, 2010, the Company redeemed, in privately negotiated
transactions, $37.3 million principal amount of its outstanding Senior Notes at a cost of $31.3 million, plus accrued interest. The net gain resulting from the redemptions, after giving effect to amortization of related deferred loan costs, was $5.6
million.

On June 10, 2009, California Lyon consummated a cash tender offer (the
Tender Offer) to redeem a portion of its outstanding Senior Notes, on the terms and subject to the conditions set forth in its offer to redeem, as amended. The principal amount of Senior Notes redeemed by California Lyon on settlement of
the Tender Offer totaled $53.2 million, including $29.1 million of the 7 5/8% Senior Notes, $2.4 million of the 10 3/4% Senior Notes, and $21.7 million of the 7 1/2% Senior Notes. The aggregate Tender Offer consideration paid totaled $14.9 million, plus accrued interest. The net gain resulting from the Tender Offer, after closing costs, was $37.0 million.

Also, during 2009 the Company redeemed, in privately negotiated transactions, a total of
$103.7 million principal amount of the outstanding Senior Notes at a cost of $62.1 million, plus accrued interest. The net gain resulting from the redemption, after giving effect to amortization of related deferred loan costs, was $41.1 million. See
Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition and Liquidity and Note 6 of Notes to Consolidated Financial Statements for more information relating to the
Term Loan of the Company.

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

Construction Notes Payable

At December 31, 2010, the Company had two construction notes payable totaling $22.9 million. One of the notes matures in
July 2011 and bears interest at rates based on either LIBOR or prime with an interest rate floor of 6.5% and an outstanding principal balance of $13.9 million as of December 31, 2010. Interest is calculated on the average daily balance and is paid
following the end of each month. While the Company was previously required to maintain minimum tangible net worth of $90.0 million under this note, the Company and the lender have amended the note to eliminate the tangible net worth covenant in
exchange for a principal payment of $2.0 million. As a result of the payment of $2.0 million, which was made in April 2011, the outstanding principal balance is $11.9 million. The Company is currently in negotiations with the lender to extend the
maturity of the loan and to modify the covenants.



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The other construction note had a remaining balance at December 31, 2010 of
$9.0 million. This note was previously due to mature in July 2010; however, in conjunction with a payment of $28.1 million, the Company and the lender entered into a new loan agreement in 2010 for the then remaining outstanding principal of $10.0
million, which will mature in May 2015. The new loan pays interest monthly at a fixed rate of 12.5%, with quarterly principal payments of $500,000 beginning in July 2010. The interest rate decreases to 10.0% when the principal balance is reduced to
$7.5 million.



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Seller Financing

At December 31, 2010, the Company had $7.6 million of notes payable outstanding related to a land acquisition
for which seller financing was provided, which is included in notes payable in the accompanying consolidated balance sheet. The seller financing note is due at various dates through 2012 and bears interest at 7.0%. Interest is calculated on the
principal balance outstanding and is accrued and paid to the seller at the time each residential unit is closed. In addition, the Company makes an annual interest payment on the outstanding principal balance related to any remaining residential
units.

Land Banking Arrangements

As a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Companys available
cash or other corporate financing sources and limiting the Companys risk, the Company transfers its right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity
contributions and/or incur debt to finance the acquisition and development of the land being purchased. The entities grant the Company an option



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to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 25% of the total purchase price. The Company is under no obligation to
purchase the balance of the lots, but would forfeit remaining deposits and could be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their
liabilities. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. The use of these land banking arrangements is dependent on, among other things, the availability of capital to the
option provider, general housing market conditions and geographic preferences.

In addition, the Company
participates in one land banking arrangement that is not a VIE in accordance with FASB ASC 810, but is consolidated in accordance with FASB ASC Topic 470, Debt.Under the provisions of FASB ASC 470, the Company has determined it is
economically compelled, based on certain factors, to purchase the land in the land banking arrangements. Therefore, the Company has recorded the remaining purchase price of the land of $55.3 million, which is included in real estate inventories not
owned and liabilities from inventories not owned in the accompanying balance sheet as of December 31, 2010.

Summary information with respect to the Companys land banking arrangements is as follows as of December 31, 2010 (dollars in thousands):



|                                                      |  |   |         | 
|----------------------------------------------------- |  | - | ------- | 
|Total number of land banking projects                 |  |   | 1       | 
|                                                      |  |   |         | 
|Total number of lots                                  |  |   | 625     | 
|                                                      |  |   |         | 
|Total purchase price                                  |  | $ | 161,465 | 
|                                                      |  |   |         | 
|Balance of lots still under option and not purchased: |  |   |         | 
|Number of lots                                        |  |   | 248     | 
|                                                      |  |   |         | 
|Purchase price                                        |  | $ | 55,270  | 
|                                                      |  |   |         | 
|Forfeited deposits if lots are not purchased          |  | $ | 25,234  | 
|                                                      |  |   |         | 



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Joint Venture Financing

The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development
and sale of residential projects. As described more fully in Critical Accounting PoliciesVariable Interest Entities, certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary
beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Companys financial statements as of and for the years ended December 31, 2010 and 2009. Because the Company did not
consolidate or de-consolidate any variable interest entities as a result of adoption, the adoption of FASB ASC 810 did not affect the Companys consolidated net income. The financial statements of joint ventures in which the Company is not
considered the primary beneficiary are not consolidated with the Companys financial statements. The Companys investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less
voting or economic interest (and thus such joint ventures are not controlled by the Company). Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture
partners or from the proceeds of construction financing obtained by the joint ventures.

As of
December 31, 2010, the Companys investment in and advances to unconsolidated joint ventures was $1.5 million and the venture partners investment in such joint ventures was $1.5 million. As of December 31, 2010, these joint
ventures had repaid all financing from construction lenders.

Assessment District Bonds

In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by
municipalities to finance major infrastructure improvements and fees. Such financing has been an important part of financing master-planned communities due to the long-term nature of the financing, favorable interest rates when compared to the
Companys other sources of funds and the fact that the bonds are sold, administered and collected by the relevant government entity. As a landowner benefited by the improvements, the Company is responsible for the assessments on its land. When
the Companys homes or other properties are sold, the assessments are either prepaid or the buyers assume the responsibility for the related assessments. See Note 11 of Notes to Consolidated Financial Statements.

Cash Flows  Comparison of Years Ended December 31, 2010 and 2009

Net cash provided by operating activities increased to $24.1 million in the 2010 period from $12.9 million in the 2009
period. The increase was primarily due to (i) net loss of $135.5 million in the 2010 period compared to net loss of $21.0 million in the 2009 period, (ii) impairment loss on real estate assets of $111.9 million in the 2010 period compared
to $45.3 million in the 2009 period, (iii) gain on retirement of debt of $5.6 million in the 2010 period compared to $78.1 million in the 2009 period, (iv) increase in cash flows related to the net change in income tax refunds receivable
to $107.4 million in the 2010 period from $41.6 million in the 2009 period, (v) decrease in cash flows related to the net change in real estate inventories owned of $66.3 million in the 2010 period compared to an increase in cash flows from
real estate inventories owned of $130.4 million in the 2009 period, (vi) and increase in cash flows related to the net change in other assets of $15.9 million in the 2010 period compared to a decrease in cash flows of $7.7 million in the 2009
period. Due to the November 2009 legislation as discussed above, the Company recorded a federal income tax benefit of $101.9 million for the year ended December 31, 2009, which the Company received in the first quarter of 2010, compared to a
benefit of $0.4 million for the year ended December 31, 2010 when the legislation was no longer applicable.

The increase in impairment loss on real estate assets is described in Results of Operations above. The gain
on retirement of debt is attributable to the Senior Note redemption transactions that occurred during 2010 and 2009. The details of the transactions are more fully detailed above.

Net cash provided by investing activities increased to a source of $3.9 million in the 2010 period from a source of $2.7
million in the 2009 period. The change was primarily a result of an increase in distributions of capital from unconsolidated joint ventures of $4.2 million in the 2010 period compared to $0.1 million in the 2009 period, offset by a decrease of $2.1
million in proceeds from the sale of Company assets in the 2009 period.

Net cash provided by (used in)
financing activities increased to a use of $(74.3) million in the 2010 period from a source of $35.0 million in the 2009 period, primarily as a result of the decrease in net proceeds received from the issuance of the Term Loan of $193.9 million in
the 2009 period with no comparable amount in the 2010 period and the decrease in net proceeds from borrowings on notes payable of $113.5 million in the 2009 period with no comparable amount in the 2010 period, offset by a decrease in the net cash
paid for the redemption of Senior Notes of $31.3 million in the 2010 period, compared to $77.0 million in the 2009 period and a decrease in the net cash paid for principal payments on notes payable of $52.8 million in the 2010 period, compared to
$187.7 million in the 2009 period.



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

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

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

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

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

Off-Balance Sheet
Arrangements

The Company enters into certain off-balance sheet arrangements including joint venture
financing, option agreements, land banking arrangements and variable interests in consolidated and unconsolidated entities. These arrangements are more fully described above and in Notes 2, 6 and 11 of Notes to Consolidated Financial
Statements.



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Contractual Obligations

The Companys contractual obligations consisted of the following at December 31, 2010 (in thousands):



|                                         |  |           |           |  |                            |   |         |                      |  |   |                      |  |  |   |         | 
|---------------------------------------- |  | --------- | --------- |  | -------------------------- | - | ------- | -------------------- |  | - | -------------------- |  |  | - | ------- | 
|                                         |  |           |           |  | Payments due by period (5) |  
|                                         |  | Total (1) |           |  | Less than1 year(2011)      |   |         | 1-3 years(2012-2013) |  |   | 3-5 years(2014-2015) | 
|Other notes payable                      |  | $         | 33,487    |  |                            | $ | 24,505  |                      |  | $ | 6,220                |  |  | $ | 2,763   | 
|Term Loan                                |  |           | 315,015   |  |                            |   | 28,840  |                      |  |   | 57,680               |  |  |   | 228,495 | 
|Senior Notes(2)                          |  |           | 345,756   |  |                            |   | 25,899  |                      |  |   | 241,260              |  |  |   | 78,597  | 
|Operating leases                         |  |           | 5,184     |  |                            |   | 2,362   |                      |  |   | 2,397                |  |  |   | 424     | 
|Purchase obligations                     |  |           |           |  |                            |   |         |                      |  |   |                      |  |  |   |         | 
|Land purchases and option commitments(3) |  |           | 106,684   |  |                            |   | 31,188  |                      |  |   | 65,016               |  |  |   | 10,480  | 
|Surety Bonds                             |  |           | 90,662    |  |                            |   | 70,656  |                      |  |   | 19,960               |  |  |   | 45      | 
|Project commitments(4)                   |  |           | 154,037   |  |                            |   | 124,090 |                      |  |   | 29,947               |  |  |   |        | 
|                                         |  |           |           |  |                            |   |         |                      |  |   |                      |  |  |   |         | 
|Total                                    |  | $         | 1,050,824 |  |                            | $ | 307,540 |                      |  | $ | 422,480              |  |  | $ | 320,804 | 
|                                         |  |           |           |  |                            |   |         |                      |  |   |                      |  |  |   |         | 



|(1) | The summary of contractual obligations above includes interest on all interest-bearing obligations. Interest on all fixed rate interest-bearing
obligations is based on the stated rate and is calculated to the stated maturity date. Interest on all variable rate interest bearing obligations is based on the rates effective as of December 31, 2010 and is calculated to the stated maturity
date.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



|(5) | The Company has no contractual obligations beyond 2015.
|--- | -------------------------------------------------------

Inflation

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

Critical Accounting Policies

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



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Real Estate Inventories and Cost of Sales

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

Impairment of Real Estate Inventories

The Company accounts for its real estate inventories in accordance with FASB ASC Topic 360, Property, Plant &
Equipment. ASC Topic 360 requires impairment losses to be recorded on real estate inventories when indicators of impairment are present and the undiscounted cash flows estimated to be generated by real estate inventories are less than the
carrying amount of such assets. Indicators of impairment include a decrease in demand for housing due to softening market conditions, competitive pricing pressures which reduce the average sales price of homes, which includes sales incentives for
homebuyers, slowing sales absorption rates, a decrease in home values in the markets in which the Company operates, significant decreases in gross margins and a decrease in project cash flows for a particular project.

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

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



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Under FASB ASC Topic 360, the Company is required to make certain
assumptions to estimate undiscounted future cash flows of a project, which include: (i) estimated sales prices, including sales incentives, (ii) anticipated sales absorption rates and sales volume, (iii) project costs incurred to date
and the estimated future costs of the project based on the project budget, (iv) the carrying costs related to the time a project is actively selling until it closes the final unit in the project, and (v) alternative strategies including
selling the land to a third party or temporarily suspending development on the project. Each project has different assumptions and is based on managements assessment of the current market conditions that exist in each project location.
Interest incurred allocated to each project is included in future cash flows at effective borrowing rates of 11% for the reporting periods ending March 31, June 30, September 30 and December 31, 2010, which would yield
discount rates of 21% to 29% for the 2010 period. Interest incurred was allocated at effective borrowing rates of 9% for the reporting periods ending March 31, June 30 and September 30 and 11% for the quarter ending
December 31, 2009, which would yield discount rates of 19% to 27% for the 2009 period. Interest allocated to each project for cash flows in 2011 and beyond is 11% based on the Companys current capital structure.

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

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



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



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



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



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



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



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



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



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

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

Management assesses land deposits for impairment when estimated land values are deemed to be less than the agreed upon
contract price. The Company considers changes in market conditions, the timing of land purchases, the ability to renegotiate with land sellers the terms of the land option contract in question, the availability and best use of capital, and other
factors. If land values are determined to be less than the contract price, the future project will not be purchased. The



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Company records abandoned land deposits and related pre-acquisition costs to cost of sales-land in the consolidated statement of operations in the period that it is abandoned.

The following table summarizes inventory impairment charges recorded during the years ended December 31, 2010, 2009
and 2008:



|                                                                  |  |                         |         |  |      |   |        |      |  |   |         | 
|----------------------------------------------------------------- |  | ----------------------- | ------- |  | ---- | - | ------ | ---- |  | - | ------- | 
|                                                                  |  | Year Ended December 31, |        
|                                                                  |  | 2010                    |         |  | 2009 |   |        | 2008 | 
|                                                                  |  | (Dollars in thousands)  |        
|Inventory impairments related to:                                 |  |                         |         |  |      |   |        |      |  |   |         | 
|Land under development and homes completed and under construction |  | $                       | 80,197  |  |      | $ | 31,916 |      |  | $ | 83,174  | 
|Land held for sale or sold                                        |  |                         | 31,663  |  |      |   | 13,353 |      |  |   | 52,137  | 
|                                                                  |  |                         |         |  |      |   |        |      |  |   |         | 
|Total inventory impairments                                       |  | $                       | 111,860 |  |      | $ | 45,269 |      |  | $ | 135,311 | 
|                                                                  |  |                         |         |  |      |   |        |      |  |   |         | 
|Number of projects impaired during the year                       |  |                         | 14      |  |      |   | 13     |      |  |   | 41      | 
|                                                                  |  |                         |         |  |      |   |        |      |  |   |         | 
|Number of projects assessed for impairment during the year        |  |                         | 73      |  |      |   | 67     |      |  |   | 84      | 
|                                                                  |  |                         |         |  |      |   |        |      |  |   |         | 

The impairment loss related to land under development and homes completed and under
construction incurred during the year ended December 31, 2010, resulted from (i) in certain projects, a decrease in home sales prices related to increased incentives, (ii) in certain projects, increased future costs for outside broker expense and
sales and marketing expense, (iii) in certain projects, the decision by the Company to cancel certain land option agreements to purchase lots in projects where sales were deteriorating and the underlying value of the land to be purchased was less
than the purchase price using a residual land value approach, (iv) in certain projects, the needs to preserve the liquidity of the Company and, therefore, canceling certain land option agreements, and (v) in certain other projects, the
renegotiations of the land purchase schedule for land under option, to delay the required purchases, to allow markets to recover, and reduce the amount of lots to be purchased over time. The extended time of the project increased carry costs that
lead to the future undiscounted cash flows of the project being less than the current book value of the land.

The impairment loss related to land held for sale or sold incurred during the year ended December 31, 2010, resulted from
the reduced value of the land in the project. The Company values land held for sale using (i) projected cash flows with the strategy of selling the land on a finished or unfinished basis, or building out the project, (ii) recent, legitimate offers
received, (iii) prices for land in recent comparable sales transactions, and other factors. In addition, the Company may use appraisals to best determine the as-is value.

These charges were included in impairment loss on real estate assets in the accompanying consolidated statements of
operations (See Note 3 of Notes to Consolidated Financial Statement for a detail of impairment by segment). The impairment charges recorded during the periods noted above stemmed from lower home prices which were driven by increased
incentives and discounts resulting from weakened demand experienced during 2007 through 2010. The Company may incur further impairment on real estate inventories in the future, if the homebuilding industry continues to experience the deteriorating
market conditions identified above. In addition, the Company may incur impairments in the future if it is unable to hold its temporarily suspended projects until market conditions improve.

Sales and Profit Recognition

A sale is recorded and profit recognized when a sale is consummated, the buyers initial and continuing investments are adequate, any receivables are not subject to future subordination, and the
usual risks and rewards of ownership have been transferred to the buyer in accordance with the provisions of FASB ASC Topic 976-605-25, Real Estate. When it is determined that the earnings process is not complete, profit is deferred for
recognition in future periods. The profit recorded by the Company is based on the calculation of cost of sales which is dependent on the Companys allocation of costs which is described in more detail above in the section entitled Real
Estate Inventories and Cost of Sales.

Variable Interest Entities

Certain land purchase contracts and lot option contracts are accounted for in accordance with FASB ASC Topic 810,
Consolidation.In addition, all joint ventures are reviewed and analyzed under this guidance to determine whether or not these arrangements are accounted for under the principles of ASC 810 or other accounting rules. Under ASC 810, a variable
interest entity (VIE) is created when (i) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or
(ii) the entitys equity holders as a group either (a) lack direct or indirect ability to make decisions about the entity through voting or similar rights, (b) are not obligated to absorb expected losses of the entity if they
occur or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE pursuant to this guidance, the enterprise that absorbs a majority of the expected losses, receives a
majority of the entitys expected residual returns, or both, is considered the primary beneficiary and must consolidate the VIE. Expected losses and residual returns for VIEs are calculated based on the probability of estimated future cash
flows as defined in FASB ASC 810. Based on the provisions of ASC 810, whenever the Company enters into a land purchase contract or an option contract for land or lots with an entity and makes a non-refundable deposit, or enters into a joint venture,
a VIE may be created and the arrangement is evaluated under this guidance. In order to (i) evaluate whether the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support from
other parties, (ii) calculate expected losses, expected residual returns and the probability of estimated future cash flows, and (iii) determine whether the Company is the primary beneficiary, the Company must exercise significant judgment
regarding the interpretation of the terms of the underlying agreements in light of ASC 810 and make assumptions regarding future events that may or may not occur. The terms of these agreements are subject to various interpretations and the
assumptions used by the Company are inherently uncertain. The use by the Company of different interpretations and/or assumptions could affect the Companys evaluation as to whether or not land purchase contracts, lot option contracts or joint
ventures are VIEs and whether or not the Company is the primary beneficiary of the VIE.



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

Related Party Transactions

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

Recently Issued Accounting Standards

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



|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------

The Companys exposure to market risk for changes in interest rates relates to the Companys floating rate debt
with a total outstanding balance at December 31, 2010 of $13.9 million where the interest rate is variable based upon certain bank reference or prime rates. The average prime rate during the year ended December 31, 2010 was 3.25%. If
variable interest rates were to increase by 10%, there would be no impact on the Companys consolidated financial statements because the outstanding debt has an interest rate floor of 6.5%.

The Company does not utilize swaps, forward or option contracts on interest rates, foreign currencies or commodities, or
other types of derivative financial instruments as of or during the year ended December 31, 2010. The Company does not enter into or hold derivatives for trading or speculative purposes.



|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

The consolidated financial statements of William Lyon Homes and the reports of the independent registered public
accounting firms, listed under Item 15, are submitted as a separate section of this report beginning on page 79 and are incorporated herein by reference.



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

None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------

Evaluation of Disclosure Controls and Procedures. An evaluation was performed under the supervision and with the participation of the Companys management, including its principal
executive officer and principal financial officer, of the effectiveness of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that
evaluation, the Companys principal executive officer and principal financial officer concluded that the Companys disclosure controls and procedures were effective at the reasonable assurance levels as of the end of the period covered by
the Annual Report on Form 10-K for the period ending December 31, 2010. Although the Companys disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives, there can be no assurance
that such disclosure controls and procedures will always achieve their stated goals under all circumstances.

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

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

At December 31, 2008 controls over the financial reporting process for the validity of
assumptions used for the estimated sales price on two projects were not effective. This resulted in a significant additional impairment adjustment to the



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Companys consolidated financial statements at December 31, 2008. Specifically, controls were not effective to ensure accounting estimates based on these estimated sales prices were
appropriately reviewed, analyzed and challenged by management on a timely basis. This adjustment was appropriately reflected in the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ending December 31, 2008.

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

Managements Annual Report on Internal Control over Financial
Reporting.The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting and has designed internal controls and procedures to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. Management assessed the effectiveness of the Companys internal control
over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based
on that assessment, our management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2010.

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

This annual report does not include an audit report of the Companys registered public
accounting firm regarding internal control over financial reporting. The Companys internal controls were not subject to attestation by the Companys registered public accounting firm pursuant to The Dodd-Frank Wall Street Reform and
Consumer Protection Act which was signed into law on July 21, 2010.



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

None.



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PART III



|Item 10. | Directors, Executive Officers and Corporate Governance
|-------- | ------------------------------------------------------

Information Regarding the Directors of William Lyon Homes

The following table lists the Directors of the Company and provides their respective ages and current positions with the
Company as of March 31, 2011. Each director holds office until the Companys next Annual Meeting and until his successor is duly elected and qualified. Except as described below, there are no family relationships between any director or
executive officer and any other director or executive officer of William Lyon Homes. Biographical information for each Director is provided below.



|                              |  |     |  |                                                               
|----------------------------- |  | --- |  | --------------------------------------------------------------
|Name                          |  | Age |  | Position                                                      
|General William Lyon          |  | 88  |  | Chairman of the Board of Directors and Chief Executive Officer
|William H. Lyon               |  | 37  |  | Director, President and Chief Operating Officer               
|Douglas K. Ammerman (a, b, c) |  | 59  |  | Director                                                      
|Harold H. Greene (a, b, c)    |  | 72  |  | Director                                                      
|Gary H. Hunt (a, b, c)        |  | 62  |  | Director                                                      
|Alex Meruelo (a, b, c)        |  | 48  |  | Director                                                      



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



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



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

Composition and Qualifications

The Board of Directors
seeks to ensure that the Board of Directors is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow the Board of Directors to satisfy its oversight responsibilities effectively. New
Directors are approved by the Board of Directors after recommendation by the Nominating and Corporate Governance Committee (the Nominating and Corporate Governance Committee). In the case of a vacancy on the Board of Directors, the Board
of Directors approves a Director to fill the vacancy following the recommendation of a candidate by the Chairman of the Board. In identifying candidates for Director, the Nominating and Corporate Governance Committee and the Board of Directors take
into account (1) the comments and recommendations of board members regarding the qualifications and effectiveness of the existing Board or Directors or additional qualifications that may be required when selecting new board members that may be made
in connection with annual assessments prepared by each Director of the effectiveness of the Board of Directors and of each committee of the Board of Directors on which he serves, (2) the requisite expertise and sufficiently diverse backgrounds of
the Board of Directors overall membership composition, (3) the independence of outside Directors and other possible conflicts of interest of existing and potential members of the Board of Directors and (4) all other factors it considers
appropriate. The Board seeks to ensure that the Board is composed of members whose particular background, expertise, qualifications, attributes and skills, when taken together, allow the Board to satisfy its oversight responsibilities effectively.

