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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-K/A



Amendment No. 1



(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, 2003



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 0-18001



WILLIAM LYON HOMES

(Exact name of
registrant as specified in its charter)



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





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



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



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



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



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



None



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



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



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



The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2003 was $140,886,110. (This calculation assumes that all officers and directors of the Company are affiliates.)



The number of shares of Common Stock outstanding as of
May 1, 2004 was 9,828,940.



DOCUMENTS INCORPORATED
BY REFERENCE



Portions of registrants Proxy Statement
for the Annual Meeting of Holders of Common Stock to be held on May 10, 2004 are incorporated herein by reference into Part III.



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EXPLANATORY NOTE



On April 21, 2004, William Lyon Homes filed a Registration Statement on Form S-4 with the Securities and Exchange
Commission (the SEC). The Company hereby amends Items 1, 6, 7, 8 and 15 of its Annual Report on Form 10-K for the fiscal year ended December 31, 2003 that was originally filed with the SEC on March 12, 2004 (the Original
Filing), to respond to comments the Company received from the SEC in connection with the Form S-4.



This report continues to speak as of the date of the Original Filing, and the Company has not updated the disclosures in this report to speak as of a
later date. Updated information regarding recent developments is included in the Companys other filings with the SEC and in press releases issued by the Company.



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WILLIAM LYON HOMES



INDEX



|         |  |                                                                                       |  |         
|-------- |  | ------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                       |  | Page No.
|PART I  
|         |  |                                                                                      
|Item 1.  |  | Business                                                                              |  | 1       
|        
|PART II 
|         |  |                                                                                      
|Item 6.  |  | Selected Financial Data                                                               |  | 14      
|         |  |                                                                                      
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15      
|         |  |                                                                                      
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 37      
|        
|PART IV 
|         |  |                                                                                      
|Item 15. |  | Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K          |  | 38      
|         |  |                                                                                      
|         |  | Index to Financial Statements                                                         |  | 44      



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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 59,000 homes. The Company conducts its homebuilding operations through five geographic divisions (Southern California, San Diego, Northern California, Arizona and Nevada) including both
consolidated projects and projects being developed in unconsolidated joint ventures. For 2003, approximately 69% of the home closings of the Company and its joint ventures were derived from its California operations. For the year ended
December 31, 2003, on a consolidated basis the Company had revenues from homes sales of $866.7 million and delivered 2,149 homes. In addition, for the year ended December 31, 2003 the Companys unconsolidated joint ventures
had revenues from homes sales of $317.1 million and delivered 655 homes. The Company presents information related to its unconsolidated joint ventures as such information represents an important aspect of the Companys business as
well as a substantial portion of its operating income; however, the financial statements of the unconsolidated joint ventures are not combined or consolidated with the Companys consolidated financial statements.



The Company designs, constructs and sells a wide range of homes designed to
meet the specific needs of each of its markets, although it primarily emphasizes sales to the entry-level and move-up home buyer markets. At December 31, 2003, the Company marketed its homes through 42 sales locations in both its consolidated
projects and projects being developed in unconsolidated joint ventures. In 2003, the average sales price for combined homes delivered was $422,200. Base sales prices for actively selling projects in 2003 ranged from $119,000 to $1,825,000.



As of December 31, 2003, the Company and its joint
ventures owned approximately 6,174 lots (including 1,142 in unconsolidated joint ventures) and had options to purchase an additional 11,998 lots, substantially all of which are entitled. As used in this Annual Report on Form 10-K/A,
entitled land has a development agreement and/or vesting tentative map, or a final recorded plat or map from the appropriate county or city government. Development agreements and vesting tentative maps generally provide for the right to
develop the land in accordance with the provisions of the development agreement or vesting tentative map unless an issue arises concerning health, safety or general welfare. The Companys sources of developed lots for its homebuilding
operations are (1) development of master-planned communities, primarily through unconsolidated joint ventures at the current time, and (2) purchase of smaller projects with shorter life cycles (merchant homebuilding). The Company estimates that
its current inventory of land is adequate to supply its homebuilding operations at current operating levels for approximately 6 years.