When considering whether directors and nominees have the experience, qualifications, attributes and skills,
taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the Companys business and structure, the Nominating and Corporate Governance Committee and the Board of Directors focused
primarily on the information discussed in each of the Directors individual biographies set forth below. In particular, with regard to General Lyon, our Chief Executive Officer and Chairman of the Board, the Board of Directors considered his
more than 57 years of experience in the homebuilding industry. With regard to Mr. Lyon, our Chief Operating Officer, the Board of Directors considered his strong background, extensive experience, and training in the industry from land acquisition to
project management and operations. With regard to Mr. Ammerman, the Board of Directors considered his significant experience, expertise and background with regard to accounting, finance, and tax matters, including the broad perspective brought by
his experience in consulting to clients in many diverse industries. With regard to Mr. Greene, the Board of Directors considered his many years of experience in finance and banking matters in the real estate field, which are very valuable to the
Company as it continues to evaluate its debt profile and capital structure and various financing and refinancing alternatives. With regard to Mr. Hunt, the Board of Directors considered his significant experience, expertise and background with
regard to urban planning, construction and other real estate matters, which includes specialization in homebuilding and land development companies. With regard to Mr. Meruelo, the Board of Directors considered his significant experience, expertise
and background in residential and commercial real estate development.

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

WILLIAM H. LYON, President and Chief Operating Officer, son of General William Lyon, worked
full time with the former William Lyon Homes from November 1997 through November 1999 as an assistant project manager, has been employed by the Company since November 1999 and has been a member of the board of directors since January 25, 2000.
Since joining the Company, Mr. Lyon has been employed as an assistant project manager and project manager and has participated in a training program designed to expose him to the many facets of real estate development. From February 2003 until
February 2005, he served as the Companys Director of Corporate Affairs. In February 2005, he was appointed Vice President and Chief Administrative Officer of the Company. Effective on March 1, 2007, Mr. Lyon was appointed as
Executive Vice President and Chief Administrative Officer. Effective on March 18, 2009, Mr. Lyon was appointed as President and Chief Operating Officer of the Company. Mr. Lyon is a member of the Board of Directors of Commercial Bank
of California. Mr. Lyon received a dual B.S. in Industrial Engineering and Product Design from Stanford University in 1997.

DOUGLAS K. AMMERMAN was appointed to the Board of Directors on February 27, 2007. Mr. Ammermans business career includes almost three decades of service with
KPMG, independent public accountants, until his retirement in 2002. He was the Managing Partner of the Orange County office and was a National Partner in Charge  Tax. He is a certified public accountant (inactive). Since 2005,
Mr. Ammerman has served as a member of the Board of Directors of Fidelity National Financial (a company listed on the New York Stock Exchange), where he also serves as Chairman of the Audit Committee. Also, since 2005, he has been a member of
the Board of Directors of Quiksilver (a company listed on the New York Stock Exchange), where he also serves as Chairman of the Audit Committee, a member of the Compensation Committee and a member of the Nominating and Corporate Governance
Committee. He also is a member of the Board of Directors of El Pollo Loco, where he also serves as Chairman of the Audit Committee. Mr. Ammerman has served as a director of The Pacific Club for twelve years and is a past president. He also has
served as a director of the UCI Foundation for fourteen years.



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HAROLD H. GREENE joined the board of
directors on October 17, 2005. Mr. Greene is a 40-year veteran of the commercial and residential real estate lending industry. He most recently served as the Managing Director for Bank of Americas California Commercial Real Estate
Division from 1998 to 2001 where he was responsible for lending to commercial real estate developers in California and managed an investment portfolio of approximately $2.6 billion. From 1990 to 1998, Mr. Greene was the Executive Vice President
of SeaFirst Bank in Seattle, Washington and prior to that he served as the Vice Chairman of MetroBank from 1989 to 1990 and in various positions, including Senior Vice President in charge of the Asset Based Finance Group, with Union Bank, where he
worked for 27 years. Mr. Greene currently serves as a director of Garys and Company (mens clothing retailer) and as a director and member of the audit committee of Paladin Realty Income Properties, Inc. (real estate investments).
From September 2007 until December 2009, he also served as a director and member of the audit committee and the corporate governance committee of Grubb & Ellis (real estate management).

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

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

Audit
Committee. The Company has a standing Audit Committee, which is chaired by Mr. Harold H. Greene and consists of Messrs. Greene, Ammerman, Hunt and Meruelo. The Board has determined that all committee members are independent and
financially literate under the standards established by the Securities and Exchange Commission (the SEC). The Board has determined that Mr. Greene is an audit committee financial expert as defined by the SEC.

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

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

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

The Company strives to
compose the Board of directors with a collection of individuals who bring a variety of complementary skills which, as a group, will possess the appropriate skills and experience to oversee the Companys



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business. Accordingly, although diversity may be a consideration in the selection of Board members, the Company and the Board of Directors do not have a formal policy with regard to the
consideration of diversity in identifying director nominees.

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

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

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

Information Regarding Executive Officers of William Lyon Homes

The executive officers of the Company are chosen annually by the Board of Directors and each holds office until his or her successor is chosen and qualified or until his or her death, resignation or
removal. There are no family relationships between any director or executive officer and any other director or executive officer of the Company, except for William Lyon and William H. Lyon, who are father and son. The following table lists the
Companys executive officers and provides their respective ages as of March 31, 2011 and their current positions.



|                     |  |     |    |  |          |                                                                
|-------------------- |  | --- | -- |  | -------- | ---------------------------------------------------------------
|Name                 |  | Age |    |  | Position
|General William Lyon |  |     | 88 |  |          | Chairman of the Board of Directors and Chief Executive Officer 
|William H. Lyon      |  |     | 37 |  |          | President and Chief Operating Officer                          
|Matthew R. Zaist     |  |     | 36 |  |          | Executive Vice President                                       
|Mary J. Connelly     |  |     | 59 |  |          | Senior Vice President and Nevada Division President            
|W. Thomas Hickcox    |  |     | 58 |  |          | Senior Vice President and Arizona Division President           
|Richard S. Robinson  |  |     | 64 |  |          | Senior Vice President  Finance                                
|Colin T. Severn      |  |     | 40 |  |          | Vice President, Chief Financial Officer and Corporate Secretary
|Brian W. Doyle       |  |     | 47 |  |          | Vice President and Southern California Division President      
|Gary L.Galindo       |  |     | 47 |  |          | Vice President and Northern California Division President      
|Cynthia E. Hardgrave |  |     | 63 |  |          | Vice President  Tax and Internal Audit                        
|Maureen L. Singer    |  |     | 47 |  |          | Vice President  Human Resources                               

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

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

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



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



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

COLIN T. SEVERN, Vice President, Chief Financial Officer and Corporate Secretary joined the
Company in December 2003, and served in the role of Financial Controller until April 3, 2009. Since April 3, 2009, Mr. Severn served as Vice President, Corporate Controller and Corporate Secretary until his promotion to Chief
Financial Officer by approval of the board of directors of the Company on August 11, 2009. Mr. Severn oversees the Companys accounting and finance, treasury, and investor relations functions. Mr. Severn is a member of the
Companys Land Committee. Mr. Severn is a CPA (inactive) and has more than 15 years of experience in real estate accounting and finance, including positions with an international accounting firm, and other real estate and homebuilding
companies. Mr. Severn holds a B.A in Business Administration with concentrations in Accounting and Finance from California State University, Fullerton.

BRIAN W. DOYLE, Vice President and California Region President, joined the Company in 1999 when it acquired substantially all of the assets of the former William Lyon Homes,
where Mr. Doyle had served as Director of Sales and Marketing for the Southern California Division after his hire in November 1997. In January 2006, Mr. Doyle became Vice President and Division Manager for the San Diego Division.
In January 2008, Mr. Doyle became Division President for the San Diego/Inland Division. In February 2009, Mr. Doyle became the Southern California Division President and in 2010, was promoted to California Region President.
Mr. Doyle has more than 23 years experience in the real estate development and homebuilding industry.

GARY L. GALINDO, Vice President and Northern California Division President, joined the
Company in 2003 as Director of Land Acquisition for the Northern California Division. In January 2006, Mr. Galindo became Vice President and Division Manager for the Sacramento Division. In January 2008, Mr. Galindo became the Northern
California Division President. Mr. Galindo has more than 11 years experience in the real estate development and homebuilding industry.

CYNTHIA E. HARDGRAVE, Vice President  Tax and Internal Audit, joined the Company in 1999 when it acquired substantially all of the assets of the former William Lyon
Homes, where Ms. Hardgrave had served in various tax management positions since her hire in July 1989. Ms. Hardgrave is a CPA and has more than 25 years experience in real estate tax and audit.

MAUREEN L. SINGER, Vice President  Human Resources, joined the Company in 2003 as
Director of Human Resources, and was promoted to Vice President in 2007. Ms. Singer is responsible for all aspects of Human Resources including employee relations, compensation, benefits, compliance, and staffing. Prior to joining the Company, she
worked for Automatic Data Processing for over 16 years. Ms. Singer has more than 20 years of experience and holds a B.A. in Business Administration from California State University, Fullerton.

Section 16(a) Beneficial Ownership Reporting Compliance

During 2010, the Company had no class of equity securities registered under Section 12 of the Securities Exchange Act
of 1934. Accordingly, no reports were required to be filed during or with respect to the year ended December 31, 2010 on Form 3, Form 4 and Form 5 by the Companys directors, officers and 10% stockholders.

Code of Ethics

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

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



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|Item 11. | Executive Compensation
|-------- | ----------------------

Compensation Discussion and Analysis

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

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

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

Elements of Compensation

Salary

The Companys Compensation Committee generally
reviews the base salary of the Companys named executive officers annually. In view of the Companys desire to reward performance and loyalty while keeping SG&A costs competitive, the Company does not regard salary as the principal
component of the compensation of its named executive officers. The Company believes that the salaries of its named executive officers are very conservative when compared with the salaries paid by other major homebuilders to similar officers.

Bonuses

Near the beginning of each year, the Compensation Committee sets objective performance criteria for the bonuses of named executive officers for that year. The Company believes that the uniformity of the
objective performance criteria over the past several years has helped to reward productivity and loyalty by stabilizing the goalposts for bonuses over changing economic times.

The objective performance criteria which the Compensation Committee has selected correlate each named executive
officers bonus directly to a percentage of each named executives salary and subjective job performance level. The awards are based on the recommendation of the Chief Executive Officer and Chief Operating Officer. The Company believes
that the bonus plan for its named executive officers is comparable to the bonus plans at other major homebuilders.

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

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

In 2008, the Compensation
Committee established a bonus plan at the recommendation of the CEO and COO to help retain key employees during challenging economic times and taking into account the likelihood the Company would not be profitable. The final year that bonuses
correlated to the performance of the Company was 2008. The plan established a maximum bonus for the CEO and COO equal to the greater of 50% of salary or 3% of pre-tax, pre-bonus income, with a target bonus of 50% of salary. The plan established a
maximum bonus for the EVP - CAO and the EVP - Business Development Operations equal to the greater of 50% of salary or 1% of pre-tax, pre-bonus income, with a target bonus of 50% of salary. The plan established a maximum bonus for the SVP - CFO
equal to the greater of 50% of salary or 1⁄2% of pre-tax, pre-bonus income, with a target bonus of 50% of salary.

In 2009, the Compensation Committee did not establish a bonus plan at the beginning of the year, due to the state of the economy and the industry. Management believed it was in the best interests of the
Company to wait until the end of 2009 to determine bonus awards based on the Companys operating results and cash position, as well as individual employee performance. The Compensation Committee approved bonuses to employees and named executive
officers on a subjective basis based on the recommendations of the CEO and COO.

In 2010, the Compensation
Committee established a bonus plan at the recommendation of the CEO and COO to improve the likelihood of employee retention. The plan established a maximum bonus for the CEO and COO equal to the greater of 50% of salary or 3% of pre-tax, pre-bonus
income, with a target bonus of 0% of salary. The plan established a maximum bonus for the EVP equal to 300% of salary, with a target bonus of 100% of salary, and for the VP - CFO, a maximum bonus equal to 250% of salary, with a target bonus of 85%
of salary, and for the regional and divisional presidents a maximum bonus equal to 300% of salary, with a target bonus of 150% of salary. The intent of this plan was to allow annual adjustment of the target bonus within the parameters established by
the plan based on the expected performance of the Company, changes in the homebuilding market and trends in industry compensation.

Also in 2010, the Compensation Committee approved a project completion bonus program, as discussed below, which replaced the Companys policy of awarding bonuses based on divisional or Company-wide
pre-tax, pre-bonus income, and awards bonuses based on the net profit of a project, from inception to the close out of the final unit. The CEO and COO are the only executive officers whose bonus is directly tied to the performance of the Company.



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Project Completion Bonus Plan

Effective May 4, 2010, the Company adopted its Project Completion Bonus Plan (the Plan). Under the Plan,
with respect to any project, subject to the terms of the Plan and subject to the participant remaining in continuous service with the Company throughout the applicable project, a participant will be entitled to receive a bonus (in addition to any
other bonus which such participant may receive) equal to the applicable percentage of the net profits (as defined in the Plan) from the applicable project, generally as follows:



|                                    |  |                      |       |   |                     |                                             
|----------------------------------- |  | -------------------- | ----- | - | ------------------- | --------------------------------------------
|PARTICIPANT                         |  | APPLICABLEPERCENTAGE |       |   | APPLICABLE PROJECTS
|Executive Vice President            |  |                      | 0.875 | % |                     | All Projects                                
|Chief Financial Officer             |  |                      | 0.5   | % |                     | All Projects                                
|Senior Vice President of Finance    |  |                      | 0.5   | % |                     | All Projects                                
|Division President                  |  |                      | 1.25  | % |                     | Projects in Presidents division            
|Division President                  |  |                      | 0.25  | % |                     | Projects in all other divisions             
|Senior Vice President of Operations |  |                      | 0.75  | % |                     | Projects in Senior Vice Presidents division
|Senior Vice President of Operations |  |                      | 0.125 | % |                     | Projects in all other divisions             

The purpose of the Plan is to align the interests of key executives with the interests of the Companys shareholders. The Company believes this can be accomplished by encouraging key executives of
the Company to remain in the service of the Company while working diligently to complete the Companys projects through the sale, to unrelated parties in the ordinary course of business, of all of the parcels of real property in such projects.
Accordingly, under this Plan, each participant who remains in the service of the Company through the completion of certain projects, and who meets the requirements for payment, will receive a bonus measured by the net profits of the projects.

Provided that a participant remains in the continuous service of the Company from the date of the
commencement of an applicable project through the date of the completion of the applicable project and thereafter until the date of payment, the participant shall receive a bonus equal to the applicable percentage of the net profits from the
project. If the participant is not in continuous service from the commencement of the applicable project through the date of the completion of the applicable project, and until the date on which the bonus with respect to such applicable project is
paid, the participants entitlement to receive the bonus shall be forfeited.



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Summary Compensation Table

The following table summarizes the annual and long-term compensation during 2010, 2009 and 2008 of the Companys
Principal Executive Officer, Principal Financial Officer and the three additional most highly compensated executive officers whose annual salaries and bonuses exceeded $100,000 in total during the fiscal year ended December 31, 2010
(collectively, the Named Executive Officers).



|                                                                                                                  |  |      |               |  |              |  |                              |                |  |   |                       |  |  |                 |      |  |                                                  |   |      |                                                                       |  |   |                             |  |  |           |      |  |  |   |                  |  |  |  |                              | 
|----------------------------------------------------------------------------------------------------------------- |  | ---- | ------------- |  | ------------ |  | ---------------------------- | -------------- |  | - | --------------------- |  |  | --------------- | ---- |  | ------------------------------------------------ | - | ---- | --------------------------------------------------------------------- |  | - | --------------------------- |  |  | --------- | ---- |  |  | - | ---------------- |  |  |  | ---------------------------- | 
|Name and Principal Position                                                                                       |  | Year |               |  | Salary($)(1) |  |                              | Bonus($)(2)(6) |  |   | StockAwards($)        |  |  | OptionAwards($) |      |  | Non-EquityIncentive PlanCompensation($)(1)(2)(3) |   |      | Change inPension ValueandNonqualifiedDeferredCompensationEarnings
($) |  |   | All OtherCompensation($)(3) |  |  | Total ($) |     
|General William Lyon
Chairman of the Board and Chief
Executive Officer (Principal
Executive Officer)              |  |      | 20102009
2008 |  |              |  | 1,000,0001,000,000
1,000,000 |                |  | $ | 
                  |  |  | $               | 
 |  |                                                  | $ | 
 |                                                                       |  | $ | 
                        |  |  | $         | 
 |  |  | $ | 
             |  |  |  | 1,000,0001,000,000
1,000,000 | 
|                                                                                                                  |  |      |               |  |              |  |                              |                | 
|Colin T. Severn (4)
Vice President, Chief Financial
Officer and Corporate Secretary
(Principal Financial Officer) |  |      | 20102009
2008 |  |              |  | 200,000156,923
103,192       |                |  |   | 140,830137,896
26,250 |  |  |                 | 
 |  |                                                  |   | 
 |                                                                       |  |   | 
                        |  |  |           | 
 |  |  |   | 6,9004,800
6,900 |  |  |  | 347,730299,629
134,242       | 
|                                                                                                                  |  |      |               |  |              |  |                              |                | 
|William H. Lyon (5)
Director, President and Chief
Operating Officer                                               |  |      | 20102009
2008 |  |              |  | 500,000341,923
350,000       |                |  |   | 
                  |  |  |                 | 
 |  |                                                  |   | 
 |                                                                       |  |   | 
                        |  |  |           | 
 |  |  |   | 
             |  |  |  | 500,000341,923
350,000       | 
|                                                                                                                  |  |      |               |  |              |  |                              |                | 
|Matthew R. Zaist (4)
Executive Vice President                                                                     |  |      | 20102009
2008 |  |              |  | 225,000139,432
119,346       |                |  |   | 192,078168,600
30,125 |  |  |                 | 
 |  |                                                  |   | 
 |                                                                       |  |   | 
                        |  |  |           | 
 |  |  |   | 6,9004,800
6,900 |  |  |  | 423,978312,832
156,371       | 
|                                                                                                                  |  |      |               |  |              |  |                              |                | 
|Brian W. Doyle (4)
Vice President and Southern
California Region President                                        |  |      | 20102009
2008 |  |              |  | 225,000197,115
184,230       |                |  |   | 217,602137,896
92,500 |  |  |                 | 
 |  |                                                  |   | 
 |                                                                       |  |   | 
                        |  |  |           | 
 |  |  |   | 6,9004,800
6,900 |  |  |  | 449,502339,811
283,630       | 



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



|(2) | In 2008, the Compensation Committee established a bonus plan at the recommendation of the CEO and COO to help retain key employees during
challenging economic times and taking into account the likelihood the Company would not be profitable. The final year that bonuses correlated to the performance of the Company was 2008. The plan established a maximum bonus for the CEO and COO equal
to the greater of 50% of salary or 3% of pre-tax, pre-bonus income, with a target bonus of 50% of salary. The plan established a maximum bonus for the EVP - CAO and the EVP - Business Development Operations equal to the greater of 50% of salary or
1% of pre-tax, pre-bonus income, with a target bonus of 50% of salary. The plan established a maximum bonus for the SVP - CFO equal to the greater of 50% of salary or 1⁄2% of pre-tax, pre-bonus income, with a target bonus of 50% of salary.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | In 2009, the Compensation Committee did not establish a bonus plan at the beginning of the year, due to the state of the economy and the industry.
Management believed it was in the best interests of the Company to wait until the end of 2009 to determine bonus awards based on the Companys operating results and cash position, as well as individual employee performance. The Compensation
Committee approved bonuses to employees and named executive officers on a subjective basis based on the recommendations of the CEO and COO.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | In 2010, the Compensation Committee established a bonus plan at the recommendation of the CEO and COO to improve the likelihood of employee
retention. The plan established a maximum bonus for the CEO and COO equal to the greater of 50% of salary or 3% of pre-tax, pre-bonus income, with a target bonus of 0% of salary. The plan established a maximum bonus for the EVP equal to 300% of
salary, with a target bonus of 100% of salary, and for the VP - CFO, a maximum bonus equal to 250% of salary, with a target bonus of 85% of salary, and for the regional and divisional presidents a maximum bonus equal to 300% of salary, with a target
bonus of 150% of salary. The intent of this plan was to allow annual adjustment of the target bonus within the parameters established by the plan based on the expected performance of the Company, changes in the homebuilding market and trends in
industry compensation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Also in 2010, the Compensation Committee approved a project completion bonus program, as discussed below, which replaced the Companys policy
of awarding bonuses based on divisional or Company-wide pre-tax, pre-bonus income, and awards bonuses based on the net profit of a project, from inception to the close out of the final unit. The CEO and COO are the only executive officers whose
bonus is directly tied to the performance of the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Represents matching contributions made by the Company into each executives 401(k) plan account in an amount equal to 6% of each
executives eligible earnings, up to the maximum permitted. Does not include perquisites or other personal benefits provided to the executive, since the aggregate incremental cost to the Company of such perquisites or other personal benefits
provided to the executive is less than $10,000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | 2009 salary blended due to promotion during the year.
|--- | -----------------------------------------------------



|(5) | Effective on March 1, 2007, Mr. Lyon was appointed as Executive Vice President and Chief Administrative Officer. Effective on
March 18, 2009, Mr. Lyon was appointed as President and Chief Operating Officer of the Company. In 2009, William H. Lyon received a base salary of $350,000 until December 2009, when it was increased to $500,000 upon approval by the Board
of Directors.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Includes Project Completion Bonus earned and paid in 2010, as discussed elsewhere herein.
|--- | -----------------------------------------------------------------------------------------



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Grants of Plan-Based Awards

Options/SAR Grants in Fiscal Year Ended December 31, 2010

No options were granted during 2010 to any director or Named Executive Officer. No options are outstanding as of
December 31, 2010.

Option Exercises and Stock Vested Table

No exercises of stock options and no vesting of stock occurred during the fiscal year ended December 31, 2010 by any
of the Named Executive Officers. No options are outstanding as of December 31, 2010.

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

Employees, including executive officers,
enter into annual employment agreements which provide that their employment is at-will. The employment agreements with each of General William Lyon, Colin T. Severn, William H. Lyon, Matthew R. Zaist and Brian R. Doyle provide for an annual salary
as of December 31, 2010 of $1,000,000, $200,000, $500,000, $225,000 and $225,000 respectively. Each employment agreement also provides for a monthly automobile allowance of $400, except for General William Lyon and William H. Lyon. The
employment agreements do not provide for any severance or other payments on termination of employment, or in connection with a change in control of the Company.

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



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Compensation Committee Interlocks and Insider Participation

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

Compensation Committee Report

The Compensation Committee
has reviewed and discussed the Compensation Discussion and Analysis with management and, based on that review and discussion, has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Compensation
Committee

Gary H. Hunt, Chairman

Douglas K. Ammerman

Harold H. Greene

Alex Meruelo

Director Compensation

In 2010, outside directors received
an annual fee of $60,000 per year, payable $15,000 per calendar quarter, and $2,500 or each board meeting attended in person and $1,500 for each meeting attended via teleconference. In addition, the chairperson of the Audit Committee of the Board of
Directors received a fee of $10,000 per year, payable $2,500 per calendar quarter, to serve in such capacity, the chairperson of each other committee of the Board of Directors received a fee of $7,500 per year, payable $1,875 per calendar quarter,
to serve in such capacity, and other committee members received a fee of $2,000 per year, payable $500 per calendar quarter, per committee for service on committees of the Board of Directors.

In 2011, outside directors will receive an annual fee of $60,000 per year, payable $15,000 per calendar quarter, and
$2,500 for each board meeting attended in person and $1,500 for each meeting attended via teleconference. In addition, the chairperson of the Audit Committee of the Board of Directors receives a fee of $10,000 per year, payable $2,500 per calendar
quarter, to serve in such capacity, the chairperson of each other committee of the Board of Directors receives a fee of $7,500 per year, payable $1,875 per calendar quarter, to serve in such capacity, and other committee members receive a fee of
$2,000 per year, payable $500 per calendar quarter, per committee for service on committees of the Board of Directors.

The following table sets forth information concerning the compensation of the directors during the fiscal year ended December 31, 2010.



|                    |  |                              |        |  |                |  |   |                 |  |  |                                         |  |  |                                                                       |   |  |                          |  |   |          |  |  |   |  |  |   |        | 
|------------------- |  | ---------------------------- | ------ |  | -------------- |  | - | --------------- |  |  | --------------------------------------- |  |  | --------------------------------------------------------------------- | - |  | ------------------------ |  | - | -------- |  |  | - |  |  | - | ------ | 
|Name                |  | Fees Earnedor Paidin Cash($) |        |  | StockAwards($) |  |   | OptionAwards($) |  |  | Non-EquityIncentive PlanCompensation($) |  |  | Change inPension
Valueand NonqualifiedDeferredCompensationEarnings($) |   |  | All OtherCompensation($) |  |   | Total($) | 
|Douglas K. Ammerman |  | $                            | 81,250 |  |                |  |  |                 |  |  |                                        |  |  |                                                                       |  |  |                          |  |  |          |  |  |  |  |  | $ | 81,250 | 
|Harold H. Greene    |  |                              | 89,250 |  |                |  |  |                 |  |  |                                        |  |  |                                                                       |  |  |                          |  |  |          |  |  |  |  |  |   | 89,250 | 
|Gary H. Hunt        |  |                              | 85,250 |  |                |  |  |                 |  |  |                                        |  |  |                                                                       |  |  |                          |  |  |          |  |  |  |  |  |   | 85,250 | 
|Alex Meruelo        |  |                              | 84,500 |  |                |  |  |                 |  |  |                                        |  |  |                                                                       |  |  |                          |  |  |          |  |  |  |  |  |   | 84,500 | 

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



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##### Table of Contents

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

The following table sets forth certain information as to the number of shares of Common
Stock beneficially owned as of March 31, 2011. The following table includes information for (a) each person or group that is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock,
(b) each of the directors and nominees of the Company, (c) each Named Executive Officer named in the Summary Compensation Table, and (d) all directors and executive officers of the Company as a group.



|                                                             |  |                          |  |                              
|------------------------------------------------------------ |  | ------------------------ |  | -----------------------------
|                                                             |  | As of March 31, 2011    
|                                                             |  | Shares BeneficiallyOwned |  | Percentage of AllCommon Stock
|General William Lyon(1)                                      |  | 946                      |  | 94.6%                        
|The William Harwell Lyon Separate Property Trust(2)          |  | 54                       |  | 5.4%                         
|William H. Lyon(1)                                           |  | 0(3)                     |  | 0.00%                        
|Douglas K. Ammerman(1)                                       |  | 0                        |  | 0.00%                        
|Harold H. Greene(1)                                          |  | 0                        |  | 0.00%                        
|Gary H. Hunt(1)                                              |  | 0                        |  | 0.00%                        
|Alex Meruelo(1)                                              |  | 0                        |  | 0.00%                        
|Richard S. Robinson(1)                                       |  | 0                        |  | 0.00%                        
|Colin T. Severn(1)                                           |  | 0                        |  | 0.00%                        
|Brian W. Doyle                                               |  | 0                        |  | 0.00%                        
|All directors and executive officers as a group (14 persons) |  | 946(3)                   |  | 94.6%                        



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



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



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

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

As of December 31, 2010,
the Company had no securities authorized for issuance under compensation plans.



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

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

In October 2008, the Company was contracted by and for Frank T. Suryan, Jr. (see Note 10 of Notes to Consolidated
Financial Statements for further description of the relationship between General William Lyon, William H. Lyon and Frank T. Suryan) to build apartment units for a contract price of $13.5 million, which includes the Companys contractor
fee of $0.5 million. As described in Note 1  Construction Services of Notes to Consolidated Financial Statements, the Company accounts for this transaction based on the percentage of completion method, and recorded construction
services revenue of $12.6 million and $0.2 million and construction services costs of $11.6 million and $0.2 million during the years ended December 31, 2009 and 2008, respectively. No construction service revenue or costs relating to this
transaction were recorded for the year ended December 31, 2010.

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

For the years ended December 31, 2010, 2009 and 2008, the Company
incurred reimbursable on-site labor costs of $217,000, $197,000 and $176,000, respectively, for providing customer service to real estate projects developed by entities controlled by General William Lyon and William H. Lyon, of which $38,000 and
$58,000 was due to the Company at December 31, 2010 and 2009, respectively. The Company earned fees of $24,000, $36,000 and $64,000, respectively, for tax and accounting services performed for entities controlled by General William Lyon and
William H. Lyon during the years ended December 31, 2010, 2009 and 2008.



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The Company earned fees of $426,000 and $123,000 during the years ended
December 31, 2010 and 2009, respectively, related to a Human Resources and Payroll Services contract between the Company and an entity controlled by General William Lyon and William H. Lyon. Effective April 1, 2011, the Company and this entity
amended the Human Resources and Payroll Services contract to provide that the affiliate will now pay to the Company a base monthly fee of $21,335 and a variable monthly fee equal to $23 multiplied by the number of active employees employed by such
entity (which will initially result in a variable monthly fee of approximately $8,000). The amended contract also provides that the Company will be reimbursed by such affiliate for a pro rata share of any bonuses paid to the Companys Human
Resources staff (other than any bonus paid to the Vice President of Human Resources). The Company believes that the compensation being paid to it for the services provided to the affiliate is at a market rate of compensation, and that as a result of
the fees that are paid to the Company under this contract, the overall cost to the Company of its Human Resources department will be reduced.

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

In each of the three years ended December 31, 2010, 2009 and 2008, the Company incurred charges of $0.8 million related to rent on the Companys corporate office, from a trust of which William
H. Lyon is the sole beneficiary.

Charges Incurred Related to the Charter, Use and Sale of Aircraft.

Effective September 1, 2004, the Company entered into an aircraft consulting and management agreement with an
affiliate (the Affiliate) of General William Lyon to operate and manage the Companys aircraft. The terms of the agreement provide that the Affiliate shall consult and render its advice and management services to the Company with
respect to all functions necessary to the operation, maintenance and administration of the aircraft. The Companys business plan for the aircraft includes (i) use by Company executives for traveling on Company business to the
Companys divisional offices and other destinations, (ii) charter service to outside third parties and (iii) charter service to General William Lyon personally. Charter services for outside third parties are contracted for at market
rates. As compensation to the Affiliate for its management and consulting services under the agreement, the Company pays the Affiliate a fee equal to (i) the amount equal to 107% of compensation paid by the Affiliate for the pilots supplied
pursuant to the agreement, (ii) $50 per operating hour for the aircraft and (iii) $9,000 per month for hangar rent. In addition, all maintenance work, inspections and repairs performed by the Affiliate on the aircraft are charged to the
Company at the Affiliates published rates for maintenance, inspection and repairs in effect at the time such work is completed. The total expenses incurred by the Company and paid to the Affiliate under the agreement amounted to $0.8 million
and $1.6 million during the years ended December 31, 2009 and 2008, with no related fees earned during the year ended December 31, 2010.

Effective July 1, 2006, General William Lyon entered into a time sharing agreement (the Agreement) with the Company pertaining to his personal use of the aircraft. The agreement calls for
General William Lyon to reimburse the company for all costs incurred by the Company during his personal flights plus a surcharge on fuel consumption of two times the cost. Pursuant to the Agreement, the Company had earned revenue of $53,000 and
$368,000 for charter services provided to General William Lyon personally, for the years ended December 31, 2009 and 2008, respectively.

On September 3, 2009, Presley CMR, Inc., a California corporation (Presley CMR) and wholly owned subsidiary of California Lyon, entered into an Aircraft Purchase and Sale Agreement
(PSA) with an affiliate of General William Lyon to sell the aircraft described above. The PSA provides for an aggregate purchase price for the Aircraft of $8.3 million (which value was the appraised fair market value of the Aircraft),
which consists of: (i) cash in the amount of $2.1 million which was paid at closing and (ii) a promissory note from the affiliate in the amount of $6.2 million, which is included in receivables in the accompanying consolidated balance
sheet. The closing of this sale occurred on September 9, 2009. The Company recorded a loss on the sale of the Aircraft totaling $3.0 million, which is included in other loss in the accompanying statement of operations for the year ending
December 31, 2009.

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

On October 26, 2000, the Companys Board of Directors (with
Messrs. William Lyon and William H. Lyon abstaining) approved the purchase of 579 lots for a total purchase price of $12.6 million from an entity controlled by William Lyon and William H. Lyon. In addition to the purchase price, one-half of the
net profits in excess of six percent from the development are to be paid to the seller. As of December 31, 2004, all lots were purchased under this agreement. During the year ended December 31, 2007, $8.3 million was paid to the seller and
a total cumulative amount of $14.0 million has been paid to the seller as of December 31, 2010.

Certain Family
Relationships.

William H. Lyon, one of the Companys directors and the President and Chief Operating
Officer of the Company, is the son of General William Lyon. General William Lyon is the Companys Chairman of the Board of Directors and the Chief Executive Officer. Mr. Lyons compensation is disclosed in the Summary Compensation
Table above.

Terry A. Connelly, who is Senior Vice President and Director of Operations of the Companys
Nevada Division, is married to Mary J. Connelly, President of the Nevada Division. In 2010, Mr. Connelly received a base salary of $160,000 and a monthly car allowance of $400 from the Company. Mr. Connelly earned a bonus of $ 93,333 in
2010.



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Director Independence.

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

Nominating and Corporate Governance Committee.    The Company has a standing Nominating
and Corporate Governance Committee, which is chaired by Mr. Meruelo and consists of Messrs. Meruelo, Ammerman, Greene and Hunt. The Board has determined that all committee members are independent under standards established by the SEC and the
NYSE.

Audit Committee.    The Company has a standing Audit Committee, which
is chaired by Mr. Greene and consists of Messrs. Greene, Ammerman, Hunt and Meruelo. The Board has determined that all committee members are independent and financially literate under the standards established by the SEC and the NYSE. The Board
has determined that Mr. Greene is an audit committee financial expert as defined by the SEC.

Compensation Committee.    The Company has a standing Compensation Committee, which is
chaired by Mr. Hunt and consists of Messrs. Hunt, Ammerman, Greene, and Meruelo. The Board has determined that all committee members are independent under standards established by the SEC and the NYSE.



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

The fees for professional services provided by Windes & McClaughry in fiscal year 2010 and both Ernst &
Young and Windes & McClaughry in fiscal year 2009 were:



|             |  |      |         |  |      |   |         | 
|------------ |  | ---- | ------- |  | ---- | - | ------- | 
|Type of Fees |  | 2010 |         |  | 2009 |  
|Audit Fees   |  | $    | 298,000 |  |      | $ | 494,000 | 
|Tax Fees     |  |      | 25,000  |  |      |   | 25,000  | 
|             |  |      |         |  |      |   |         | 
|Total Fees   |  | $    | 323,000 |  |      | $ | 519,000 | 
|             |  |      |         |  |      |   |         | 

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

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

The Audit Committee considered the compatibility of the provision of other services by its registered public accountants
with the maintenance of their independence. The Audit Committee approved all audit and non-audit services provided by Windes & McClaughry in 2009 and 2010 and by Ernst & Young LLP in 2008 and 2009.



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##### Table of Contents

PART IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------

(a)(1)  Financial Statements

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



|                                                          |  |      |        | 
|--------------------------------------------------------- |  | ---- | ------ | 
|                                                          |  | Page |       
|William Lyon Homes                                        |  |      |        | 
|Reports of Independent Registered Public Accounting Firms |  |      | 84, 85 | 
|Consolidated Balance Sheets                               |  |      | 86     | 
|Consolidated Statements of Operations                     |  |      | 87     | 
|Consolidated Statements of Equity                         |  |      | 88     | 
|Consolidated Statements of Cash Flows                     |  |      | 89     | 
|Notes to Consolidated Financial Statements                |  |      | 91     | 

(2)  Financial Statement Schedules:

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

(3)  Listing of Exhibits:



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                    
|              | 
|3.1(2)        |  | Certificate of Incorporation of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                                    
|3.2(1)        |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                           
|3.3(13)       |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                           
|3.4(13)       |  | Certificate of Amendment of Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                      
|3.5(2)        |  | Bylaws of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                                                          
|4.1(11)       |  | Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee
(including form of notes and guarantees).                                                                                                                                                                                                             
|4.2(8)        |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S.
Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as
Trustee).   
|4.3(12)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank
National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as
Trustee).              
|4.4(3)        |  | Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee
(including form of notes and guarantees).                                                                                                                                                                                                           
|4.5(8)        |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S.
Bank National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as
Trustee). 
|4.6(12)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank
National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as
Trustee).            
|4.7(7)        |  | Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee
(including form of notes and guarantees).                                                                                                                                                                                                          
|4.8(8)        |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S.
Bank National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as
Trustee).



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                         
|              | 
|4.9(12)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank
National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as
Trustee).
|10.1(6)       |  | Revolving Line of Credit Loan Agreement, dated as of March 11, 2003, by and among Moffett Meadows Partners, LLC, a Delaware limited liability company, as
borrower, and California Bank & Trust, a California banking corporation, and the other financial institutions named therein, as lenders.                                                                                                  
|10.2(6)       |  | Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware
corporation.                                                                                                                                                                                                                                                       
|10.3(15)      |  | Senior Secured Term Loan Agreement dated as of October 20, 2009 by and between William Lyon Homes, Inc., (Borrower) and COLFIN WLH Funding, LLC,
as Administrative Agent (Admin Agent), COLFIN WLH Funding, LLC, as Initial Lender and Lead Arranger (COLFIN).                                                                                                                                
|10.4(9)       |  | Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.                                                                                                                                                                                                                                                              
|10.5(9)       |  | 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.                                                                                                                                                                                          
|10.6(9)       |  | Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and
effective November 5, 1999.                                                                                                                                                                                                               
|10.7(4)       |  | Option Agreement and Escrow Instructions between William Lyon Homes, Inc., a California corporation and Lathrop Investment, L.P., a California limited
partnership, dated as of October 24, 2000.                                                                                                                                                                                                   
|10.8(13)      |  | Description of 2007 Cash Bonus Plan.                                                                                                                                                                                                                                                                                                                                                                
|10.9(13)      |  | 2007 Senior Executive Bonus Plan.                                                                                                                                                                                                                                                                                                                                                                   
|10.10(10)     |  | Standard Industrial/Commercial Single-Tenant Lease  Net between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole
beneficiary.                                                                                                                                                                                                                                             
|10.11(5)      |  | The Presley Companies Non-Qualified Retirement Plan for Outside Directors.                                                                                                                                                                                                                                                                                                                          
|10.12(14)     |  | Third Extension and Modification agreement dated May 19, 2008, by and between Circle G at the Church Farm North Joint Venture, LLC, an Arizona limited
liability company, and California National Bank, a national banking association.                                                                                                                                                             
|10.13(16)     |  | Aircraft Purchase and Sale Agreement dated as of September 3, 2009 (Effective Date), by and between Presley CMR, Inc., and Martin Aviation, Inc.,
or its designee.                                                                                                                                                                                                                                
|10.14(16)     |  | Secured Promissory Note dated September 9, 2009 from Martin Aviation, Inc., a California corporation (Maker) payable to William Lyon Homes, Inc.,
a California corporation (Holder).                                                                                                                                                                                                            
|10.15(16)     |  | Aircraft Mortgage and Security Agreement between Martin Aviation, Inc., a California corporation and William Lyon Homes, Inc., dated as of September 9,
2009.                                                                                                                                                                                                                                       
|10.16(17)     |  | Project Completion Bonus Plan.                                                                                                                                                                                                                                                                                                                                                                      
|10.17(18)     |  | First Amendment to Senior Secured Term Loan Agreement dated as of March 18, 2011 by and between William Lyon Homes, Inc., (Borrower) and COLFIN
WLH Funding, LLC, as Administrative Agent (Admin Agent), COLFIN WLH Funding, LLC, as Initial Lender and Lead Arranger (COLFIN).                                                                                                               
|12.1(19)      |  | Statement of computation of ratio of earnings to fixed charges.                                                                                                                                                                                                                                                                                                                                     
|21.1(19)      |  | List of Subsidiaries of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                                 
|31.1(19)      |  | Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 
|31.2(19)      |  | Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 
|32.1(19)      |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of
2002.                                                                                                                                                                                                                                                  
|32.2(19)      |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of
2002.                                                                                                                                                                                                                                                  



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

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

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



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

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

|(6) |  | Previously filed as an exhibit to Amendment No. 3 to the Companys Registration Statement on Form S-4 (File No. 333-114691) filed
July 15, 2004 and incorporated herein by this reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed November 23, 2004 and incorporated herein by this
reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-4 (SEC Registration No. 333-121346) filed
December 16, 2004 and incorporated herein by this reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(11) |  | Previously filed as an exhibit to Amendment No. 1 to the Companys Registration Statement on Form S-4 (SEC Registration
No. 333-121346) filed January 10, 2005 and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed November 14, 2005 and incorporated herein by this
reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by
reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(14) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on May 28, 2008 and incorporated herein by reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------

|(15) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on October 22, 2009 and incorporated herein by reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|(16) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on September 10, 2009 and incorporated herein by
reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(17) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on September 20, 2010 and incorporated herein by
reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(18) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on March 21, 2011 and incorporated herein by reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|(19) |  | Filed herewith.
|---- |  | ---------------



81



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SIGNATURES

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



|             |  |  |  |                    |  |                                                                
|------------ |  |  |  | ------------------ |  | ---------------------------------------------------------------
|             |  |  |  | WILLIAM LYON HOMES
|             |  |  | 
|May 13, 2011 |  |  |  | By:                |  | /s/    COLIN T.
SEVERN                                         
|             |  |  |  |                    |  | Colin T. Severn                                                
|             |  |  |  |                    |  | Vice President, Chief Financial Officer
and Corporate Secretary

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



|                                               |  |                                                                                                              |  |            
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | -----------
|Name                                           |  | Title                                                                                                        |  | Date       
|                                               |  |                                                                                                             
|/S/    WILLIAM
LYON William Lyon               |  | Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)                    |  | May 6, 2011
|                                               |  |                                                                                                             
|/S/    WILLIAM H.
LYON William H. Lyon         |  | Director, President and Chief Operating Officer                                                              |  | May 6, 2011
|                                               |  |                                                                                                             
|/S/    DOUGLAS K.
AMMERMAN Douglas K. Ammerman |  | Director                                                                                                     |  | May 6, 2011
|                                               |  |                                                                                                             
|/S/    HAROLD H.
GREENE Harold H. Greene       |  | Director                                                                                                     |  | May 6, 2011
|                                               |  |                                                                                                             
|/S/    GARY H.
HUNT Gary H. Hunt               |  | Director                                                                                                     |  | May 6, 2011
|                                               |  |                                                                                                             
|/S/    ALEX
MERUELO Alex Meruelo               |  | Director                                                                                                     |  | May 6, 2011
|                                               |  |                                                                                                             
|/S/    COLIN T.
SEVERN Colin T. Severn         |  | Vice President, Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) |  | May 6, 2011



82



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INDEX TO FINANCIAL STATEMENTS



|                                                          |  |      |        | 
|--------------------------------------------------------- |  | ---- | ------ | 
|                                                          |  | Page |       
|William Lyon Homes                                        |  |      |        | 
|                                                          | 
|Reports of Independent Registered Public Accounting Firms |  |      | 84, 85 | 
|Consolidated Balance Sheets                               |  |      | 86     | 
|Consolidated Statements of Operations                     |  |      | 87     | 
|Consolidated Statements of Equity                         |  |      | 88     | 
|Consolidated Statements of Cash Flows                     |  |      | 89     | 
|Notes to Consolidated Financial Statements                |  |      | 91     | 

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.



83



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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors and Stockholders

William Lyon Homes

We have audited the accompanying consolidated
balance sheets of William Lyon Homes (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, equity and cash flows for each of the two years in the period ended December 31,
2010. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, 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 consolidated financial statements referred to above present fairly, in
all material respects, the financial position of William Lyon Homes as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2010, in conformity
with accounting principles generally accepted in the United States of America.

/S/    WINDES & MCCLAUGHRY

Irvine, California

May 13, 2011



84



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

William Lyon Homes

We have audited the accompanying consolidated
statements of operations, equity and cash flows of William Lyon Homes for the year ended December 31, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated results of the Companys operations and its cash flows for the year ended December 31, 2008 in conformity with U.S. generally accepted accounting principles.

/S/    ERNST & YOUNG LLP

Irvine, California

March 25, 2009,

except for the effects

of the restatement to adopt ASC 810-10

(formerly SFAS No. 160),

as to which the date is

March 29, 2010



85



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WILLIAM LYON HOMES

CONSOLIDATED BALANCE SHEETS

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



|                                                                                                                        |  |              |         |   |      |   |         | 
|----------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | 
|                                                                                                                        |  | December 31, |        
|                                                                                                                        |  | 2010         |         |   | 2009 |  
|ASSETS                                                                                                                  | 
|Cash and cash equivalents  Note 1                                                                                      |  | $            | 71,286  |   |      | $ | 117,587 | 
|Restricted cash  Note 1                                                                                                |  |              | 641     |   |      |   | 4,352   | 
|Receivables  Note 4                                                                                                    |  |              | 18,499  |   |      |   | 16,294  | 
|Income tax refunds receivable  Note 9                                                                                  |  |              |        |   |      |   | 106,989 | 
|Real estate inventories  Notes 2 and 5                                                                                 |  |              |         |   |      |   |         | 
|Owned                                                                                                                   |  |              | 488,906 |   |      |   | 523,336 | 
|Not owned                                                                                                               |  |              | 55,270  |   |      |   | 55,270  | 
|Property and equipment, less accumulated depreciation of $4,816 and $8,195 at December 31, 2010 and 2009,
respectively  |  |              | 1,230   |   |      |   | 1,673   | 
|Deferred loan costs                                                                                                     |  |              | 12,404  |   |      |   | 14,859  | 
|Other assets                                                                                                            |  |              | 768     |   |      |   | 19,739  | 
|                                                                                                                        |  |              |         |   |      |   |         | 
|                                                                                                                        |  | $            | 649,004 |   |      | $ | 860,099 | 
|                                                                                                                        |  |              |         |   |      |   |         | 
|LIABILITIES AND EQUITY                                                                                                  |  |              |         |   |      |   |         | 
|Accounts payable                                                                                                        |  | $            | 6,904   |   |      | $ | 11,046  | 
|Accrued expenses                                                                                                        |  |              | 41,722  |   |      |   | 45,294  | 
|Liabilities from inventories not owned                                                                                  |  |              | 55,270  |   |      |   | 55,270  | 
|Notes payable  Notes 6 and 7                                                                                           |  |              | 30,541  |   |      |   | 64,227  | 
|Senior Secured Term Loan due October 20, 2014  Notes 6 and 7                                                           |  |              | 206,000 |   |      |   | 206,000 | 
|75/8% Senior Notes due December 15, 2012  Notes 6 and 7                                                                |  |              | 66,704  |   |      |   | 67,204  | 
|103/4% Senior Notes due April 1, 2013  Notes 6 and 7                                                                   |  |              | 138,619 |   |      |   | 168,158 | 
|71/2% Senior Notes due February 15, 2014  Notes 6 and 7                                                                |  |              | 77,867  |   |      |   | 84,701  | 
|                                                                                                                        |  |              |         |   |      |   |         | 
|                                                                                                                        |  |              | 623,627 |   |      |   | 701,900 | 
|                                                                                                                        |  |              |         |   |      |   |         | 
|Commitments and contingencies  Note 11                                                                                 |  |              |         |   |      |   |         | 
|                                                                                                                        |  |             
|Equity:                                                                                                                 |  |              |         |   |      |   |         | 
|Stockholders equity  Note 8                                                                                           |  |              |         |   |      |   |         | 
|Common stock, par value $.01 per share; 3,000 shares authorized; 1,000 shares outstanding at December 31, 2010 and
2009 |  |              |        |   |      |   |        | 
|Additional paid-in capital                                                                                              |  |              | 48,867  |   |      |   | 48,867  | 
|(Accumulated deficit) Retained earnings                                                                                 |  |              | (35,053 | ) |      |   | 101,733 | 
|                                                                                                                        |  |              |         |   |      |   |         | 
|                                                                                                                        |  |              | 13,814  |   |      |   | 150,600 | 
|Non-controlling interest  Note 2                                                                                       |  |              | 11,563  |   |      |   | 7,599   | 
|                                                                                                                        |  |              |         |   |      |   |         | 
|                                                                                                                        |  |              | 25,377  |   |      |   | 158,199 | 
|                                                                                                                        |  |              |         |   |      |   |         | 
|                                                                                                                        |  | $            | 649,004 |   |      | $ | 860,099 | 
|                                                                                                                        |  |              |         |   |      |   |         | 

See accompanying notes.