As of December 31, 2003, the Company and certain of its subsidiaries were general partners or members in a number of joint ventures involved in the
development and sale of residential projects. As described more fully in Note 2 of Notes to Consolidated Financial Statements, in accordance with Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable
Interest Entities, as amended (Interpretation No. 46), six joint ventures created after January 31, 2003 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 six joint ventures have been consolidated with the Companys financial statements as of December 31, 2003 and for the period then ended.



The financial statements of joint ventures in which the Company has a 50% or
less voting or economic interest (and thus are not controlled by the Company) and which were created prior to February 1, 2003, and the financial statements of joint ventures which have not been determined to be variable interest entities in which
the Company is considered the primary beneficiary are not consolidated with the Companys financial



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



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



The Company had total consolidated revenues from operations of $897.8
million, $613.3 million and $468.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. Homes closed by the Company, including its joint ventures, were 2,804, 2,522 and 2,566 for the years ended December 31, 2003, 2002
and 2001, respectively. Including its joint ventures, the Companys dollar amount of backlog of homes sold but not closed as of December 31, 2003, was $595.2 million, a 130% increase over the $259.1 million as of December 31, 2002. The
cancellation rate of buyers who contracted to buy a home but did not close escrow was approximately 18% during 2003 and 19% during 2002.



The Companys operations are dependent to a significant extent on debt financing and on joint venture financing. The Companys principal credit
sources are its 103/4% Senior Notes, 71/2% Senior Notes, secured revolving credit facilities, seller-provided financing, and land banking transactions. At December 31, 2003, the outstanding principal amount of the
103/4% Senior Notes was $246.4 million. The secured revolving credit facilities are revolving lines of
credit with a maximum commitment of $325.0 million at December 31, 2003. However, the credit facilities have limitations on the amounts that can be borrowed at any time based on assets which are included in the credit facilities and the specified
borrowings permitted under borrowing base calculations. The secured revolving credit facilities are secured by substantially all of the Companys assets. At December 31, 2003, the outstanding principal amount under the secured revolving credit
facilities was $49.2 million. The Companys mortgage subsidiary has a $20.0 million revolving credit facility and a $10.0 million revolving credit facility to fund its mortgage operations, of which an aggregate $9.6 million was outstanding
at December 31, 2003. On February 6, 2004, the Company completed an offering of 71/2% Senior Notes due 2014 in
the outstanding principal amount of $150.0 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.



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 through five geographic divisions: Southern California, San Diego, Northern California,
Arizona, and Nevada. Each of the divisions has responsibility for the management of the Companys homebuilding and development operations within the geographic boundaries of the division.



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



|                              |  |                         |         |      |   |         |  |   |        
|----------------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | -------
|                              |  | Year Ended December 31,
|                              |  | 2003                    |         | 2002 |   | 2001   
|                              |  | (in thousands)         
|Consolidated                  |  |                         |         |      |   |         |  |   |        
|Southern California(1)        |  | $                       | 304,190 |      | $ | 232,868 |  | $ | 118,611
|San Diego(2)                  |  |                         | 170,264 |      |   | 115,843 |  |   | 117,652
|Northern California(3)        |  |                         | 181,062 |      |   | 84,679  |  |   | 75,108 
|Arizona(4)                    |  |                         | 67,402  |      |   | 65,571  |  |   | 46,262 
|Nevada(5)                     |  |                         | 165,395 |      |   | 103,449 |  |   | 101,423
|                              |  |                         |         |      |   |         |  |   |        
|                              |  | $                       | 888,313 |      | $ | 602,410 |  | $ | 459,056
|                              |  |                         |         |      |   |         |  |   |        
|Unconsolidated joint ventures |  |                         |         |      |   |         |  |   |        
|Southern California(1)        |  |                         | 103,020 |      |   | 167,518 |  |   | 156,336
|San Diego(2)                  |  |                         | 118,753 |      |   | 90,843  |  |   | 49,748 
|Northern California(3)        |  |                         | 103,776 |      |   | 121,415 |  |   | 115,385
|                              |  |                         |         |      |   |         |  |   |        
|                              |  | $                       | 325,549 |      | $ | 379,776 |  | $ | 321,469
|                              |  |                         |         |      |   |         |  |   |        

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



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



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



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



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



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



LAND ACQUISITION AND DEVELOPMENT



As of December 31, 2003, the Company and its joint ventures controlled
18,172 lots. Of these lots, 6,174 were owned and entitled.