86



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WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)



|                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                         |  | Year Ended December 31, |         
|                                                         |  | 2010                    |          |   | 2009 |   |          | 2008 | 
|Operating revenue                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|Home sales                                               |  | $                       | 266,865  |   |      | $ | 253,874  |      |  | $ | 468,452  |  
|Lots, land and other sales                               |  |                         | 17,204   |   |      |   | 21,220   |      |  |   | 39,512   |  
|Construction services  Note 1                           |  |                         | 10,629   |   |      |   | 34,149   |      |  |   | 18,114   |  
|                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|                                                         |  |                         | 294,698  |   |      |   | 309,243  |      |  |   | 526,078  |  
|                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Operating costs                                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Cost of sales  homes                                    |  |                         | (225,751 | ) |      |   | (219,486 | )    |  |   | (439,276 | )
|Cost of sales  lots, land and other                     |  |                         | (20,426  | ) |      |   | (131,640 | )    |  |   | (47,599  | )
|Impairment loss on real estate assets  Note 5           |  |                         | (111,860 | ) |      |   | (45,269  | )    |  |   | (135,311 | )
|Impairment loss on goodwill  Note 1                     |  |                         |         |   |      |   |         |      |  |   | (5,896   | )
|Construction services  Note 1                           |  |                         | (7,805   | ) |      |   | (28,486  | )    |  |   | (15,431  | )
|Sales and marketing                                      |  |                         | (19,746  | ) |      |   | (17,636  | )    |  |   | (40,441  | )
|General and administrative                               |  |                         | (25,129  | ) |      |   | (21,027  | )    |  |   | (27,645  | )
|Other  Note 10                                          |  |                         | (2,740   | ) |      |   | (6,580   | )    |  |   | (4,461   | )
|                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|                                                         |  |                         | (413,457 | ) |      |   | (470,124 | )    |  |   | (716,060 | )
|                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Equity in income (loss) of unconsolidated joint ventures |  |                         | 916      |   |      |   | (420     | )    |  |   | (3,877   | )
|                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Operating loss                                           |  |                         | (117,843 | ) |      |   | (161,301 | )    |  |   | (193,859 | )
|Gain on retirement of debt  Note 6                      |  |                         | 5,572    |   |      |   | 78,144   |      |  |   | 54,044   |  
|Interest expense, net of amounts capitalized  Note 6    |  |                         | (23,653  | ) |      |   | (35,902  | )    |  |   | (24,440  | )
|Other income (expense), net  Note 10                    |  |                         | 57       |   |      |   | (3,802   | )    |  |   | 579      |  
|                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Loss before benefit from income taxes                    |  |                         | (135,867 | ) |      |   | (122,861 | )    |  |   | (163,676 | )
|                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Benefit from income taxes  Note 9                       |  |                         | 412      |   |      |   | 101,908  |      |  |   | 41,592   |  
|                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Consolidated net loss                                    |  |                         | (135,455 | ) |      |   | (20,953  | )    |  |   | (122,084 | )
|Less: net (income) loss  non-controlling interest       |  |                         | (1,331   | ) |      |   | 428      |      |  |   | 10,446   |  
|                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Net loss attributable to William Lyon Homes              |  | $                       | (136,786 | ) |      | $ | (20,525  | )    |  | $ | (111,638 | )
|                                                         |  |                         |          |   |      |   |          |      |  |   |          |  

See accompanying notes.



87



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WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)



|                                                                                                  |        |              |   |        |                   |   |         |                                      |  |   |                         |  |  |       |          |   |  |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------------------- | ------ | ------------ | - | ------ | ----------------- | - | ------- | ------------------------------------ |  | - | ----------------------- |  |  | ----- | -------- | - |  | - | ------- | - |  | - | -------- | -
|                                                                                                  |        | Common Stock |   |        | AdditionalPaid-In |   |         | (AccumulatedDeficit)RetainedEarnings |  |   | Non-ControllingInterest |  |  | Total |         
|                                                                                                  | Shares |              |   | Amount |                   |   | Capital |                                      |  |   |                        
|Balance  December 31, 2007                                                                       |        |              | 1 |        |                   |   |        |                                      |  |   | 48,867                  |  |  |       | 233,896  |   |  |   | 56,009  |   |  |   | 338,772  |  
|Cancellation of consolidated land banking arrangement determined to be a variable interest entity |        |              |  |        |                   |   |        |                                      |  |   |                        |  |  |       |         |   |  |   | (3,186  | ) |  |   | (3,186   | )
|Cash contributions from members of consolidated entities, net                                     |        |              |  |        |                   |   |        |                                      |  |   |                        |  |  |       |         |   |  |   | 1,039   |   |  |   | 1,039    |  
|Net loss                                                                                          |        |              |  |        |                   |   |        |                                      |  |   |                        |  |  |       | (111,638 | ) |  |   | (10,446 | ) |  |   | (122,084 | )
|                                                                                                  |        |              |   |        |                   |   |         |                                      |  |   |                         |  |  |       |          |   |  |   |         |   |  |   |          |  
|                                                                                                  |        |              |   |        |                   |  
|Balance  December 31, 2008                                                                       |        |              | 1 |        |                   |   |        |                                      |  |   | 48,867                  |  |  |       | 122,258  |   |  |   | 43,416  |   |  |   | 214,541  |  
|Cancellation of consolidated land banking arrangement determined to be a variable interest entity |        |              |  |        |                   |   |        |                                      |  |   |                        |  |  |       |         |   |  |   | (27,684 | ) |  |   | (27,684  | )
|Cash distributions to members of consolidated entities, net                                       |        |              |  |        |                   |   |        |                                      |  |   |                        |  |  |       |         |   |  |   | (7,705  | ) |  |   | (7,705   | )
|Net loss                                                                                          |        |              |  |        |                   |   |        |                                      |  |   |                        |  |  |       | (20,525  | ) |  |   | (428    | ) |  |   | (20,953  | )
|                                                                                                  |        |              |   |        |                   |   |         |                                      |  |   |                         |  |  |       |          |   |  |   |         |   |  |   |          |  
|                                                                                                  |        |              |   |        |                   |  
|Balance  December 31, 2009                                                                       |        |              | 1 |        |                   |   |        |                                      |  |   | 48,867                  |  |  |       | 101,733  |   |  |   | 7,599   |   |  |   | 158,199  |  
|Cash contributions from members of consolidated entities, net                                     |        |              |  |        |                   |   |        |                                      |  |   |                        |  |  |       |         |   |  |   | 2,633   |   |  |   | 2,633    |  
|Net (loss) income                                                                                 |        |              |  |        |                   |   |        |                                      |  |   |                        |  |  |       | (136,786 | ) |  |   | 1,331   |   |  |   | (135,455 | )
|                                                                                                  |        |              |   |        |                   |   |         |                                      |  |   |                         |  |  |       |          |   |  |   |         |   |  |   |          |  
|                                                                                                  |        |              |   |        |                   |  
|Balance  December 31, 2010                                                                       |        |              | 1 |        |                   | $ |        |                                      |  | $ | 48,867                  |  |  | $     | (35,053  | ) |  | $ | 11,563  |   |  | $ | 25,377   |  
|                                                                                                  |        |              |   |        |                   |   |         |                                      |  |   |                         |  |  |       |          |   |  |   |         |   |  |   |          |  

See accompanying notes.



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WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                |  |                         |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                |  | Year Ended December 31, |         
|                                                                                |  | 2010                    |          |   | 2009 |   |          | 2008 | 
|Operating activities                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Consolidated net loss                                                           |  | $                       | (135,455 | ) |      | $ | (20,953  | )    |  | $ | (122,084 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                         |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                   |  |                         | 385      |   |      |   | 1,493    |      |  |   | 2,218    |  
|Impairment loss on real estate assets                                           |  |                         | 111,860  |   |      |   | 45,269   |      |  |   | 135,311  |  
|Impairment loss on goodwill                                                     |  |                         |         |   |      |   |         |      |  |   | 5,896    |  
|Equity in loss (income) of unconsolidated joint ventures                        |  |                         | (916     | ) |      |   | 420      |      |  |   | 3,877    |  
|Distributions of income from unconsolidated joint ventures                      |  |                         |         |   |      |   |         |      |  |   | 816      |  
|Gain on retirement of debt                                                      |  |                         | (5,572   | ) |      |   | (78,144  | )    |  |   | (54,044  | )
|Loss on sale of fixed asset                                                     |  |                         | 122      |   |      |   | 3,009    |      |  |   |         |  
|Benefit from income taxes                                                       |  |                         | (412     | ) |      |   | (101,908 | )    |  |   | (41,592  | )
|Net changes in operating assets and liabilities:                                |  |                         |          |   |      |   |          |      |  |   |          |  
|Restricted cash                                                                 |  |                         | 3,711    |   |      |   | 727      |      |  |   | (5,079   | )
|Receivables                                                                     |  |                         | (2,205   | ) |      |   | 19,879   |      |  |   | 9,628    |  
|Income tax refunds receivable                                                   |  |                         | 107,401  |   |      |   | 41,615   |      |  |   | 550      |  
|Real estate inventories  owned                                                 |  |                         | (66,317  | ) |      |   | 130,436  |      |  |   | 167,516  |  
|Deferred loan costs                                                             |  |                         | 3,333    |   |      |   | 1,720    |      |  |   | 2,501    |  
|Other assets                                                                    |  |                         | 15,898   |   |      |   | (7,658   | )    |  |   | 4,257    |  
|Accounts payable                                                                |  |                         | (4,142   | ) |      |   | (5,285   | )    |  |   | (24,559  | )
|Accrued expenses                                                                |  |                         | (3,572   | ) |      |   | (17,693  | )    |  |   | (4,799   | )
|                                                                                |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                       |  |                         | 24,119   |   |      |   | 12,927   |      |  |   | 80,413   |  
|                                                                                |  |                         |          |   |      |   |          |      |  |   |          |  
|Investing activities                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Net proceeds from sale of fixed asset                                           |  |                         |         |   |      |   | 2,063    |      |  |   |         |  
|Investment in and advances to unconsolidated joint ventures                     |  |                         | (194     | ) |      |   | (194     | )    |  |   | (3,003   | )
|Distributions of capital from unconsolidated joint ventures                     |  |                         | 4,183    |   |      |   | 840      |      |  |   | 212      |  
|Purchases of property and equipment                                             |  |                         | (64      | ) |      |   | (23      | )    |  |   | (529     | )
|                                                                                |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                             |  |                         | 3,925    |   |      |   | 2,686    |      |  |   | (3,320   | )
|                                                                                |  |                         |          |   |      |   |          |      |  |   |          |  
|Financing activities                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Proceeds from borrowings on notes payable, net                                  |  |                         | 7,087    |   |      |   | 113,467  |      |  |   | 591,427  |  
|Principal payments on notes payable                                             |  |                         | (52,797  | ) |      |   | (187,718 | )    |  |   | (659,021 | )
|Net proceeds from Senior Secured Term Loan                                      |  |                         |         |   |      |   | 193,904  |      |  |   |         |  
|Net cash paid for repurchase of Senior Notes                                    |  |                         | (31,268  | ) |      |   | (76,991  | )    |  |   | (16,718  | )
|Non-controlling interest contributions (distributions), net                     |  |                         | 2,633    |   |      |   | (7,705   | )    |  |   | 1,039    |  
|                                                                                |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash (used in) provided by financing activities                             |  |                         | (74,345  | ) |      |   | 34,957   |      |  |   | (83,273  | )
|                                                                                |  |                         |          |   |      |   |          |      |  |   |          |  
|Net (decrease) increase in cash and cash equivalents                            |  |                         | (46,301  | ) |      |   | 50,570   |      |  |   | (6,180   | )
|Cash and cash equivalents  beginning of year                                   |  |                         | 117,587  |   |      |   | 67,017   |      |  |   | 73,197   |  
|                                                                                |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents  end of year                                         |  | $                       | 71,286   |   |      | $ | 117,587  |      |  | $ | 67,017   |  
|                                                                                |  |                         |          |   |      |   |          |      |  |   |          |  

See accompanying notes



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WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)



|                                                                                                          |  |                         |        |  |      |   |         |      |  |   |        | 
|--------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ |  | ---- | - | ------- | ---- |  | - | ------ | 
|                                                                                                          |  | Year Ended December 31, |       
|                                                                                                          |  | 2010                    |        |  | 2009 |   |         | 2008 | 
|Supplemental disclosures of non-cash activities:                                                          |  |                         |        |  |      |   |         |      |  |   |        | 
|Decrease in real estate inventories owned and related notes payable in variable interest entity           |  | $                       |       |  |      | $ | 56,151  |      |  | $ |       | 
|                                                                                                          |  |                         |        |  |      |   |         |      |  |   |        | 
|Issuance of note receivable related to sale of aircraft                                                   |  | $                       |       |  |      | $ | 6,188   |      |  | $ |       | 
|                                                                                                          |  |                         |        |  |      |   |         |      |  |   |        | 
|Reduction of notes payable to secure land option agreement                                                |  | $                       |       |  |      | $ |        |      |  | $ | 4,709  | 
|                                                                                                          |  |                         |        |  |      |   |         |      |  |   |        | 
|Net (decrease) increase in real estate inventories  not owned and liabilities from inventories not
owned |  | $                       | 10,652 |  |      | $ | (24,809 | )    |  | $ | 33,316 | 
|                                                                                                          |  |                         |        |  |      |   |         |      |  |   |        | 
|Net (decrease) increase in real estate inventories  not owned and non-controlling interest               |  | $                       |       |  |      | $ | (27,684 | )    |  | $ | 3,186  | 
|                                                                                                          |  |                         |        |  |      |   |         |      |  |   |        | 

See accompanying notes.



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies

Operations

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

Basis of Presentation

The consolidated financial statements include the accounts of the Company and all majority-owned and controlled subsidiaries and joint ventures, and certain joint ventures and other entities which have
been determined to be variable interest entities in which the Company is considered the primary beneficiary (see Note 2). Investments in joint ventures which have not been determined to be variable interest entities in which the Company is
considered the primary beneficiary are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the Company). The accounting policies of the joint
ventures are substantially the same as those of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.

Financial Condition and Liquidity

During the year ended
December 31, 2010, the Company incurred net loss of $136.8 million, due primarily to non-cash impairment loss on real estate assets of $111.9 million. As discussed in Note 6 to Notes to Consolidated Financial Statements, the Company has
certain financial covenants with its lenders, including a tangible net worth covenant of $75.0 million, relating to the Senior Secured Term Loan due 2014 (the Term Loan) and the Senior Notes. As of December 31, 2010, the tangible net
worth of the Company was $13.0 million.

Related to the Companys Term Loan and as reported on the
Companys current report on Form 8-K dated March 18, 2011, the Company reached an agreement with the Lenders under the Senior Secured Term Loan Agreement (the Term Loan Agreement) that amended the Term Loan to permit the
Companys tangible net worth to fall below $75.0 million for two consecutive quarters. In addition, as reported on the Companys current report on Form 8-K dated April 21, 2011, the Company reached a subsequent agreement with the lenders
under the Term Loan to waive any non-compliance with the tangible net worth covenant and with certain other technical requirements through July 19, 2011, subject to certain terms and conditions. Management of the Company believes that it is in the
best interests of the lenders of the Term Loan to extend the waiver and work with the Company on a solution, if the Companys tangible net worth remains below $75.0 million on July 19, 2011.

Under the Senior Notes Indentures, if the Companys consolidated tangible net worth falls below $75.0 million for
any two consecutive fiscal quarters, California Lyon will be required to make an offer to purchase up to 10% of each class of Senior Notes originally issued at a purchase price equal to 100% of the principal amount, plus accrued and unpaid interest,
if any. Any such offer to purchase must be made within 65 days after the second quarter ended for which the Companys tangible net worth is less than $75.0 million. However, California Lyon may reduce the principal amount of the notes to be
purchased by the aggregate principal amount of all notes previously redeemed.

The Company has determined and
calculated that California Lyons redemptions of Senior Notes during the period from 2008 to 2010 would reduce California Lyons repurchase obligations (assuming that the Companys consolidated tangible net worth is less than $75.0
million for the quarter ended March 31, 2011), as follows: California Lyon would not be obligated to repurchase any of the 7 5/8% Senior Notes, as a result of California Lyons previous redemption of $83.3 million in aggregate principal amount
of the 7 5/8% Senior Notes; California Lyon would not be obligated to repurchase any of the 10 3/4% Senior Notes, as a result of California Lyons previous redemption of $110.7 million in aggregate principal amount of the 10 3/4% Senior Notes;
and California Lyon would not be obligated to repurchase any of the 7 1/2% Senior Notes, until March 13, 2013, at which time the Company would be required to offer to purchase $2.9 million of principal outstanding, as a result of California
Lyons previous redemption of $72.1 million in aggregate principal amount of the 7 1/2% Senior Notes.

The ability of the Company to meet its obligations on its indebtedness will depend to a large degree on its future
performance. The Company cannot be certain that its cash flow will be sufficient to allow it to pay principal and interest on its debt, support its operations and meet its other obligations. In addition, the Company cannot be certain that it will be
able to comply with the financial covenants under its debt obligations. If the Company is not able to meet any of the foregoing obligations, it may be required to refinance all or part of its existing debt, sell assets or borrow more money. The
Company may not be able to do so on terms acceptable to it, if at all. In addition, the terms of existing or future indentures and credit or other agreements governing the Term Loan, Senior Note obligations and other indebtedness may restrict the
Company from pursuing any of these alternatives.

The management of the Company, with the approval of the
board of directors, has retained the services of an outside consulting firm to institute and implement all required programs to accomplish managements objectives and to work with management in the analysis and process of renegotiating,
refinancing, repaying or restructuring debt maturities and loan terms, including covenants. In addition, the Company is currently working through the process of requesting a financing proposal from the investment banking community. The Company has
requested proposals for a debt financing to use in some combination of debt refinance or capital restructuring of the Term Loan and the Senior Notes.

The Company believes the debt markets are a viable option due to the growing demand for high yield paper in 2011, according to a publication by a global investment bank (unaudited), as evidenced by $105.8
billion in high yield paper issued through April 2011 in the US Market; 16% more than had been placed through the same time period in 2010. For the year ended December 31, 2010, high yield paper saw a record $259.3 billion placed in the US Market.
Additionally, high yield mutual funds have reported year to date 2011 inflows of $9.0 billion after 2010 inflows of $12.2 billion. The Company has also identified other competitors that received financing to repay or extend existing maturities.

Management of the Company has analyzed its liquidity through April 2012 based on its current capital
structure and existing cash forecast as well as factoring in the potential of acceleration of the Term Loan. Management believes it has adequate sources of liquidity to fund the Company and meet its obligations for at least the next year, from the
date of this filing. Also, the Company is evaluating sales of certain real estate inventories to generate the cash necessary to repay the Term Loan, should an extension not be reached. The Companys real estate inventory balance at December 31,
2010 is $488.9 million.



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Real Estate Inventories and Related Indebtedness

Real estate inventories are carried at cost net of impairment losses, if any. Real estate inventories consist primarily of
land deposits, raw land, lots under development, finished lots, homes under construction, completed homes and model homes of real estate projects. All direct and indirect land costs, offsite and onsite improvements and applicable interest and other
carrying charges are capitalized to real estate projects during periods when the project is under development. Land, offsite costs and all other common costs are allocated to land parcels benefited based upon relative fair values before
construction. Onsite construction costs and related carrying charges (principally interest and property taxes) are allocated to the individual homes within a phase based upon the relative sales value of the homes. The Company relieves its
accumulated real estate inventories through cost of sales for the estimated cost of homes sold. Selling expenses and other marketing costs are expensed in the period incurred. A provision for warranty costs relating to the Companys limited
warranty plans is included in cost of sales and accrued expenses at the time the sale of a home is recorded. The Company generally reserves one percent of the sales price of its homes against the possibility of future charges relating to its
one-year limited warranty and similar potential claims. Factors that affect the Companys warranty liability include the number of homes under warranty, historical and anticipated rates of warranty claims, and cost per claim. The Company
periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary. Changes in the Companys warranty liability during the years ended December 31 are as follows (in thousands):



|                                                                |  |              |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                |  | December 31, |       
|                                                                |  | 2010         |        |   | 2009 |   |        | 2008 | 
|Warranty liability, beginning of year                           |  | $            | 21,365 |   |      | $ | 26,394 |      |  | $ | 30,048 |  
|Warranty provision during year                                  |  |              | 2,574  |   |      |   | 2,429  |      |  |   | 5,040  |  
|Warranty payments during year                                   |  |              | (8,277 | ) |      |   | (8,727 | )    |  |   | (8,853 | )
|Warranty charges related to pre-existing warranties during year |  |              | 679    |   |      |   | 1,269  |      |  |   | 159    |  
|                                                                |  |              |        |   |      |   |        |      |  |   |        |  
|Warranty liability, end of year                                 |  | $            | 16,341 |   |      | $ | 21,365 |      |  | $ | 26,394 |  
|                                                                |  |              |        |   |      |   |        |      |  |   |        |  

Interest incurred under the Term Loan, the 75/8% Senior Notes due 2012 (the  75/8% Senior Notes), 103/4% Senior Notes due 2013 (the 103/4% Senior Notes), 71/2% Senior Notes due 2014 (the 71/2% Senior Notes and, together with the 75/8% Senior Notes and the 103/4% Senior Notes, the Senior Notes) and other notes
payable, as more fully discussed in Note 6 of Notes to Consolidated Financial Statements, is capitalized to qualifying real estate projects under development. Any additional interest charges related to real estate projects not under
development are expensed in the period incurred. During the years ended December 31, 2010 and 2009, the Company recorded $23.7 million and $35.9 million, respectively, of interest expense, due to a decrease in real estate assets which qualify
for interest capitalization relative to the debt outstanding.

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives ranging from three to fifteen years. Leasehold improvements are stated at cost
and are amortized using the straight-line method over the shorter of either their estimated useful lives or term of the lease. As more fully discussed in Note 10, the Company owned an aircraft which was depreciated using the straight-line method
over an estimated useful life of fifteen years. This aircraft was sold on September 9, 2009.

Deferred Loan Costs

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

Goodwill

The amount paid for business acquisitions over the net fair value of assets acquired and liabilities assumed is reflected
as goodwill, which is subject to FASB ASC Topic 350, Intangibles  Goodwill and Other. The Company reviewed goodwill for impairment on an annual basis or when indicators of impairment existed. Evaluating goodwill for impairment involved
the determination of the fair value of the Companys reporting units in which the Company had recorded goodwill. A reporting unit is a component of an operating segment for which discrete financial information is available and reviewed by the
Companys management on a regular basis. Inherent in the determination of fair value are judgments and assumptions, including the interpretation of current economic conditions and market valuations.

Due to deterioration in market conditions, the Company recorded an impairment charge on goodwill of $5.9 million during
the year ended December 31, 2008. As of December 31, 2010 and 2009 there is no goodwill recorded on the Companys accompanying consolidated balance sheet.



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Sales and Profit Recognition

A sale is recorded and profit recognized when a sale is consummated, the buyers initial and continuing investments
are adequate, any receivables are not subject to future subordination, and the usual risks and rewards of ownership have been transferred to the buyer in accordance with the provisions of FASB ASC Topic 360-20, Property, Plant and Equipment, Real
Estate Sales. When it is determined that the earnings process is not complete, profit is deferred for recognition in future periods.

Construction Services

The Company accounts for
construction management agreements using the Percentage of Completion Method in accordance with FASB ASC Topic 605 Revenue Recognition. Under ASC 605, the Company records revenues and expenses as work on a contract progresses, and
based on the percentage of costs incurred to date compared to the total estimated costs of the contract. Based on the provisions of ASC 605, the Company has recorded construction services revenues and expenses of $10.6 million and $7.8 million
respectively for the year ended December 31, 2010 and $34.1 million and $28.5 million respectively, for the year ended December 31, 2009, in the accompanying consolidated statement of operations.

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

Financial Instruments

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

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

Cash and Cash Equivalents

Short-term investments with a
maturity of three months or less when purchased are considered cash equivalents. The Companys cash and cash equivalents balance exceeds federally insurable limits as of December 31, 2010. The Company monitors the cash balances in its
operating accounts and adjusts the cash balances as appropriate; however, these cash balances could be negatively impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date,
the Company has experienced no loss or lack of access to cash in its operating accounts.

Restricted Cash

Restricted cash consists of deposits made by the Company to a bank account as collateral for the use of letters of credit
to guarantee the Companys financial obligations under certain land banking arrangements and other contractual arrangements in the normal course of business. Under the terms of the Term Loan disclosed in Note 6, all of the Companys
standby letters of credit are secured by cash.



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Use of Estimates

The preparation of the Companys financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 2010 and 2009 and revenues and expenses for each of the three years in the period ended
December 31, 2010. Accordingly, actual results could differ from those estimates. The significant accounting policies using estimates include real estate inventories and cost of sales, impairment of real estate inventories, warranty reserves,
loss contingencies, sales and profit recognition, and accounting for variable interest entities. The current economic environment increases the uncertainty inherent in these estimates and assumptions.

Codification

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

Subsequent Events

The Company follows the guidance in ASC Topic 855. Subsequent Events (ASC 855), which provides guidance to establish general standards of accounting for and disclosures of events that
occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 sets forth (i) the period after the balance sheet date during which management of a reporting entity evaluate events or
transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial
statements, and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. ASC 855 became effective for interim periods ending after June 15, 2009. Pursuant to ASC 855 the
Companys management has evaluated subsequent events through the date that the consolidated financial statements were issued for the period ended December 31, 2010.

Impact of New Accounting Pronouncements

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

Adoption of New Accounting Standard Restating Noncontrolling Interest

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



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



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



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



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Reclassifications

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

Note 2  Variable Interest Entities and Non-controlling Interests

The FASB issued guidance now codified as ASC 810, Consolidation, which addresses the consolidation of variable
interest entities (VIEs). Under this guidance, arrangements that are not controlled through voting or similar rights are accounted for as VIEs. An enterprise is required to consolidate a VIE if it is the primary beneficiary of the VIE.
The primary beneficiary is an enterprise that has the power to direct the activities of the VIE that most significantly impact its economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could be
potentially significant to the VIE.

A VIE is created when (i) the equity investment at risk is not
sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity through
voting or similar rights, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur.

Based on the provisions of this guidance, the Company has concluded that under certain circumstances when the Company
(i) enters into option agreements for the purchase of land or lots from an entity and pays a non-refundable deposit, (ii) enters into land banking arrangements or (iii) enters into arrangements with a financial partner for the
formation of joint ventures which engage in homebuilding and land development activities, a VIE may be created under condition (ii) (b) or (c) of the previous paragraph. The Company may be deemed to have provided subordinated
financial support, which refers to variable interests that will absorb some or all of an entitys expected losses if they occur. For each VIE created, in order to determine if the Company is the primary beneficiary, the Company considers
various factors including, but not limited to, voting rights, risks, involvement in the operations of the VIE, ability to make major decisions, contractual obligations including distributions of income and loss, and computations of expected losses
and residual returns based on the probability of future cash flow. If the Company has been determined to be the primary beneficiary of the VIE, the assets, liabilities and operations of the VIE are consolidated with the Companys financial
statements.

Joint Ventures

Certain joint ventures have been determined to be VIEs under ASC 810 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these VIEs have been
consolidated with the Companys financial statements. The Company did not recognize any gain or loss on initial consolidation of the VIE since the joint ventures were previously accounted for on an unconsolidated basis using the equity method
of accounting.

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

As
of December 31, 2010, the assets and liabilities of the consolidated VIEs totaled $15.4 million and $0.8 million, respectively. In addition, the Companys interest in the consolidated VIEs is $3.1 million and the members interest in
the consolidated VIEs is $11.6 million, which is reported as non-controlling interest on the accompanying consolidated balance sheet.

As of December 31, 2009, the assets and liabilities of the consolidated VIEs totaled $13.5 million and $2.1 million, respectively. In addition, the Companys interest in the consolidated VIEs
was $3.7 million and the members interest in the consolidated VIEs was $7.6 million, which is reported as non-controlling interest on the accompanying consolidated balance sheet.

Land Banking Arrangements

The Company enters into purchase agreements with various land sellers. As a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Companys available cash or
other corporate financing sources and limiting the Companys risk, the Company transfers the Companys right in such purchase agreements to entities owned by



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third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the previous land being purchased.
The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit of 15% to 25% of the total purchase price. The Company is under no obligation to purchase the
balance of the lots, but would forfeit remaining deposits and could be subject to penalties if the lots were not purchased. The Company does not have legal title to these entities or their assets and has not guaranteed their liabilities. These land
banking arrangements help the Company manage the financial and market risk associated with land holdings. FASB ASC Topic 810, requires the consolidation of the assets, liabilities and operations of the Companys land banking arrangements that
are VIEs, of which none existed at December 31, 2010.

The Company participates in one land banking
arrangement, which is not a VIE in accordance with FASB ASC Topic 810, but is consolidated in accordance with FASB ASC Topic 470, Debt.Under the provisions of FASB ASC Topic 470, the Company has determined it is economically compelled, based
on certain factors, to purchase the land in the land banking arrangement. The Company has recorded the remaining purchase price of the land of $55.3 million, which is included in real estate inventories not owned and liabilities from inventories not
owned in the accompanying consolidated balance sheet as of December 31, 2010.

Summary information with
respect to the Companys consolidated land banking arrangement is as follows as of December 31, 2010 (dollars in thousands):



|                                                      |  |   |         | 
|----------------------------------------------------- |  | - | ------- | 
|Total number of land banking projects                 |  |   | 1       | 
|                                                      |  |   |         | 
|Total number of lots                                  |  |   | 625     | 
|                                                      |  |   |         | 
|Total purchase price                                  |  | $ | 161,465 | 
|                                                      |  |   |         | 
|Balance of lots still under option and not purchased: |  |   |         | 
|Number of lots                                        |  |   | 248     | 
|                                                      |  |   |         | 
|Purchase price                                        |  | $ | 55,270  | 
|                                                      |  |   |         | 
|Forfeited deposits if lots are not purchased          |  | $ | 25,234  | 
|                                                      |  |   |         | 

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

Note 3  Segment Information

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

Operating segments are defined as components of an enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Companys chief executive officer and chief operating officer have been identified as the chief operating
decision makers. The Companys chief operating decision makers direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.

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



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

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



|                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|--------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                        |  | Year Ended December 31, |         
|                                        |  | 2010                    |          |   | 2009 |   |          | 2008 | 
|Homebuilding revenues:                  |  |                         |          |   |      |   |          |      |  |   |          |  
|Southern California                     |  | $                       | 206,241  |   |      | $ | 179,282  |      |  | $ | 323,446  |  
|Northern California                     |  |                         | 56,095   |   |      |   | 43,211   |      |  |   | 95,084   |  
|Arizona                                 |  |                         | 16,595   |   |      |   | 51,215   |      |  |   | 49,187   |  
|Nevada                                  |  |                         | 15,767   |   |      |   | 35,535   |      |  |   | 58,361   |  
|                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|Total homebuilding revenues             |  | $                       | 294,698  |   |      | $ | 309,243  |      |  | $ | 526,078  |  
|                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|                                        | 
|                                        |  | Year Ended December 31, |         
|                                        |  | 2010                    |          |   | 2009 |   |          | 2008 | 
|Homebuilding pretax (loss) income:      |  |                         |          |   |      |   |          |      |  |   |          |  
|Southern California                     |  | $                       | (83,176  | ) |      | $ | (57,716  | )    |  | $ | (74,908  | )
|Northern California                     |  |                         | (41      | ) |      |   | (37,853  | )    |  |   | (68,913  | )
|Arizona                                 |  |                         | (26,887  | ) |      |   | (21,451  | )    |  |   | (17,746  | )
|Nevada                                  |  |                         | (21,449  | ) |      |   | (70,915  | )    |  |   | (37,265  | )
|Corporate                               |  |                         | (4,314   | ) |      |   | 65,074   |      |  |   | 35,256   |  
|                                        |  |                         |          |   |      |   |          |      |  |   |          |  
|Total homebuilding pretax (loss) income |  | $                       | (135,867 | ) |      | $ | (122,861 | )    |  | $ | (163,676 | )
|                                        |  |                         |          |   |      |   |          |      |  |   |          |  

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



|                      |  |                              |        |  |                    |   |        |         |  |   |        |  |  |       |        |  |  |   |         | 
|--------------------- |  | ---------------------------- | ------ |  | ------------------ | - | ------ | ------- |  | - | ------ |  |  | ----- | ------ |  |  | - | ------- | 
|                      |  | Year Ended December 31, 2010 |       
|                      |  | SouthernCalifornia           |        |  | NorthernCalifornia |   |        | Arizona |  |   | Nevada |  |  | Total |       
|Inventory impairments |  | $                            | 70,801 |  |                    | $ | 3,103  |         |  | $ | 22,409 |  |  | $     | 15,547 |  |  | $ | 111,860 | 
|                      |  |                              |        |  |                    |   |        |         |  |   |        |  |  |       |        |  |  |   |         | 
|                      | 
|                      |  | Year Ended December 31, 2009 |       
|                      |  | SouthernCalifornia           |        |  | NorthernCalifornia |   |        | Arizona |  |   | Nevada |  |  | Total |       
|Inventory impairments |  | $                            | 19,518 |  |                    | $ | 6,144  |         |  | $ |       |  |  | $     | 19,607 |  |  | $ | 45,269  | 
|                      |  |                              |        |  |                    |   |        |         |  |   |        |  |  |       |        |  |  |   |         | 
|                      | 
|                      |  | Year Ended December 31, 2008 |       
|                      |  | SouthernCalifornia           |        |  | NorthernCalifornia |   |        | Arizona |  |   | Nevada |  |  | Total |       
|Inventory impairments |  | $                            | 39,925 |  |                    | $ | 51,457 |         |  | $ | 14,256 |  |  | $     | 29,673 |  |  | $ | 135,311 | 
|Goodwill impairments  |  |                              | 4,831  |  |                    |   | 1,065  |         |  |   |       |  |  |       |       |  |  |   | 5,896   | 
|                      |  |                              |        |  |                    |   |        |         |  |   |        |  |  |       |        |  |  |   |         | 
|Total impairments     |  | $                            | 44,756 |  |                    | $ | 52,522 |         |  | $ | 14,256 |  |  | $     | 29,673 |  |  | $ | 141,207 | 
|                      |  |                              |        |  |                    |   |        |         |  |   |        |  |  |       |        |  |  |   |         | 



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



|                                             |  |                              |         |   |                       |   |         |            |  |   |           |   |  |       |         |   |  |   |          |  
|-------------------------------------------- |  | ---------------------------- | ------- | - | --------------------- | - | ------- | ---------- |  | - | --------- | - |  | ----- | ------- | - |  | - | -------- | -
|                                             |  | Year Ended December 31, 2010 |        
|                                             |  | SouthernCalifornia(1)        |         |   | NorthernCalifornia    |   |         | Arizona    |  |   | Nevada(1) |   |  | Total |        
|(Loss) gain on sales of lots, land and other |  |                              |         |   |                       |   |         |            |  |   |           |   |  |       |         |   |  |   |          |  
|Operating revenue                            |  | $                            |        |   |                       | $ | 17,204  |            |  | $ |          |   |  | $     |        |   |  | $ | 17,204   |  
|Operating costs                              |  |                              | (6,001  | ) |                       |   | (14,334 | )          |  |   |          |   |  |       | (91     | ) |  |   | (20,426  | )
|                                             |  |                              |         |   |                       |   |         |            |  |   |           |   |  |       |         |   |  |   |          |  
|Loss on sales of lots, land and other        |  | $                            | (6,001  | ) |                       | $ | 2,870   |            |  | $ |          |   |  | $     | (91     | ) |  | $ | (3,222   | )
|                                             |  |                              |         |   |                       |   |         |            |  |   |           |   |  |       |         |   |  |   |          |  
|                                             | 
|                                             |  | Year Ended December 31, 2009 |        
|                                             |  | SouthernCalifornia           |         |   | NorthernCalifornia(1) |   |         | Arizona    |  |   | Nevada    |   |  | Total |        
|Loss on sales of lots, land and other        |  |                              |         |   |                       |   |         |            |  |   |           |   |  |       |         |   |  |   |          |  
|Operating revenue                            |  | $                            | 3,250   |   |                       | $ |        |            |  | $ | 11,595    |   |  | $     | 6,375   |   |  | $ | 21,220   |  
|Operating costs                              |  |                              | (27,294 | ) |                       |   | (29,410 | )          |  |   | (25,588   | ) |  |       | (49,348 | ) |  |   | (131,640 | )
|                                             |  |                              |         |   |                       |   |         |            |  |   |           |   |  |       |         |   |  |   |          |  
|Loss on sales of lots, land and other        |  | $                            | (24,044 | ) |                       | $ | (29,410 | )          |  | $ | (13,993   | ) |  | $     | (42,973 | ) |  | $ | (110,420 | )
|                                             |  |                              |         |   |                       |   |         |            |  |   |           |   |  |       |         |   |  |   |          |  
|                                             | 
|                                             |  | Year Ended December 31, 2008 |        
|                                             |  | SouthernCalifornia           |         |   | NorthernCalifornia    |   |         | Arizona(1) |  |   | Nevada    |   |  | Total |        
|Loss on sales of lots, land and other        |  |                              |         |   |                       |   |         |            |  |   |           |   |  |       |         |   |  |   |          |  
|Operating revenue                            |  | $                            | 24,721  |   |                       | $ | 14,791  |            |  | $ |          |   |  | $     |        |   |  | $ | 39,512   |  
|Operating costs                              |  |                              | (30,780 | ) |                       |   | (16,036 | )          |  |   | (783      | ) |  |       |        |   |  |   | (47,599  | )
|                                             |  |                              |         |   |                       |   |         |            |  |   |           |   |  |       |         |   |  |   |          |  
|Loss on sales of lots, land and other        |  | $                            | (6,059  | ) |                       | $ | (1,245  | )          |  | $ | (783      | ) |  | $     |        |   |  | $ | (8,087   | )
|                                             |  |                              |         |   |                       |   |         |            |  |   |           |   |  |       |         |   |  |   |          |  



|(1) | Consists of write-off of land option deposits and pre-acquisition costs.
|--- | ------------------------------------------------------------------------



|                          |  |              |         |  |      |   |         | 
|------------------------- |  | ------------ | ------- |  | ---- | - | ------- | 
|                          |  | December 31, |        
|                          |  | 2010         |         |  | 2009 |  
|Homebuilding assets:      |  |              |         |  |      |   |         | 
|Southern California       |  | $            | 239,510 |  |      | $ | 324,728 | 
|Northern California       |  |              | 60,542  |  |      |   | 38,383  | 
|Arizona                   |  |              | 194,635 |  |      |   | 172,518 | 
|Nevada                    |  |              | 58,827  |  |      |   | 60,764  | 
|Corporate(1)              |  |              | 95,490  |  |      |   | 263,706 | 
|                          |  |              |         |  |      |   |         | 
|Total homebuilding assets |  | $            | 649,004 |  |      | $ | 860,099 | 
|                          |  |              |         |  |      |   |         | 



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

Note 4  Receivables

Receivables consist of the
following (in thousands):



|                                                                                                                   |  |              |        |  |      |   |        | 
|------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------ |  | ---- | - | ------ | 
|                                                                                                                   |  | December 31, |       
|                                                                                                                   |  | 2010         |        |  | 2009 |  
|Secured promissory note from affiliate, sale of aircraft                                                           |  | $            | 6,188  |  |      | $ | 6,188  | 
|Development costs receivable from municipality                                                                     |  |              | 3,100  |  |      |   | 3,100  | 
|Construction management fee receivable                                                                             |  |              | 779    |  |      |   | 2,668  | 
|Escrow proceeds receivable                                                                                         |  |              | 4,328  |  |      |   | 1,173  | 
|First trust deed mortgage notes receivable, pledged as collateral for revolving mortgage warehouse credit
facility |  |              | 316    |  |      |   | 320    | 
|Property tax refund receivable                                                                                     |  |              | 1,173  |  |      |   |       | 
|Other receivables                                                                                                  |  |              | 2,615  |  |      |   | 2,845  | 
|                                                                                                                   |  |              |        |  |      |   |        | 
|                                                                                                                   |  | $            | 18,499 |  |      | $ | 16,294 | 
|                                                                                                                   |  |              |        |  |      |   |        | 



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

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



|                                       |  |              |         |  |      |   |         | 
|-------------------------------------- |  | ------------ | ------- |  | ---- | - | ------- | 
|                                       |  | December 31, |        
|                                       |  | 2010         |         |  | 2009 |  
|Inventories owned: (1)                 |  |              |         |  |      |   |         | 
|Land deposits                          |  | $            | 27,939  |  |      | $ | 33,582  | 
|Land and land under development        |  |              | 298,677 |  |      |   | 334,877 | 
|Homes completed and under construction |  |              | 114,592 |  |      |   | 100,795 | 
|Model homes                            |  |              | 47,698  |  |      |   | 54,082  | 
|                                       |  |              |         |  |      |   |         | 
|Total                                  |  | $            | 488,906 |  |      | $ | 523,336 | 
|                                       |  |              |         |  |      |   |         | 
|Inventories not owned: (2)             |  |              |         |  |      |   |         | 
|Other land options contracts           |  | $            | 55,270  |  |      | $ | 55,270  | 
|                                       |  |              |         |  |      |   |         | 
|Total inventories not owned            |  | $            | 55,270  |  |      | $ | 55,270  | 
|                                       |  |              |         |  |      |   |         | 



|(1) | Beginning in 2008, the Company temporarily suspended all development, sales and marketing activities at certain of its projects which were in
various stages of development. Management of the Company concluded that this strategy was necessary under the prevailing market conditions and would allow the Company to market the properties at some future time when market conditions may have
improved. Certain of these projects were restarted in 2010; and, as markets continue to improve, management continues to evaluate and analyze the marketplace to potentially activate temporarily suspended projects in 2011 and beyond. The Company has
incurred costs related to these certain projects of $72.3 million as of December 31, 2010, of which $31.1 million is included in Land and land under development, $23.6 million is included in Homes completed and under construction and $17.6
million is included in Model homes. The Company may bring more of these projects to market in 2011.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes the consolidation of certain land banking arrangements which do not obligate the Company to complete the lot purchases, however, based on
certain factors, the Company has determined it is economically compelled to purchase the land in the land banking arrangement. Amounts are net of deposits.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

FASB ASC 360 requires impairment
losses to be recorded on real estate inventories when indicators of impairment are present and the undiscounted cash flows estimated to be generated by real estate inventories are less than the carrying amount of such assets. Indicators of
impairment include a decrease in demand for housing due to softening market conditions, competitive pricing pressures which reduce the average sales prices of homes including an increase in sales incentives and decreased base pricing offered to
buyers, slowing sales absorption rates, decreases in home values in the markets in which the Company operates, significant decreases in gross margins and a decrease in project cash flows for a particular project.

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

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



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

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

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

The following table summarizes inventory impairments recorded during the years ended
December 31, 2010, 2009 and 2008:



|                                                                  |  |                         |         |  |      |   |        |      |  |   |         | 
|----------------------------------------------------------------- |  | ----------------------- | ------- |  | ---- | - | ------ | ---- |  | - | ------- | 
|                                                                  |  | Year Ended December 31, |        
|                                                                  |  | 2010                    |         |  | 2009 |   |        | 2008 | 
|                                                                  |  | (Dollars in thousands)  |        
|Inventory impairments related to:                                 |  |                         |         |  |      |   |        |      |  |   |         | 
|Land under development and homes completed and under construction |  | $                       | 80,197  |  |      | $ | 31,916 |      |  | $ | 83,174  | 
|Land held for sale or sold                                        |  |                         | 31,663  |  |      |   | 13,353 |      |  |   | 52,137  | 
|                                                                  |  |                         |         |  |      |   |        |      |  |   |         | 
|Total inventory impairments                                       |  | $                       | 111,860 |  |      | $ | 45,269 |      |  | $ | 135,311 | 
|                                                                  |  |                         |         |  |      |   |        |      |  |   |         | 
|Number of projects impaired during the year                       |  |                         | 14      |  |      |   | 13     |      |  |   | 41      | 
|                                                                  |  |                         |         |  |      |   |        |      |  |   |         | 
|Number of projects assessed for impairment during the year        |  |                         | 73      |  |      |   | 67     |      |  |   | 84      | 
|                                                                  |  |                         |         |  |      |   |        |      |  |   |         | 

The impairment loss related to land under development and homes completed and under
construction incurred during the year ended December 31, 2010, resulted from (i) in certain projects, a decrease in home sales prices related to increased incentives, (ii) in certain projects, increased future costs for outside broker expense and
sales and marketing expense, (iii) in certain projects, the decision by the Company to cancel certain land option agreements to purchase lots in projects where sales were deteriorating and the underlying value of the land to be purchased was less
than the purchase price using a residual land value approach, (iv) in certain projects, the needs to preserve the liquidity of the Company and, therefore, canceling certain land option agreements, and (v) in certain other projects, the
renegotiations of the land purchase schedule for land under option, to delay the required purchases, to allow markets to recover, and reduce the amount of lots to be purchased over time. The extended time of the project increased carry costs that
lead to the future undiscounted cash flows of the project being less than the current book value of the land.

The impairment loss related to land held for sale or sold incurred during the year ended December 31, 2010, resulted from
the reduced value of the land in the project. The Company values land held for sale using, (i) projected cash flows with the strategy of selling the land, on a finished or unfinished basis, or building out the project, (ii) considering recent,
legitimate offers received, (iii) prices for land in recent comparable sales transactions, and other factors. In addition, the Company may use appraisals to best determine the as-is value.

These charges were included in impairment loss on real estate assets in the accompanying consolidated statements of
operations (See Note 3 of Notes to Consolidated Financial Statement for a detail of impairment by segment). The impairment charges recorded during the periods noted above stemmed from lower home prices which were driven by increased
incentives and discounts resulting from weakened demand experienced during 2007 through 2010. The Company may incur impairment on real estate inventories in the future, if the markets in which the Company operates continue to experience the
deteriorating market conditions.