The
Company estimates that its current inventory of land owned is adequate to supply its homebuilding operations at current operating levels for approximately six years.



The Company uses a land acquisition team, which includes members of its senior management, to manage the risks associated
with land ownership and development. It is the Companys policy that land can be purchased or sold only with the prior approval of senior management. The Companys land acquisition strategy has been to undertake projects with shorter
life-cycles in order to reduce development and market risk while maintaining an inventory of owned lots sufficient for construction of homes over a two-year period. The Companys strategy consists of the following elements:



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



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



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



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



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



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



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



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



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



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



During the year ended December 31, 2003, the Company and two unaffiliated parties formed a series of limited liability companies for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and
Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into 1,910 residential homesites. This unique acquisition is positioned to deliver homes in multiple product segments in what the Company believes is
one of the highest demand and supply constrained markets in the country. Upon completion of the development, the Company has the obligation under certain specific conditions to purchase approximately one-half of the homesites. It is anticipated that
homebuilding activities and first deliveries will begin in 2005. See Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition and Liquidity and Note 5 of Notes to
Consolidated Financial Statements for more information relating to this transaction and related financing.



HOMEBUILDING AND MARKET STRATEGY



The Company currently has a wide variety of product lines which enables it to meet the specific needs of each of its markets. Although the Company
primarily emphasizes sales to the entry-level and move-up home markets, it believes that this diversified product strategy enables it to best serve a wide range of buyers and adapt quickly to a variety of market conditions. In order to reduce
exposure to local market conditions, the Companys sales locations are geographically dispersed. At December 31, 2003, the Company and its joint ventures had 42 sales locations.



Because the decision as to which product to develop is based on the Companys assessment of market conditions and the
restrictions imposed by government regulations, homestyles and sizes vary from project to project. The Companys attached housing ranges in size from 1,207 to 2,666 square feet, and the detached housing ranges from 1,309 to 5,770 square feet.



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Due to the Companys product and geographic diversification strategy, the prices of the
Companys homes also vary substantially. Base sales prices for the Companys attached housing range from approximately $297,000 to $437,000 and base sales prices for detached housing range from approximately $119,000 to $1,825,000. On a
combined basis with the Companys joint ventures, the average sales price of homes closed for the year ended December 31, 2003 was $422,200.



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



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



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



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Description of Projects and Communities Under Development



The Companys homebuilding projects usually take two to five years to
develop. The following table presents project information relating to each of the Companys homebuilding divisions as of December 31, 2003 and only includes projects with lots owned as of December 31, 2003 or homes closed for the year ended
December 31, 2003.