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



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

Note 6  Notes Payable and Senior Notes

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



|                                              |  |              |         |  |      |   |         | 
|--------------------------------------------- |  | ------------ | ------- |  | ---- | - | ------- | 
|                                              |  | December 31, |        
|                                              |  | 2010         |         |  | 2009 |  
|Notes payable:                                |  |              |         |  |      |   |         | 
|Construction notes payable                    |  | $            | 30,541  |  |      | $ | 64,227  | 
|                                              |  |              |         |  |      |   |         | 
|Senior Notes:                                 |  |              |         |  |      |   |         | 
|Senior Secured Term Loan due October 20, 2014 |  |              | 206,000 |  |      |   | 206,000 | 
|75/8% Senior Notes due December 15, 2012      |  |              | 66,704  |  |      |   | 67,204  | 
|103/4% Senior Notes due April 1, 2013         |  |              | 138,619 |  |      |   | 168,158 | 
|71/2% Senior Notes due February 15, 2014      |  |              | 77,867  |  |      |   | 84,701  | 
|                                              |  |              |         |  |      |   |         | 
|                                              |  |              | 489,190 |  |      |   | 526,063 | 
|                                              |  |              |         |  |      |   |         | 
|                                              |  | $            | 519,731 |  |      | $ | 590,290 | 
|                                              |  |              |         |  |      |   |         | 

During the year ended December 31, 2010, the Company incurred interest related to the
above debt of $62.8 million and capitalized $39.1 million, resulting in net interest expense of $23.7 million on the accompanying consolidated statement of operations. During the year ended December 31, 2009, the Company incurred interest
related to the above debt of $48.8 million and capitalized $12.9 million, resulting in net interest expense of $35.9 million on the accompanying consolidated statement of operations. During the year ended December 31, 2008, the Company incurred
interest related to the above debt of $66.7 million and capitalized $42.3 million, resulting in net interest expense of $24.4 million on the accompanying consolidated statement of operations.

Maturities of the notes payable and Senior Notes are as follows as of December 31, 2010:



|                        |  |                |         | 
|----------------------- |  | -------------- | ------- | 
|Year Ended December 31, |  | (in thousands) |        
|2011                    |  | $              | 22,383  | 
|2012                    |  |                | 69,862  | 
|2013                    |  |                | 140,619 | 
|2014                    |  |                | 285,867 | 
|2015                    |  |                | 1,000   | 
|Thereafter              |  |                |        | 
|                        |  |                |         | 
|                        |  | $              | 519,731 | 
|                        |  |                |         | 



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Term Loan

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

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

California Lyon received the
first installment of $131.0 million in October 2009, and its second installment of $75.0 million in December 2009. Under the Term Loan Agreement, California Lyon is restricted from future borrowings, and, if necessary, will be required to repay
existing borrowings in order to maintain required loan-to-value ratios such that: (i) the aggregate amount of outstanding loans under the Term Loan Agreement may not exceed 60% of the aggregate value of the properties securing the facility,
with valuation based on the lower of appraised value (if any) and discounted net present value of the cash flows, and (ii) the aggregate amount of secured debt may not exceed 60% of the aggregate value of the properties owned by California Lyon
and its subsidiaries, with valuation based on the lower of appraised value (if any) and discounted net present value of the cash flows. California Lyon is currently in compliance with the above requirements. The net proceeds to the Company from the
first installment of the Term Loan, after giving effect to attorney fees, loan fees and other miscellaneous costs associated with the loan transaction, and repayment of the revolving credit facilities and redemption of the Senior Notes as described
in Note 6 to Notes to Consolidated Financial Statements, were $34.6 million. A portion of the $75.0 million proceeds from the second installment was used to fund additional land acquisitions in 2009 and 2010.

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

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

Upon any prepayment of any portion of the Term Loan
prior to its scheduled maturity (other than any prepayment required in connection with a payment of all or any portion of the outstanding principal balance of any of the Indentures), the Term Loan Agreement provides that California Lyon to make a
make whole payment equal to an amount, if positive, of the present value of all future payments of



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interest which would become due with respect to such prepaid amount from the date of prepayment thereof through and including the maturity date, discounted at a rate of 14%.

The Term Loan is scheduled to mature on October 20, 2014; however, in the event that any portion of the outstanding
principal amounts (the Repaid Senior Note Principal) of the Senior Notes is repaid (whether or not at maturity), the Lenders may elect to require California Lyon to repay that portion of the outstanding loan as bears the same ratio to
the entire Term Loan outstanding as the Repaid Senior Note Principal bears to the entire amounts then outstanding under all of the indentures governing the Senior Notes. All or a portion of the Term Loan may also be accelerated upon certain other
events described in the Term Loan Agreement. The lenders waived the requirement for such repayment in connection with the Senior Note redemptions which occurred from 2008 to 2010 and which are described below.

The Term Loan Agreement requires that the Companys Minimum Tangible Net Worth (as defined therein) not fall below
$75.0 million at the end of any two consecutive fiscal quarters. The Term Loan Agreement also contains covenants that limit the ability of California Lyon and the Company to, without prior approval from Lenders, among other things: (i) incur
liens; (ii) incur additional indebtedness; (iii) transfer or dispose of assets; (iv) merge, consolidate or alter their line of business; (v) guarantee obligations; (vi) engage in affiliated party transactions;
(vii) declare or pay dividends or make other distributions or repurchase stock; (viii) make advances, loans or investments; (ix) repurchase debt (including under the indentures governing the Senior Notes); and (x) engage in
change-of-control transactions.

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

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



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



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



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



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

The Companys covenant compliance for the Term Loan at December 31, 2010 is detailed in the table set forth below (dollars in millions):



|                                                           |  |                           |      |   |                                         |  |         | 
|---------------------------------------------------------- |  | ------------------------- | ---- | - | --------------------------------------- |  | ------- | 
|Covenant and Other Requirements                            |  | Actual atDecember 31,2010 |      |   | CovenantRequirements atDecember 31,2010 | 
|Tangible Net Worth (1)                                     |  | $                         | 13.0 |   |                                         |  | 3 $75.0 | 
|Ratio of Term Loan to Borrowing Base                       |  |                           | 49.6 | % |                                         |  | £ 60%   | 
|Secured Indebtedness (as a percentage of collateral value) |  |                           | 59.9 | % |                                         |  | £ 60%   | 
|Excluded Assets                                            |  | $                         | 6.9  |   |                                         |  | £ $25.0 | 



|(1) | Tangible Net Worth was calculated based on the stated amount of equity less intangible assets of $12.4 million as of December 31, 2010. The Company
did not meet this covenant requirement at December 31, 2010, due to impairments of $111.9 million. This covenant was subsequently amended as described below.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As reported on the Companys current report on Form 8-K dated March 18, 2011, the Company reached an agreement with
the Lenders under the Term Loan that amended the Term Loan to permit the Companys tangible net worth to fall below $75.0 million for two consecutive quarters. In addition, as reported on the Companys current report on Form 8-K, dated
April 21, 2011, the Company reached a subsequent agreement with the Lenders under the Term Loan to waive any non-compliance with the tangible net worth covenant and with certain other technical requirements through July 19, 2011, subject to
certain terms and conditions.

Except as noted above, as of and for the year ending December 31, 2010, the
Company is not in default with the covenants under the Term Loan.

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

Senior Notes

During the year ended December 31, 2010, California Lyon redeemed, in privately negotiated transactions (i) $30.0
million principal amount of its outstanding 10 3/4% Senior Notes at a cost of $25.9 million plus accrued interest, (ii) $0.5 million principal amount of



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its outstanding 7 5/8% Senior Notes at a cost of $0.4 million plus accrued interest, and (iii) $6.8 million principal amount of its outstanding 7 1/2% Senior Notes at a cost of
$5.1 million plus accrued interest. The Lenders under the Term Loan consented to these redemptions and waived their right to require any prepayment of the Term Loan in connection therewith. The net gain resulting from these redemptions, after
giving effect to amortization of related deferred loan costs and other fees, was approximately $5.6 million.

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



|                                          |  |                  |         | 
|----------------------------------------- |  | ---------------- | ------- | 
|                                          |  | December 31,2010 |        
|7 5/8% Senior Notes due December 15, 2012 |  | $                | 66,704  | 
|10 3⁄4% Senior Notes due April 1, 2013      |  |                  | 138,619 | 
|7 1/2% Senior Notes due February 15, 2014 |  |                  | 77,867  | 
|                                          |  |                  |         | 
|                                          |  | $                | 283,190 | 
|                                          |  |                  |         | 

7 5/8% Senior Notes

On November 22, 2004, California Lyon issued $150.0 million principal amount of the 7 5/8% Senior Notes, resulting in
net proceeds to the Company of approximately $148.5 million. Of the initial $150.0 million, $66.7 million in aggregate principal amount remained outstanding as of December 31, 2010 and the date hereof. In August 2010, the Company redeemed, in a
privately negotiated transaction, $0.5 principal amount of its outstanding 7 5/8% Senior Notes at a cost of $0.4 million plus accrued interest.

Interest on the 7 5/8% Senior Notes is payable semi-annually on December 15 and June 15 of each year. Based on the current outstanding principal amount of the 7 5/8% Senior Notes, the Companys
semi-annual interest payments are $2.5 million.

The 7 5/8% Senior Notes are redeemable at the option of
California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.

10 3/4% Senior Notes

On March 17, 2003, California Lyon issued $250.0 million of the 10 3/4% Senior Notes at a price of 98.493% to the public, resulting in net proceeds to the Company of approximately $246.2 million. The
redemption price reflected a discount to yield 11% under the effective interest method, and the notes have been reflected net of the unamortized discount in the consolidated balance sheet. Of the initial $250.0 million, $138.6 million aggregate
principal amount remained outstanding as of December 31, 2010 and the date hereof. In July 2010, the Company redeemed, in a privately negotiated transaction, $10.5 million principal amount of its outstanding 10 3/4% Senior Notes at a cost of
$9.0 million plus accrued interest. In August 2010, the Company



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redeemed, in privately negotiated transactions, $19.5 million principal amount of its outstanding 10 3/4% Senior Notes at a cost of $16.9 million plus accrued interest.

Interest on the 10 3/4% Senior Notes is payable on April 1 and October 1 of each year. Based on the current outstanding
principal amount of the 10 3/4% Senior Notes, the Companys semi-annual interest payments are $7.4 million.

The 10 3/4% Senior Notes are redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus
accrued and unpaid interest, if any.

7 1/2% Senior Notes

On February 6, 2004, California Lyon issued $150.0 million principal amount of the 7 1/2% Senior Notes, resulting in
net proceeds to the Company of approximately $147.6 million. Of the initial $150.0 million, $77.9 million aggregate principal amount remained outstanding as of December 31, 2010 and the date hereof. In August 2010, the Company redeemed, in a
privately negotiated transaction, $6.8 million principal amount of its outstanding 7 1/2% Senior Notes at a cost of $5.1 million plus accrued interest.

Interest on the 7 1/2% Senior Notes is payable on February 15 and August 15 of each year. Based on the current outstanding principal amount of 7 1/2% Senior Notes, the Companys semi-annual interest
payments are $2.9 million.

The 7 1/2% Senior Notes are redeemable at the option of California Lyon, in whole
or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.

General Terms of the Senior Notes

The Senior Notes
are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by the Company, and by all of the Companys existing and certain of its future restricted subsidiaries. The Senior Notes and the
guarantees rank senior to all of the Companys and the guarantors debt that is expressly subordinated to the Senior Notes and the guarantees, but are effectively subordinated to all of the Companys and the guarantors senior
secured indebtedness to the extent of the value of the assets securing that indebtedness.

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

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



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plus accrued and unpaid interest, if any. Any such offer to purchase must be made within 65 days after the second quarter ended for which the Companys tangible net worth is less than $75.0
million. However, California Lyon may reduce the principal amount of the notes to be purchased by the aggregate principal amount of all notes previously redeemed.

The Company has determined and calculated that California Lyons redemptions of Senior Notes during the period from
2008 to 2010 would reduce California Lyons repurchase obligations (assuming that the Companys consolidated tangible net worth is less than $75.0 million for the quarter ended March 31, 2011), as follows: California Lyon would not be
obligated to repurchase any of the 7 5/8% Senior Notes, as a result of California Lyons previous redemption of $83.3 million in aggregate principal amount of the 7 5/8% Senior Notes; California Lyon would not be obligated to repurchase any of
the 10 3/4% Senior Notes, as a result of California Lyons previous redemption of $110.7 million in aggregate principal amount of the 10 3/4% Senior Notes; and California Lyon would not be obligated to repurchase any of the 7 1/2% Senior Notes,
until March 13, 2013, at which time the Company would be required to offer to purchase $2.9 million of principal outstanding, as a result of California Lyons previous redemption of $72.1 million in aggregate principal amount of the 7 1/2%
Senior Notes.

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

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

As of and for the year ending December 31, 2010, the Company was in compliance with the Senior Note
covenants.

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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING BALANCE SHEET

December 31, 2010

(in thousands)



|                                       |  |                |        |  |                |   |          |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|-------------------------------------- |  | -------------- | ------ |  | -------------- | - | -------- | --------------------- |  | - | ------------------------- |  |  | ------------------ | ------ |  | ------------------- | - | -------- | - |  | - | ------- | 
|                                       |  | Unconsolidated |        |  |                |   |          |                       | 
|                                       |  | DelawareLyon   |        |  | CaliforniaLyon |   |          | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |  |  | EliminatingEntries |        |  | ConsolidatedCompany |  
|ASSETS                                 |  |                |        |  |                |   |          |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|Cash and cash equivalents              |  | $              |       |  |                | $ | 69,499   |                       |  | $ | 131                       |  |  | $                  | 1,656  |  |                     | $ |         |   |  | $ | 71,286  | 
|Restricted cash                        |  |                |       |  |                |   | 641      |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 641     | 
|Receivables                            |  |                |       |  |                |   | 15,034   |                       |  |   | 316                       |  |  |                    | 3,149  |  |                     |   |         |   |  |   | 18,499  | 
|Real estate inventories                |  |                |        |  |                |   |          |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|Owned                                  |  |                |       |  |                |   | 478,010  |                       |  |   |                          |  |  |                    | 10,896 |  |                     |   |         |   |  |   | 488,906 | 
|Not owned                              |  |                |       |  |                |   | 55,270   |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 55,270  | 
|Property and equipment, net            |  |                |       |  |                |   | 1,230    |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 1,230   | 
|Deferred loan costs                    |  |                |       |  |                |   | 12,404   |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 12,404  | 
|Other assets                           |  |                |       |  |                |   | 612      |                       |  |   | 156                       |  |  |                    |       |  |                     |   |         |   |  |   | 768     | 
|Investments in subsidiaries            |  |                | 13,814 |  |                |   | 3,286    |                       |  |   |                          |  |  |                    |       |  |                     |   | (17,100  | ) |  |   |        | 
|Intercompany receivables               |  |                |       |  |                |   |         |                       |  |   | 203,480                   |  |  |                    | 12     |  |                     |   | (203,492 | ) |  |   |        | 
|                                       |  |                |        |  |                |   |          |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|                                       |  | $              | 13,814 |  |                | $ | 635,986  |                       |  | $ | 204,083                   |  |  | $                  | 15,713 |  |                     | $ | (220,592 | ) |  | $ | 649,004 | 
|                                       |  |                |        |  |                |   |          |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|LIABILITIES AND STOCKHOLDERS EQUITY   |  |                |        |  |                |   |          |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|Accounts payable                       |  | $              |       |  |                | $ | 6,221    |                       |  | $ | 27                        |  |  | $                  | 656    |  |                     | $ |         |   |  | $ | 6,904   | 
|Accrued expenses                       |  |                |       |  |                |   | 41,435   |                       |  |   | 216                       |  |  |                    | 71     |  |                     |   |         |   |  |   | 41,722  | 
|Liabilities from inventories not owned |  |                |       |  |                |   | 55,270   |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 55,270  | 
|Notes payable                          |  |                |       |  |                |   | 30,541   |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 30,541  | 
|Senior Secured Term Loan               |  |                |       |  |                |   | 206,000  |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 206,000 | 
|75/8% Senior Notes                     |  |                |       |  |                |   | 66,704   |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 66,704  | 
|103/4% Senior Notes                    |  |                |       |  |                |   | 138,619  |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 138,619 | 
|71/2% Senior Notes                     |  |                |       |  |                |   | 77,867   |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 77,867  | 
|Intercompany payables                  |  |                |       |  |                |   | 203,355  |                       |  |   |                          |  |  |                    | 137    |  |                     |   | (203,492 | ) |  |   |        | 
|                                       |  |                |        |  |                |   |          |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|Total liabilities                      |  |                |       |  |                |   | 826,012  |                       |  |   | 243                       |  |  |                    | 864    |  |                     |   | (203,492 | ) |  |   | 623,627 | 
|Equity                                 |  |                |        |  |                |   |          |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|Stockholders equity (deficit)         |  |                | 13,814 |  |                |   | (190,026 | )                     |  |   | 203,840                   |  |  |                    | 14,849 |  |                     |   | (28,663  | ) |  |   | 13,814  | 
|Non-controlling interest               |  |                |       |  |                |   |         |                       |  |   |                          |  |  |                    |       |  |                     |   | 11,563   |   |  |   | 11,563  | 
|                                       |  |                |        |  |                |   |          |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|                                       |  | $              | 13,814 |  |                | $ | 635,986  |                       |  | $ | 204,083                   |  |  | $                  | 15,713 |  |                     | $ | (220,592 | ) |  | $ | 649,004 | 
|                                       |  |                |        |  |                |   |          |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING BALANCE SHEET

December 31, 2009

(in thousands)



|                                       |  |                |         |  |                |   |         |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|-------------------------------------- |  | -------------- | ------- |  | -------------- | - | ------- | --------------------- |  | - | ------------------------- |  |  | ------------------ | ------ |  | ------------------- | - | -------- | - |  | - | ------- | 
|                                       |  | Unconsolidated |         |  |                |   |         |                       | 
|                                       |  | DelawareLyon   |         |  | CaliforniaLyon |   |         | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |  |  | EliminatingEntries |        |  | ConsolidatedCompany |  
|ASSETS                                 |  |                |         |  |                |   |         |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|Cash and cash equivalents              |  | $              |        |  |                | $ | 115,247 |                       |  | $ | 111                       |  |  | $                  | 2,229  |  |                     | $ |         |   |  | $ | 117,587 | 
|Restricted cash                        |  |                |        |  |                |   | 4,352   |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 4,352   | 
|Receivables                            |  |                |        |  |                |   | 12,599  |                       |  |   | 320                       |  |  |                    | 3,375  |  |                     |   |         |   |  |   | 16,294  | 
|Income tax refunds receivable          |  |                |        |  |                |   | 106,989 |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 106,989 | 
|Real estate inventories                |  |                |         |  |                |   |         |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|Owned                                  |  |                |        |  |                |   | 515,102 |                       |  |   |                          |  |  |                    | 8,234  |  |                     |   |         |   |  |   | 523,336 | 
|Not owned                              |  |                |        |  |                |   | 55,270  |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 55,270  | 
|Property and equipment, net            |  |                |        |  |                |   | 1,624   |                       |  |   | 49                        |  |  |                    |       |  |                     |   |         |   |  |   | 1,673   | 
|Deferred loan costs                    |  |                |        |  |                |   | 14,859  |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 14,859  | 
|Other assets                           |  |                |        |  |                |   | 19,522  |                       |  |   | 217                       |  |  |                    |       |  |                     |   |         |   |  |   | 19,739  | 
|Investments in subsidiaries            |  |                | 150,600 |  |                |   | 3,978   |                       |  |   |                          |  |  |                    |       |  |                     |   | (154,578 | ) |  |   |        | 
|Intercompany receivables               |  |                |        |  |                |   |        |                       |  |   | 204,917                   |  |  |                    |       |  |                     |   | (204,917 | ) |  |   |        | 
|                                       |  |                |         |  |                |   |         |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|                                       |  | $              | 150,600 |  |                | $ | 849,542 |                       |  | $ | 205,614                   |  |  | $                  | 13,838 |  |                     | $ | (359,495 | ) |  | $ | 860,099 | 
|                                       |  |                |         |  |                |   |         |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|LIABILITIES AND STOCKHOLDERS EQUITY   |  |                |         |  |                |   |         |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|Accounts payable                       |  | $              |        |  |                | $ | 8,914   |                       |  | $ | 42                        |  |  | $                  | 2,090  |  |                     | $ |         |   |  | $ | 11,046  | 
|Accrued expenses                       |  |                |        |  |                |   | 44,814  |                       |  |   | 397                       |  |  |                    | 83     |  |                     |   |         |   |  |   | 45,294  | 
|Liabilities from inventories not owned |  |                |        |  |                |   | 55,270  |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 55,270  | 
|Notes payable                          |  |                |        |  |                |   | 64,227  |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 64,227  | 
|Senior Secured Term Loan               |  |                |        |  |                |   | 206,000 |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 206,000 | 
|75/8% Senior Notes                     |  |                |        |  |                |   | 67,204  |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 67,204  | 
|103/4% Senior Notes                    |  |                |        |  |                |   | 168,158 |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 168,158 | 
|71/2% Senior Notes                     |  |                |        |  |                |   | 84,701  |                       |  |   |                          |  |  |                    |       |  |                     |   |         |   |  |   | 84,701  | 
|Intercompany payables                  |  |                |        |  |                |   | 204,829 |                       |  |   |                          |  |  |                    | 88     |  |                     |   | (204,917 | ) |  |   |        | 
|                                       |  |                |         |  |                |   |         |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|Total liabilities                      |  |                |        |  |                |   | 904,117 |                       |  |   | 439                       |  |  |                    | 2,261  |  |                     |   | (204,917 | ) |  |   | 701,900 | 
|Equity                                 |  |                |         |  |                |   |         |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|Stockholders equity (deficit)         |  |                | 150,600 |  |                |   | (54,575 | )                     |  |   | 205,175                   |  |  |                    | 11,577 |  |                     |   | (162,177 | ) |  |   | 150,600 | 
|Non-controlling interest               |  |                |        |  |                |   |        |                       |  |   |                          |  |  |                    |       |  |                     |   | 7,599    |   |  |   | 7,599   | 
|                                       |  |                |         |  |                |   |         |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 
|                                       |  | $              | 150,600 |  |                | $ | 849,542 |                       |  | $ | 205,614                   |  |  | $                  | 13,838 |  |                     | $ | (359,495 | ) |  | $ | 860,099 | 
|                                       |  |                |         |  |                |   |         |                       |  |   |                           |  |  |                    |        |  |                     |   |          |   |  |   |         | 



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2010

(in thousands)



|                                                  |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|------------------------------------------------- |  | -------------- | -------- | - | -------------- | - | -------- | --------------------- |  | - | ------------------------- | - |  | ------------------ | ------ | - | ------------------- | - | ------- | - |  | - | -------- | -
|                                                  |  | Unconsolidated |          |   |                |   |          |                       | 
|                                                  |  | DelawareLyon   |          |   | CaliforniaLyon |   |          | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |        |   | ConsolidatedCompany |  
|Operating revenue                                 |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Sales                                             |  | $              |         |   |                | $ | 263,864  |                       |  | $ | 16,595                    |   |  | $                  | 3,610  |   |                     | $ |        |   |  | $ | 284,069  |  
|Construction services                             |  |                |         |   |                |   | 10,629   |                       |  |   |                          |   |  |                    |       |   |                     |   |        |   |  |   | 10,629   |  
|Management fees                                   |  |                |         |   |                |   | 165      |                       |  |   |                          |   |  |                    |       |   |                     |   | (165    | ) |  |   |         |  
|                                                  |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|                                                  |  |                |         |   |                |   | 274,658  |                       |  |   | 16,595                    |   |  |                    | 3,610  |   |                     |   | (165    | ) |  |   | 294,698  |  
|                                                  |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Operating costs                                   |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Cost of sales                                     |  |                |         |   |                |   | (228,542 | )                     |  |   | (16,167                   | ) |  |                    | (1,633 | ) |                     |   | 165     |   |  |   | (246,177 | )
|Impairment loss on real estate assets             |  |                |         |   |                |   | (111,860 | )                     |  |   |                          |   |  |                    |       |   |                     |   |        |   |  |   | (111,860 | )
|Construction services                             |  |                |         |   |                |   | (7,805   | )                     |  |   |                          |   |  |                    |       |   |                     |   |        |   |  |   | (7,805   | )
|Sales and marketing                               |  |                |         |   |                |   | (17,953  | )                     |  |   | (1,208                    | ) |  |                    | (585   | ) |                     |   |        |   |  |   | (19,746  | )
|General and administrative                        |  |                |         |   |                |   | (24,795  | )                     |  |   | (313                      | ) |  |                    | (21    | ) |                     |   |        |   |  |   | (25,129  | )
|Other                                             |  |                |         |   |                |   | (2,740   | )                     |  |   |                          |   |  |                    |       |   |                     |   |        |   |  |   | (2,740   | )
|                                                  |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|                                                  |  |                |         |   |                |   | (393,695 | )                     |  |   | (17,688                   | ) |  |                    | (2,239 | ) |                     |   | 165     |   |  |   | (413,457 | )
|                                                  |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Equity in income of unconsolidated joint ventures |  |                |         |   |                |   | 916      |                       |  |   |                          |   |  |                    |       |   |                     |   |        |   |  |   | 916      |  
|                                                  |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Loss from subsidiaries                            |  |                | (136,786 | ) |                |   | (1,053   | )                     |  |   | 12                        |   |  |                    |       |   |                     |   | 137,827 |   |  |   |         |  
|                                                  |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Operating (loss) income                           |  |                | (136,786 | ) |                |   | (119,174 | )                     |  |   | (1,081                    | ) |  |                    | 1,371  |   |                     |   | 137,827 |   |  |   | (117,843 | )
|Gain on retirement of debt                        |  |                |         |   |                |   | 5,572    |                       |  |   |                          |   |  |                    |       |   |                     |   |        |   |  |   | 5,572    |  
|Interest expense, net of amounts capitalized      |  |                |         |   |                |   | (23,653  | )                     |  |   |                          |   |  |                    |       |   |                     |   |        |   |  |   | (23,653  | )
|Other income (expense), net                       |  |                |         |   |                |   | 280      |                       |  |   | (235                      | ) |  |                    | 12     |   |                     |   |        |   |  |   | 57       |  
|                                                  |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|(Loss) income before benefit from income taxes    |  |                | (136,786 | ) |                |   | (136,975 | )                     |  |   | (1,316                    | ) |  |                    | 1,383  |   |                     |   | 137,827 |   |  |   | (135,867 | )
|Benefit from income taxes                         |  |                |         |   |                |   | 412      |                       |  |   |                          |   |  |                    |       |   |                     |   |        |   |  |   | 412      |  
|                                                  |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Consolidated net (loss) income                    |  |                | (136,786 | ) |                |   | (136,563 | )                     |  |   | (1,316                    | ) |  |                    | 1,383  |   |                     |   | 137,827 |   |  |   | (135,455 | )
|Less: net income from non-controlling interest    |  |                |         |   |                |   |         |                       |  |   |                          |   |  |                    |       |   |                     |   | (1,331  | ) |  |   | (1,331   | )
|                                                  |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Net loss attributable to William Lyon Homes       |  | $              | (136,786 | ) |                | $ | (136,563 | )                     |  | $ | (1,316                    | ) |  | $                  | 1,383  |   |                     | $ | 136,496 |   |  | $ | (136,786 | )
|                                                  |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |         |   |  |   |          |  



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2009

(in thousands)



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



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2008

(in thousands)



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



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2010

(in thousands)



|                                                                                                   |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  
|-------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | -------------- | - | -------- | --------------------- |  | - | ------------------------- | - |  | ------------------ | ------ | - | ------------------- | - | -------- | - |  | - | -------- | -
|                                                                                                   |  | Unconsolidated |          |   |                |   |          |                       | 
|                                                                                                   |  | DelawareLyon   |          |   | CaliforniaLyon |   |          | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |        |   | ConsolidatedCompany |  
|Operating activities                                                                               |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  
|Net (loss) income                                                                                  |  | $              | (136,786 | ) |                | $ | (136,563 | )                     |  | $ | (1,316                    | ) |  | $                  | 1,383  |   |                     | $ | 137,827  |   |  | $ | (135,455 | )
|Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  
|Depreciation and amortization                                                                      |  |                |         |   |                |   | 293      |                       |  |   | 92                        |   |  |                    |       |   |                     |   |         |   |  |   | 385      |  
|Impairment loss on real estate assets                                                              |  |                |         |   |                |   | 111,860  |                       |  |   |                          |   |  |                    |       |   |                     |   |         |   |  |   | 111,860  |  
|Equity in income of unconsolidated joint ventures                                                  |  |                |         |   |                |   | (916     | )                     |  |   |                          |   |  |                    |       |   |                     |   |         |   |  |   | (916     | )
|Equity in loss of subsidiaries                                                                     |  |                | 136,786  |   |                |   | 1,053    |                       |  |   | (12                       | ) |  |                    |       |   |                     |   | (137,827 | ) |  |   |         |  
|Gain on retirement of debt                                                                         |  |                |         |   |                |   | (5,572   | )                     |  |   |                          |   |  |                    |       |   |                     |   |         |   |  |   | (5,572   | )
|Loss on sale of fixed asset                                                                        |  |                |         |   |                |   |         |                       |  |   | 122                       |   |  |                    |        |   |                     |   |          |   |  |   | 122      |  
|Benefit from income taxes                                                                          |  |                |         |   |                |   | (412     | )                     |  |   |                          |   |  |                    |       |   |                     |   |         |   |  |   | (412     | )
|Net changes in operating assets and liabilities:                                                   |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  
|Restricted cash                                                                                    |  |                |         |   |                |   | 3,711    |                       |  |   |                          |   |  |                    |       |   |                     |   |         |   |  |   | 3,711    |  
|Receivables                                                                                        |  |                |         |   |                |   | (2,435   | )                     |  |   | 4                         |   |  |                    | 226    |   |                     |   |         |   |  |   | (2,205   | )
|Income tax refund receivable                                                                       |  |                |         |   |                |   | 107,401  |                       |  |   |                          |   |  |                    |       |   |                     |   |         |   |  |   | 107,401  |  
|Real estate inventories-owned                                                                      |  |                |         |   |                |   | (63,655  | )                     |  |   |                          |   |  |                    | (2,662 | ) |                     |   |         |   |  |   | (66,317  | )
|Deferred loan costs                                                                                |  |                |         |   |                |   | 3,333    |                       |  |   |                          |   |  |                    |       |   |                     |   |         |   |  |   | 3,333    |  
|Other assets                                                                                       |  |                |         |   |                |   | 15,837   |                       |  |   | 61                        |   |  |                    |       |   |                     |   |         |   |  |   | 15,898   |  
|Accounts payable                                                                                   |  |                |         |   |                |   | (2,693   | )                     |  |   | (15                       | ) |  |                    | (1,434 | ) |                     |   |         |   |  |   | (4,142   | )
|Accrued expenses                                                                                   |  |                |         |   |                |   | (3,379   | )                     |  |   | (181                      | ) |  |                    | (12    | ) |                     |   |         |   |  |   | (3,572   | )
|                                                                                                   |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  
|Net cash provided by (used in) operating activities                                                |  |                |         |   |                |   | 27,863   |                       |  |   | (1,245                    | ) |  |                    | (2,499 | ) |                     |   |         |   |  |   | 24,119   |  
|                                                                                                   |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  
|Investing activities                                                                               |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  
|Net change in investments in and advances to unconsolidated joint ventures                         |  |                |         |   |                |   | 3,989    |                       |  |   |                          |   |  |                    |       |   |                     |   |         |   |  |   | 3,989    |  
|Purchases of property and equipment                                                                |  |                |         |   |                |   | 101      |                       |  |   | (165                      | ) |  |                    |       |   |                     |   |         |   |  |   | (64      | )
|Investment in subsidiaries                                                                         |  |                |         |   |                |   | (361     | )                     |  |   | 12                        |   |  |                    |       |   |                     |   | 349      |   |  |   |         |  
|                                                                                                   |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  
|Net cash provided by (used in) investing activities                                                |  |                |         |   |                |   | 3,729    |                       |  |   | (153                      | ) |  |                    |       |   |                     |   | 349      |   |  |   | 3,925    |  
|                                                                                                   |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  
|Financing activities                                                                               |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  
|Proceeds from borrowings on notes payable                                                          |  |                |         |   |                |   | 7,087    |                       |  |   |                          |   |  |                    |       |   |                     |   |         |   |  |   | 7,087    |  
|Principal payments on notes payable                                                                |  |                |         |   |                |   | (52,797  | )                     |  |   |                          |   |  |                    |       |   |                     |   |         |   |  |   | (52,797  | )
|Net cash paid for repurchase of senior notes                                                       |  |                |         |   |                |   | (31,268  | )                     |  |   |                          |   |  |                    |       |   |                     |   |         |   |  |   | (31,268  | )
|Minority interest contributions, net                                                               |  |                |         |   |                |   |         |                       |  |   |                          |   |  |                    |       |   |                     |   | 2,633    |   |  |   | 2,633    |  
|Intercompany receivables/payables                                                                  |  |                |         |   |                |   | (362     | )                     |  |   | 1,437                     |   |  |                    | 37     |   |                     |   | (1,112   | ) |  |   |         |  
|Advances to affiliates                                                                             |  |                |         |   |                |   |         |                       |  |   | (19                       | ) |  |                    | 1,889  |   |                     |   | (1,870   | ) |  |   |         |  
|                                                                                                   |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  
|Net cash (used in) provided by financing activities                                                |  |                |         |   |                |   | (77,340  | )                     |  |   | 1,418                     |   |  |                    | 1,926  |   |                     |   | (349     | ) |  |   | (74,345  | )
|                                                                                                   |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  
|Net (decrease) increase in cash and cash equivalents                                               |  |                |         |   |                |   | (45,748  | )                     |  |   | 20                        |   |  |                    | (573   | ) |                     |   |         |   |  |   | (46,301  | )
|Cash and cash equivalents at beginning of year                                                     |  |                |         |   |                |   | 115,247  |                       |  |   | 111                       |   |  |                    | 2,229  |   |                     |   |         |   |  |   | 117,587  |  
|                                                                                                   |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  
|Cash and cash equivalents at end of year                                                           |  | $              |         |   |                | $ | 69,499   |                       |  | $ | 131                       |   |  | $                  | 1,656  |   |                     | $ |         |   |  | $ | 71,286   |  
|                                                                                                   |  |                |          |   |                |   |          |                       |  |   |                           |   |  |                    |        |   |                     |   |          |   |  |   |          |  



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2009

(in thousands)



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



114



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2008

(in thousands)



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



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Construction Notes Payable

At December 31, 2010, the Company had two construction notes payable totaling $22.9 million. One of the notes matures in
July 2011 and bears interest at rates based on either LIBOR or prime with an interest rate floor of 6.5% and an outstanding principal balance of $13.9 million as of December 31, 2010. Interest is calculated on the average daily balance and is paid
following the end of each month. While the Company was previously required to maintain minimum tangible net worth of $90.0 million under this note, the Company and the lender have amended the note to eliminate the tangible net worth covenant in
exchange for a principal payment of $2.0 million. As a result of the payment of $2.0 million, which was made in April 2011, the outstanding principal balance is $11.9 million. The Company is currently in negotiations with the lender to extend the
maturity of the loan and to modify the covenants.

The other construction note had a remaining balance at
December 31, 2010 of $9.0 million. This note was previously due to mature in July 2010; however, in conjunction with a partial payment of principal on that loan, the Company and the lender entered into a new loan agreement in 2010 for the then
remaining outstanding principal of $10.0 million, which will mature in May 2015. The new loan pays interest monthly at a fixed rate of 12.5%, with quarterly principal payments of $500,000 beginning in July 2010. The interest rate decreases to 10.0%
when the principal balance is reduced to $7.5 million.

Seller Financing

At December 31, 2010, the Company had $7.6 million of notes payable outstanding related to a land acquisition
for which seller financing was provided, which is included in notes payable in the accompanying consolidated balance sheet. The seller financing note is due at various dates through 2012 and bear interest at 7.0%. Interest is calculated on the
principal balance outstanding and is accrued and paid to the seller at the time each residential unit is closed. In addition, the Company makes an annual interest payment on the outstanding principal balance related to any remaining residential
units.

Prime Interest Rates

The prime interest rates at December 31, 2010, 2009 and 2008 were 3.25%, 3.25% and 3.25%, respectively. The
weighted-average prime interest rates for each of the three years ended December 31, 2010, 2009 and 2008 were 3.25%, 3.25% and 5.09%, respectively.



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 7  Fair Value of Financial Instruments

In accordance with FASB ASC Topic 820 Fair Value Measurements and Disclosure, the Company is required to disclose
the estimated fair value of financial instruments. As of December 31, 2010, the Company used the following assumptions to estimate the fair value of each type of financial instrument for which it is practicable to estimate:



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



| |  |  | Construction Notes Payable  For certain notes, the carrying amount is a reasonable estimate of fair value because the maturities occur
within one year or the loan was renegotiated during the period.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Seller Financing  The carrying amount is a reasonable estimate of fair value because the note originated during the current period and
has a short term maturity.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Senior Secured Term Loan  As reported in an affiliate of the lenders Annual Report on Form 10-k for the year ending December 31,
2010, the fair value of the loan is estimated using inputs such as discounted cash flow projections, current interest rates available for similar instruments and other quantitative and qualitative factors, however this amount does not represent the
amount the Company expects to pay. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different assumptions or methodologies could have a material effect on the estimated fair value amounts. Fair
value includes the carrying amount of the loan plus a portion of the make-whole amount as defined in the related loan agreement. In 2009, the circumstances related to the fair value calculation and the potential timing of repayment were
very different, and our best estimate of fair value was the carrying amount.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Senior Notes Payable  The Senior Notes are traded over the counter and their fair values were based upon quotes from industry sources,
as of December 31, 2010.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

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



|                                  |  |                   |         |  |                   |   |         |                |  |   |           |  |  |   |         | 
|--------------------------------- |  | ----------------- | ------- |  | ----------------- | - | ------- | -------------- |  | - | --------- |  |  | - | ------- | 
|                                  |  | December 31, 2010 |         |  | December 31, 2009 |  
|                                  |  | CarryingAmount    |         |  | FairValue         |   |         | CarryingAmount |  |   | FairValue | 
|Financial assets:                 |  |                   |         |  |                   |   |         |                |  |   |           |  |  |   |         | 
|Cash and equivalents              |  | $                 | 71,286  |  |                   | $ | 71,286  |                |  | $ | 117,587   |  |  | $ | 117,587 | 
|Financial liabilities:            |  |                   |         |  |                   |   |         |                |  |   |           |  |  |   |         | 
|Construction notes payable        |  | $                 | 22,899  |  |                   | $ | 22,899  |                |  | $ | 64,227    |  |  | $ | 42,149  | 
|Seller financing                  |  |                   | 7,642   |  |                   |   | 7,642   |                |  |   |          |  |  |   |        | 
|Senior Secured Term Loan due 2014 |  | $                 | 206,000 |  |                   | $ | 230,800 |                |  | $ | 206,000   |  |  | $ | 206,000 | 
|75/8% Senior Notes due 2012       |  | $                 | 66,704  |  |                   | $ | 56,785  |                |  | $ | 67,204    |  |  | $ | 42,943  | 
|103/4% Senior Notes due 2013      |  | $                 | 138,619 |  |                   | $ | 119,933 |                |  | $ | 168,158   |  |  | $ | 120,233 | 
|71/2% Senior Notes due 2014       |  | $                 | 77,867  |  |                   | $ | 56,049  |                |  | $ | 84,701    |  |  | $ | 59,291  | 

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



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



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



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

Non-financial Instruments

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



117



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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The following table summarizes the fair-value measurements of its
non-financial assets for the year ended December 31, 2010:



|                                                                     |  |                      |         |  |                                |   |         |                                                         |  |   |        | 
|-------------------------------------------------------------------- |  | -------------------- | ------- |  | ------------------------------ | - | ------- | ------------------------------------------------------- |  | - | ------ | 
|                                                                     |  | Fair 
ValueHierarchy |         |  | Fair ValueatMeasurementDate(1) |   |         | ImpairmentChargesfor the Year EndedDecember 
31,2010(1) | 
|                                                                     |  | (in thousands)       |        
|Land under development and homes completed and under construction(2) |  |                      | Level 3 |  |                                | $ | 122,270 |                                                         |  | $ | 80,197 | 
|Inventory held-for-sale(3)                                           |  |                      | Level 3 |  |                                | $ | 48,445  |                                                         |  | $ | 31,663 | 



|(1) | Amounts represent the aggregate fair values for communities where the Company recognized noncash inventory impairment charges during the year ended
December 31, 2010.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | In accordance with FASB ASC 360-10-35, inventory under this caption with a carrying value of $202.5 million was written down to its fair value of
$122.3 million, resulting in total impairments of $80.2 million for the year ended December 31, 2010.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | In accordance with FASB ASC 360-10-35, inventory under this caption with a carrying value of $80.1 million was written down to its fair value of
$48.4 million, resulting in total impairments of $31.7 million for the year ended December 31, 2010.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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



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



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



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

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

Note
8  Stockholders Equity

Tender Offer and Merger

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

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

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

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



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Incentive Compensation Plans

In 2008, the Compensation Committee established a bonus plan at the recommendation of the CEO and COO to help retain key
employees during challenging economic times and taking into account the likelihood the Company would not be profitable. The final year that bonuses correlated to the performance of the Company was 2008. The plan established a maximum bonus for the
CEO and COO equal to the greater of 50% of salary or 3% of pre-tax, pre-bonus income, with a target bonus of 50% of salary. The plan established a maximum bonus for the EVP - CAO and the EVP - Business Development Operations equal to the greater of
50% of salary or 1% of pre-tax, pre-bonus income, with a target bonus of 50% of salary. The plan established a maximum bonus for the SVP - CFO equal to the greater of 50% of salary or 1⁄2% of pre-tax, pre-bonus income, with a target bonus of 50%
of salary.

In 2009, the Compensation Committee did not establish a bonus plan at the beginning of the year,
due to the state of the economy and the industry. Management believed it was in the best interests of the Company to wait until the end of 2009 to determine bonus awards based on the Companys operating results and cash position, as well as
individual employee performance. The Compensation Committee approved bonuses to employees and named executive officers on a subjective basis based on the recommendations of the CEO and COO.

In 2010, the Compensation Committee established a bonus plan at the recommendation of the CEO and COO to improve the
likelihood of employee retention. The plan established a maximum bonus for the CEO and COO equal to the greater of 50% of salary or 3% of pre-tax, pre-bonus income, with a target bonus of 0% of salary. The plan established a maximum bonus for the
EVP equal to 300% of salary, with a target bonus of 100% of salary, and for the VP - CFO, a maximum bonus equal to 250% of salary, with a target bonus of 85% of salary, and for the regional and divisional presidents a maximum bonus equal to 300% of
salary, with a target bonus of 150% of salary. The intent of this plan was to allow annual adjustment of the target bonus within the parameters established by the plan based on the expected performance of the Company, changes in the homebuilding
market and trends in industry compensation.

Also in 2010, the Compensation Committee approved a project
completion bonus program, as discussed below, which replaced the Companys policy of awarding bonuses based on divisional or Company-wide pre-tax, pre-bonus income, and awards bonuses based on the net profit of a project, from inception to the
close out of the final unit. The CEO and COO are the only executive officers whose bonus is directly tied to the performance of the Company.

Project Completion Bonus Plan

Effective May 4, 2010,
the Company adopted its Project Completion Bonus Plan (the Plan). Under the Plan, with respect to any project, subject to the terms of the Plan and subject to the participant remaining in continuous service with the Company throughout
the applicable project, a participant will be entitled to receive a bonus (in addition to any other bonus which such participant may receive) equal to the applicable percentage of the net profits (as defined in the Plan) from the applicable project,
generally as follows:



|                                    |  |                      |       |   |                     |                                             
|----------------------------------- |  | -------------------- | ----- | - | ------------------- | --------------------------------------------
|PARTICIPANT                         |  | APPLICABLEPERCENTAGE |       |   | APPLICABLE PROJECTS
|Executive Vice President            |  |                      | 0.875 | % |                     | All Projects                                
|Chief Financial Officer             |  |                      | 0.5   | % |                     | All Projects                                
|Senior Vice President of Finance    |  |                      | 0.5   | % |                     | All Projects                                
|Division President                  |  |                      | 1.25  | % |                     | Projects in Presidents division            
|Division President                  |  |                      | 0.25  | % |                     | Projects in all other divisions             
|Senior Vice President of Operations |  |                      | 0.75  | % |                     | Projects in Senior Vice Presidents division
|Senior Vice President of Operations |  |                      | 0.125 | % |                     | Projects in all other divisions             

The purpose of the Plan is to align the interests of key executives with the interests of the Companys shareholders. The Company believes this can be accomplished by encouraging key executives of
the Company to remain in the service of the Company while working diligently to complete the Companys projects through the sale, to unrelated parties in the ordinary course of business, of all of the parcels of real property in such projects.
Accordingly, under this Plan, each participant who remains in the service of the Company through the completion of certain projects, and who meets the requirements for payment, will receive a bonus measured by the net profits of the projects.

Provided that a participant remains in the continuous service of the Company from the date of the
commencement of an applicable project through the date of the completion of the applicable project and thereafter until the date of payment, the participant shall receive a bonus equal to the applicable percentage of the net profits from the
project. If the participant is not in continuous service from the commencement of the applicable project through the date of the completion of the applicable project, and until the date on which the bonus with respect to such applicable project is
paid, the participants entitlement to receive the bonus shall be forfeited.

Note 9  Income Taxes

Income taxes are accounted for under the provisions of Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes,which are now codified as FASB ASC Topic 740, Income Taxes. Effective as of January 1, 1994, the Company completed a capital restructuring and quasi-reorganization.
The quasi-reorganization resulted in the adjustment of assets and liabilities to estimated fair values and the elimination of an accumulated deficit effective January 1, 1994. Income tax benefits resulting from the utilization of net operating
loss and other carry forwards existing at January 1, 1994 and temporary differences existing prior to or resulting from the quasi-reorganization are excluded from the results of operations and credited to additional paid-in capital.

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



|                                    |  |                         |     |   |      |   |         |      |  |   |        |  
|----------------------------------- |  | ----------------------- | --- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                    |  | Year Ended December 31, |    
|                                    |  | 2010                    |     |   | 2009 |   |         | 2008 | 
|Current                             |  |                         |     |   |      |   |         |      |  |   |        |  
|Interest on uncertain tax positions |  | $                       | 75  |   |      | $ | 108     |      |  | $ |       |  
|Federal                             |  |                         | 347 |   |      |   | 101,810 |      |  |   | 41,602 |  
|State                               |  |                         | (10 | ) |      |   | (10     | )    |  |   | (10    | )
|                                    |  |                         |     |   |      |   |         |      |  |   |        |  
|                                    |  | $                       | 412 |   |      | $ | 101,908 |      |  | $ | 41,592 |  
|                                    |  |                         |     |   |      |   |         |      |  |   |        |  



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



|                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                      |  | Year Ended December 31, |        
|                                                                                      |  | 2010                    |         |   | 2009 |   |         | 2008 | 
|Provision for federal income taxes at the statutory rate                              |  | $                       | 48,019  |   |      | $ | 42,852  |      |  | $ | 53,630  |  
|Provision for state income taxes, net of federal income tax benefits                  |  |                         | (6      | ) |      |   | (6      | )    |  |   | (6      | )
|Valuation allowance                                                                   |  |                         | (47,949 | ) |      |   | 60,015  |      |  |   | (94,607 | )
|Increase of deferred tax assets as a result of revocation of S corporation election |  |                         |        |   |      |   |        |      |  |   | 86,113  |  
|Goodwill impairment                                                                   |  |                         |        |   |      |   |        |      |  |   | (2,064  | )
|Other                                                                                 |  |                         | 348     |   |      |   | (953    | )    |  |   | (1,474  | )
|                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                                      |  | $                       | 412     |   |      | $ | 101,908 |      |  | $ | 41,592  |  
|                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  

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



|                                                                                  |  |              |          |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | ------- | -
|                                                                                  |  | December 31, |         
|                                                                                  |  | 2010         |          |   | 2009 |  
|Deferred tax assets                                                               |  |              |          |   |      |   |         |  
|Reserves deducted for financial reporting purposes not allowable for tax purposes |  | $            | 52,539   |   |      | $ | 21,810  |  
|Compensation deductible for tax purposes when paid                                |  |              | 586      |   |      |   | 468     |  
|State income tax provisions deductible when paid for federal tax purposes         |  |              | 3        |   |      |   | 3       |  
|Effect of book/tax differences for joint ventures                                 |  |              | 2,046    |   |      |   | 4,567   |  
|Other                                                                             |  |              | 320      |   |      |   | 311     |  
|AMT credit carryover                                                              |  |              | 2,698    |   |      |   | 2,698   |  
|Net operating loss                                                                |  |              | 76,374   |   |      |   | 48,482  |  
|Valuation allowance                                                               |  |              | (125,773 | ) |      |   | (71,160 | )
|                                                                                  |  |              |          |   |      |   |         |  
|                                                                                  |  |              | 8,793    |   |      |   | 7,179   |  
|Deferred tax liabilities                                                          |  |              |          |   |      |   |         |  
|Effect of book/tax differences for joint ventures                                 |  |              | (6,027   | ) |      |   | (5,962  | )
|Effect of book/tax differences for capped interest/G&A                            |  |              | (2,766   | ) |      |   | (1,217  | )
|                                                                                  |  |              |          |   |      |   |         |  
|                                                                                  |  |              | (8,793   | ) |      |   | (7,179  | )
|                                                                                  |  |              |          |   |      |   |         |  
|                                                                                  |  | $            |         |   |      | $ |        |  
|                                                                                  |  |              |          |   |      |   |         |  

On November 6, 2009, an expanded carry back election was signed into law as part of the
Worker, Homeownership, and Business Assistance Act of 2009. As a result of this legislation, the Company elected to carry back for five years the taxable losses generated in 2009. As of December 31, 2009, The Company recorded an income tax
refund receivable and the related income tax benefit of $101.8 million. The Company received the tax refund during the first quarter of 2010. As of December 31, 2010, the Company received an additional refund related to the 2009 loss carry back
of $347,000 and recorded the related income tax benefit as of December 31, 2010.

In assessing the
realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in carry back years, the scheduled reversal of deferred tax liabilities, tax planning strategies and
projected future taxable income in making this assessment. The expanded carry back election provided in legislation, effective November 6, 2009, allowed the recording of the deferred tax assets on the books; however, as of December 31,
2009, due to uncertainties surrounding the realization of the cumulative federal and state deferred tax assets, the Company had a full valuation allowance against the deferred tax assets. The valuation allowances for the years ending
December 31, 2010, 2009 and 2008 were $125.8 million, $71.2 million and $123.3 million, respectively.

At
December 31, 2010, the Company had gross federal and state net operating loss carry forwards totaling approximately $115.5 million and $386.3 million, respectively. Federal net operating loss carry forwards begin to expire in 2028; state net
operating loss carry forwards begin to expire in 2013.



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

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

In addition, as of
December 31, 2010, the Company has unused built-in losses of $7.9 million which are available to offset future income and expire in 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 under certain circumstances.

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

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
No. 109 (FIN 48) which is now codified as FASB ASC Topic 740, Income Taxes. FASB ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of
tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be considered more-likely-than-not to be sustained upon examination by taxing authorities. The Company has taken
positions in certain taxing jurisdictions for which it is more likely than not that previously unrecognized tax benefits will be recognized. In addition, the Company has elected to recognize interest and penalties related to uncertain tax positions
in the income tax provision. In accordance with the provisions of FASB ASC Topic 740, effective January 1, 2007, the Company recorded an income tax refund receivable of $5.7 million and recognized the associated tax benefit as an increase in
additional paid-in capital. In connection therewith, the Company recorded interest receivable of $1.1 million and recognized the associated tax benefit as an increase in retained earnings. Since recording the income tax refund, the Company has
received refunds and accrued additional interest, leaving approximately $5.2 million of income tax refunds and interest receivable on the consolidated balance sheet at December 31, 2009. As of December 31, 2010, the Company received the
tax refund and accrued interest. At January 1, 2007, and for the years ended December 31, 2007 through December 31, 2010, the Company has no unrecognized tax benefits.

In compliance with the Companys election to recognize interest income (expense) and penalties related to uncertain
tax positions in the income tax provision, $75,000 of interest income related to the income tax refund receivable, recorded under the provisions of FASB ASC 740, is included in the benefit from income taxes of $412,000 for the twelve months ended
December 31, 2010.

The estimated overall effective tax rate for the years ending December 31, 2010,
2009 and 2008 were .01%, 83.2% and 27.1%, respectively.

The Company and its subsidiaries file income tax
returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal income tax examination for calendar tax years ending 2004 through 2010. The Company is subject to various state income tax examinations
for calendar tax years ending 2005 through 2010.

The Company received a letter dated February 4, 2010
from the Internal Revenue Service giving notice that the income tax examination by the Internal Revenue Service for amended tax returns for the years ended December 31, 2002 and 2003 was completed without adjustments.

Note 10  Related Party Transactions

On December 27, 2007, the Company sold certain land in San Diego County, California for $12.0 million in cash to a limited liability company owned indirectly by Frank T. Suryan, Jr. as Trustee for
the Suryan Family Trust. Mr. Suryan is Chairman and Chief Executive Officer of Lyon Capital Ventures, a company wholly owned by Frank T. Suryan, Jr., General William Lyon, Chairman and Chief Executive Officer of the Company, and a trust whose
sole beneficiary is William H. Lyon, President and Chief Operating Officer of the Company. The Company has received a report from a third-party



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valuation and financial advisory services firm as to the reasonableness of the sales price in the transaction. Further, the transaction was unanimously approved by all independent members of the
Board of Directors. Prior to the sale, the net book value of this land (as reflected on the Companys financial statements) was approximately $18.7 million resulting in a loss on the transaction of $6.7 million. In October 2008, in a separately
negotiated transaction from the sale of the land to the Company owned indirectly by the Suryan Family Trust (the Owner), the Company was contracted by and for the Owner to build apartment units for a contract price of $13.5 million,
which includes the Companys contractor fee of $0.5 million. As described in Note 1  Construction Services, the company accounts for this transaction based on the percentage of completion method, and recorded construction services revenue
of $12.6 million and $0.2 million and construction services costs of $11.6 million and $0.2 million during the years ended December 31, 2009 and 2008, respectively.

For the years ended December 31, 2010, 2009 and 2008, the Company incurred reimbursable on-site labor costs of
$217,000, $197,000 and $176,000, respectively, for providing customer service to real estate projects developed by entities controlled by General William Lyon and William H. Lyon, of which $38,000 and $58,000 was due to the Company at
December 31, 2010 and 2009, respectively. The Company earned fees of $36,000 and $64,000, respectively, for tax and accounting services performed for entities controlled by General William Lyon and William H. Lyon during the years ended
December 31, 2009 and 2008.

The Company earned fees of $426,000 and $123,000 during the years ended
December 31, 2010 and 2009, respectively, related to a Human Resources and Payroll Services contract between the Company and an entity controlled by General William Lyon and William H. Lyon. Effective April 1, 2011, the Company and this entity
amended the Human Resources and Payroll Services contract to provide that the affiliate will now pay to the Company a base monthly fee of $21,335 and a variable monthly fee equal to $23 multiplied by the number of active employees employed by such
entity (which will initially result in a variable monthly fee of approximately $8,000). The amended contract also provides that the Company will be reimbursed by such affiliate for a pro rata share of any bonuses paid to the Companys Human
Resources staff (other than any bonus paid to the Vice President of Human Resources). The Company believes that the compensation being paid to it for the services provided to the affiliate is at a market rate of compensation, and that as a result of
the fees that are paid to the Company under this contract, the overall cost to the Company of its Human Resources department will be reduced.

In each of the three years ended December 31, 2010, 2009 and 2008, the Company incurred charges of $0.8 million related to rent on the Companys corporate office, from a trust of which William
H. Lyon is the sole beneficiary.

Effective September 1, 2004, the Company entered into an aircraft
consulting and management agreement with an affiliate (the Affiliate) of General William Lyon to operate and manage the Companys aircraft. The terms of the agreement provide that the Affiliate shall consult and render its advice
and management services to the Company with respect to all functions necessary to the operation, maintenance and administration of the aircraft. The Companys business plan for the aircraft includes (i) use by Company executives for
traveling on Company business to the Companys divisional offices and other destinations, (ii) charter service to outside third parties and (iii) charter service to General William Lyon personally. Charter services for outside third
parties are contracted for at market rates. As compensation to the Affiliate for its management and consulting services under the agreement, the Company pays the Affiliate a fee equal to (i) the amount equal to 107% of compensation paid by the
Affiliate for the pilots supplied pursuant to the agreement, (ii) $50 per operating hour for the aircraft and (iii) $9,000 per month for hangar rent. In addition, all maintenance work, inspections and repairs performed by the Affiliate on
the aircraft are charged to the Company at the Affiliates published rates for maintenance, inspection and repairs in effect at the time such work is completed. The total expenses incurred by the Company and paid to the Affiliate under the
agreement amounted to $0.8 million and $1.6 million during the years ended December 31, 2009 and 2008, respectively.

Effective July 1, 2006, General William Lyon entered into a time sharing agreement (the Agreement) with the Company pertaining to his personal use of the aircraft. The agreement calls for
General William Lyon to reimburse the company for all costs incurred by the Company during his personal flights plus a surcharge on fuel consumption of two times the cost. Pursuant to the Agreement, the Company earned revenue of $53,000 and $368,000
for charter services provided to General William Lyon personally, for the years ended December 31, 2009 and 2008, respectively.

On September 3, 2009, Presley CMR, Inc., a California corporation (Presley CMR) and wholly owned subsidiary of California Lyon, entered into an Aircraft Purchase and Sale Agreement
(PSA) with an affiliate of General William Lyon to sell the aircraft described above. The PSA provides for an aggregate sales price for the Aircraft of $8.3 million (which value was the appraised fair market value of the Aircraft), which
consists of: (i) cash in the amount of $2.1 million which was paid at closing and (ii) a promissory note from the affiliate in the amount of $6.2 million, which is included in receivables in the accompanying consolidated balance sheet. The
closing of this sale occurred on September 9, 2009. The Company recorded a loss on the sale of the Aircraft totaling $3.0 million, which is included in other loss in the accompanying statement of operations for the year ended December 31,
2009.

Note 11  Commitments and Contingencies

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



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

In some jurisdictions in which the Company develops and constructs property, assessment district bonds are issued by
municipalities to finance major infrastructure improvements. As a land owner benefited by these improvements, the Company is responsible for the assessments on its land. When properties are sold, the assessments are either prepaid or the buyers
assume the responsibility for the related assessments. Assessment district bonds issued after May 21, 1992 are accounted for under the provisions of 91-10, Accounting for Special Assessment and Tax Increment Financing Entities



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issued by the Emerging Issues Task Force of the Financial Accounting Standards Board on May 21, 1992, now codified as FASB ASC Topic 970-470, Real Estate  Debt, and recorded as
liabilities in the Companys consolidated balance sheet, if the amounts are fixed and determinable.

As
of December 31, 2010, the Company had $0.6 million in deposits as collateral for outstanding irrevocable standby letters of credit to guarantee the Companys financial obligations under certain contractual arrangements in the normal course
of business. The standby letters of credit were secured by cash as reflected as restricted cash on the accompanying consolidated balance sheet. The beneficiary may draw upon these letters of credit in the event of a contractual default by the
Company relating to each respective obligation. These letters of credit generally have a stated term of 12 months and have varying maturities throughout 2011, at which time the Company may be required to renew to coincide with the term of the
respective arrangement.

The Company also had outstanding performance and surety bonds of $90.7 million at
December 31, 2010 related principally to its obligations for site improvements at various projects. The Company does not believe that draws upon these bonds, if any, will have a material effect on the Companys financial position, results
of operations or cash flows.

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

See Note 6, Notes Payable and Senior Notes for additional information
relating to the Companys guarantee arrangements.



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Note 12  Unaudited Summarized Quarterly Financial Information

Summarized unaudited quarterly financial information for the years ended December 31, 2010, 2009, and 2008 is as
follows (in thousands except per common share amounts):



|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|-------------------------------------------------- |  | ------------------ | -------- | - | ------------ | - | -------- | ----------------- |  | - | ---------------- | - |  | - | -------- | -
|                                                   |  | Three Months Ended |         
|                                                   |  | March 31,2010      |          |   | June 30,2010 |   |          | September 30,2010 |  |   | December 31,2010 |  
|Sales                                              |  | $                  | 43,163   |   |              | $ | 86,692   |                   |  | $ | 75,253           |   |  | $ | 89,590   |  
|Cost of sales                                      |  |                    | (31,362  | ) |              |   | (72,368  | )                 |  |   | (62,134          | ) |  |   | (80,313  | )
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Gross (loss) profit                                |  |                    | 11,801   |   |              |   | 14,324   |                   |  |   | 13,119           |   |  |   | 9,277    |  
|Other income, costs and expenses, net              |  |                    | (20,320  | ) |              |   | (18,983  | )                 |  |   | (21,161          | ) |  |   | (123,924 | )
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|(Loss) income before benefit from income taxes     |  |                    | (8,519   | ) |              |   | (4,659   | )                 |  |   | (8,042           | ) |  |   | (114,647 | )
|Benefit from income taxes                          |  |                    | 65       |   |              |   |         |                   |  |   |                 |   |  |   | 347      |  
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Consolidated net (loss) income                     |  |                    | (8,454   | ) |              |   | (4,659   | )                 |  |   | (8,042           | ) |  |   | (114,300 | )
|Less: net loss (income)  non-controlling interest |  |                    | (30      | ) |              |   | 121      |                   |  |   | 29               |   |  |   | (1,451   | )
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net (loss) income                                  |  | $                  | (8,484   | ) |              | $ | (4,538   | )                 |  | $ | (8,013           | ) |  | $ | (115,751 | )
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|                                                   | 
|                                                   |  | Three Months Ended |         
|                                                   |  | March 31,2009      |          |   | June 30,2009 |   |          | September 30,2009 |  |   | December 31,2009 |  
|Sales                                              |  | $                  | 69,339   |   |              | $ | 77,407   |                   |  | $ | 67,213           |   |  | $ | 95,284   |  
|Cost of sales                                      |  |                    | (95,124  | ) |              |   | (60,501  | )                 |  |   | (49,025          | ) |  |   | (146,476 | )
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Gross (loss) profit                                |  |                    | (25,785  | ) |              |   | 16,906   |                   |  |   | 18,188           |   |  |   | (51,192  | )
|Other income, costs and expenses, net              |  |                    | (43,408  | ) |              |   | 22,770   |                   |  |   | (29,908          | ) |  |   | (30,432  | )
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|(Loss) income before benefit from income taxes     |  |                    | (69,193  | ) |              |   | 39,676   |                   |  |   | (11,720          | ) |  |   | (81,624  | )
|Benefit from income taxes                          |  |                    | 22       |   |              |   |         |                   |  |   | 56               |   |  |   | 101,830  |  
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Consolidated net (loss) income                     |  |                    | (69,171  | ) |              |   | 39,676   |                   |  |   | (11,664          | ) |  |   | 20,206   |  
|Less: net loss (income)  non-controlling interest |  |                    | 170      |   |              |   | (289     | )                 |  |   | 27               |   |  |   | 520      |  
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net (loss) income                                  |  | $                  | (69,001  | ) |              | $ | 39,387   |                   |  | $ | (11,637          | ) |  | $ | 20,726   |  
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|                                                   | 
|                                                   |  | Three Months Ended |         
|                                                   |  | March 31,2008      |          |   | June 30,2008 |   |          | September 30,2008 |  |   | December 31,2008 |  
|Sales                                              |  | $                  | 137,437  |   |              | $ | 140,089  |                   |  | $ | 102,168          |   |  | $ | 146,384  |  
|Cost of sales                                      |  |                    | (132,669 | ) |              |   | (134,693 | )                 |  |   | (88,812          | ) |  |   | (130,701 | )
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Gross profit                                       |  |                    | 4,768    |   |              |   | 5,396    |                   |  |   | 13,356           |   |  |   | 15,683   |  
|Other income, costs and expenses, net              |  |                    | (48,091  | ) |              |   | (45,116  | )                 |  |   | (53,824          | ) |  |   | (55,848  | )
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Loss before benefit from income taxes              |  |                    | (43,323  | ) |              |   | (39,720  | )                 |  |   | (40,468          | ) |  |   | (40,165  | )
|Benefit from income taxes                          |  |                    | 41,592   |   |              |   |         |                   |  |   |                 |   |  |   |         |  
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Consolidated net loss                              |  |                    | (1,731   | ) |              |   | (39,720  | )                 |  |   | (40,468          | ) |  |   | (40,165  | )
|Less: net loss (income)  non-controlling interest |  |                    | 925      |   |              |   | 790      |                   |  |   | (628             | ) |  |   | 9,359    |  
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net loss                                           |  | $                  | (806     | ) |              | $ | (38,930  | )                 |  | $ | (41,096          | ) |  | $ | (30,806  | )
|                                                   |  |                    |          |   |              |   |          |                   |  |   |                  |   |  |   |          |  



125



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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                    
|3.1(2)        |  | Certificate of Incorporation of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                                    
|3.2(1)        |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                           
|3.3(13)       |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                           
|3.4(13)       |  | Certificate of Amendment of Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                      
|3.5(2)        |  | Bylaws of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                                                                                                                                                          
|4.1(11)       |  | Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee
(including form of notes and guarantees).                                                                                                                                                                                                             
|4.2(8)        |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S.
Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as
Trustee).   
|4.3(12)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank
National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as
Trustee).              
|4.4(3)        |  | Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee
(including form of notes and guarantees).                                                                                                                                                                                                           
|4.5(8)        |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S.
Bank National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as
Trustee). 
|4.6(12)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank
National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as
Trustee).            
|4.7(7)        |  | Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee
(including form of notes and guarantees).                                                                                                                                                                                                          
|4.8(8)        |  | Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S.
Bank National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as
Trustee).
|4.9(12)       |  | Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank
National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as
Trustee).           
|10.1(6)       |  | Revolving Line of Credit Loan Agreement, dated as of March 11, 2003, by and among Moffett Meadows Partners, LLC, a Delaware limited liability company, as
borrower, and California Bank & Trust, a California banking corporation, and the other financial institutions named therein, as lenders.                                                                                                             
|10.2(6)       |  | Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware
corporation.                                                                                                                                                                                                                                                                  
|10.3(15)      |  | Senior Secured Term Loan Agreement dated as of October 20, 2009 by and between William Lyon Homes, Inc., (Borrower) and COLFIN WLH Funding, LLC,
as Administrative Agent (Admin Agent), COLFIN WLH Funding, LLC, as Initial Lender and Lead Arranger (COLFIN).                                                                                                                                           
|10.4(9)       |  | Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.                                                                                                                                                                                                                                                                         
|10.5(9)       |  | 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.                                                                                                                                                                                                     
|10.6(9)       |  | Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and
effective November 5, 1999.                                                                                                                                                                                                                          
|10.7(4)       |  | Option Agreement and Escrow Instructions between William Lyon Homes, Inc., a California corporation and Lathrop Investment, L.P., a California limited
partnership, dated as of October 24, 2000.                                                                                                                                                                                                              
|10.8(13)      |  | Description of 2007 Cash Bonus Plan.                                                                                                                                                                                                                                                                                                                                                                           
|10.9(13)      |  | 2007 Senior Executive Bonus Plan.                                                                                                                                                                                                                                                                                                                                                                              
|10.10(10)     |  | Standard Industrial/Commercial Single-Tenant Lease  Net between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole
beneficiary.                                                                                                                                                                                                                                                        



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                      
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                          
|10.11(5)      |  | The Presley Companies Non-Qualified Retirement Plan for Outside Directors.                                                                                                                                                                                                           
|10.12(14)     |  | Third Extension and Modification agreement dated May 19, 2008, by and between Circle G at the Church Farm North Joint Venture, LLC, an Arizona limited
liability company, and California National Bank, a national banking association.                                              
|10.13(16)     |  | Aircraft Purchase and Sale Agreement dated as of September 3, 2009 (Effective Date), by and between Presley CMR, Inc., and Martin Aviation, Inc.,
or its designee.                                                                                                                 
|10.14(16)     |  | Secured Promissory Note dated September 9, 2009 from Martin Aviation, Inc., a California corporation (Maker) payable to William Lyon Homes, Inc.,
a California corporation (Holder).                                                                                             
|10.15(16)     |  | Aircraft Mortgage and Security Agreement between Martin Aviation, Inc., a California corporation and William Lyon Homes, Inc., dated as of September 9,
2009.                                                                                                                        
|10.16(17)     |  | Project Completion Bonus Plan.                                                                                                                                                                                                                                                       
|10.17(18)     |  | First Amendment to Senior Secured Term Loan Agreement dated as of March 18, 2011 by and between William Lyon Homes, Inc., (Borrower) and COLFIN
WLH Funding, LLC, as Administrative Agent (Admin Agent), COLFIN WLH Funding, LLC, as Initial Lender and Lead Arranger (COLFIN).
|12.1(19)      |  | Statement of computation of ratio of earnings to fixed charges.                                                                                                                                                                                                                      
|21.1(19)      |  | List of Subsidiaries of William Lyon Homes, a Delaware corporation.                                                                                                                                                                                                                  
|31.1(19)      |  | Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                  
|31.2(19)      |  | Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                  
|32.1(19)      |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of
2002.                                                                                                                                   
|32.2(19)      |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of
2002.                                                                                                                                   



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

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

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

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

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

|(6) | Previously filed as an exhibit to Amendment No. 3 to the Companys Registration Statement on Form S-4 (File No. 333-114691) filed
July 15, 2004 and incorporated herein by this reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed November 23, 2004 and incorporated herein by this
reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Previously filed as an exhibit to the Companys Registration Statement on Form S-4 (SEC Registration No. 333-121346) filed
December 16, 2004 and incorporated herein by this reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(11) | Previously filed as an exhibit to Amendment No. 1 to the Companys Registration Statement on Form S-4 (SEC Registration
No. 333-121346) filed January 10, 2005 and incorporated herein by this reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed November 14, 2005 and incorporated herein by this
reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by
reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on May 28, 2008 and incorporated herein by reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------------

|(15) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on October 22, 2009 and incorporated herein by reference.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------

|(16) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on September 10, 2009 and incorporated herein by
reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(17) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on September 20, 2010 and incorporated herein by
reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------

|(18) | Previously filed as an exhibit to the Companys Current Report on Form 8-K filed on March 21, 2011 and incorporated herein by reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------

|(19) | Filed herewith.
|---- | ---------------