|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|------------------------------------------- |  | ---------------------- |  | ------------------------------------------ |  | ------------------------------------ |  | ---------------------------------- |  | ------------------------------------- |  | ------------------------------------------------- |  | ----------------------
|Project (County) Product                    |  | Year of First Delivery |  | Estimated Number of Homes at Completion(1) |  | Units Closed as of December 31, 2003 |  | Backlog at December 31, 2003(2)(3) |  | Lots Owned as of December 31, 2003(4) |  | Homes Closed for the Year Ended December 31, 2003 |  | Sales Price Range(5)  
|                                           
|SOUTHERN CALIFORNIA                        
|Consolidated:                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Orange County                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Terraza at Vista del Verde, Yorba Linda     |  | 2001                   |  | 106                                        |  | 106                                  |  | 0                                  |  | 0                                     |  | 6                                                 |  | $565,000  615,000    
|Monticello, Irvine                          |  | 2002                   |  | 112                                        |  | 112                                  |  | 0                                  |  | 0                                     |  | 14                                                |  | $330,000  390,000    
|Montellano at Talega, San Clemente          |  | 2002                   |  | 61                                         |  | 61                                   |  | 0                                  |  | 0                                     |  | 33                                                |  | $890,000  960,000    
|Mirador at Talega, San Clemente             |  | 2004                   |  | 76                                         |  | 0                                    |  | 0                                  |  | 76                                    |  | 0                                                 |  | $1,025,000  1,125,000
|Sterling Glen, Ladera Ranch                 |  | 2002                   |  | 102                                        |  | 102                                  |  | 0                                  |  | 0                                     |  | 11                                                |  | $502,000  535,000    
|Davenport, Ladera Ranch                     |  | 2003                   |  | 163                                        |  | 112                                  |  | 30                                 |  | 51                                    |  | 112                                               |  | $380,000  437,000    
|Walden Park, Ladera Ranch                   |  | 2004                   |  | 109                                        |  | 0                                    |  | 22                                 |  | 109                                   |  | 0                                                 |  | $560,000  590,000    
|Weatherhaven, Ladera Ranch                  |  | 2002                   |  | 71                                         |  | 71                                   |  | 0                                  |  | 0                                     |  | 68                                                |  | $485,000  565,000    
|Laurel at Quail Hill, Irvine                |  | 2003                   |  | 83                                         |  | 77                                   |  | 5                                  |  | 6                                     |  | 77                                                |  | $560,000  610,000    
|Linden at Quail Hill, Irvine                |  | 2003                   |  | 100                                        |  | 94                                   |  | 6                                  |  | 6                                     |  | 94                                                |  | $580,000  675,000    
|Ambridge at Quail Hill, Irvine              |  | 2004                   |  | 128                                        |  | 0                                    |  | 0                                  |  | 56                                    |  | 0                                                 |  | $460,000  520,000    
|Altamura @ Nellie Gail Ranch, Laguna Hills  |  | 2003                   |  | 52                                         |  | 10                                   |  | 17                                 |  | 25                                    |  | 10                                                |  | $1,650,000  1,825,000
|Seacove at the Waterfront, Huntington Beach |  | 2004                   |  | 29                                         |  | 0                                    |  | 0                                  |  | 29                                    |  | 0                                                 |  | $675,000  810,000    
|Covenant Hills P-30A, Ladera Ranch          |  | 2005                   |  | 53                                         |  | 0                                    |  | 0                                  |  | 53                                    |  | 0                                                 |  | $880,000  985,000    
|Covenant Hills P-30B, Ladera Ranch          |  | 2005                   |  | 52                                         |  | 0                                    |  | 0                                  |  | 52                                    |  | 0                                                 |  | $1,010,000  1,059,000
|Honeyman I, San Juan Capistrano             |  | 2005                   |  | 80                                         |  | 0                                    |  | 0                                  |  | 80                                    |  | 0                                                 |  | $1,020,000  1,190,000
|Honeyman II, San Juan Capistrano            |  | 2005                   |  | 40                                         |  | 0                                    |  | 0                                  |  | 40                                    |  | 0                                                 |  | $1,260,000  1,350,000
|Riverside County                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Providence Ranch, Corona                    |  | 2002                   |  | 97                                         |  | 97                                   |  | 0                                  |  | 0                                     |  | 5                                                 |  | $290,000  340,000    
|Providence Ranch North, Corona              |  | 2002                   |  | 83                                         |  | 83                                   |  | 0                                  |  | 0                                     |  | 2                                                 |  | $246,000  300,000    
|Providence Ranch III, Corona                |  | 2003                   |  | 67                                         |  | 67                                   |  | 0                                  |  | 0                                     |  | 67                                                |  | $290,000  365,000    
|San Bernardino County Echo Glen  Chino     |  | 2003                   |  | 89                                         |  | 21                                   |  | 40                                 |  | 68                                    |  | 21                                                |  | $480,000  540,000    
|Ventura County                              |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Cantada, Oxnard                             |  | 2002                   |  | 113                                        |  | 113                                  |  | 0                                  |  | 0                                     |  | 1                                                 |  | $343,000  363,000    
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Total consolidated                          |  |                        |  | 1,866                                      |  | 1,126                                |  | 120                                |  | 651                                   |  | 521                                               |  |                       
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Unconsolidated joint ventures:              |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Orange County                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Beachside, Huntington Beach                 |  | 2001                   |  | 86                                         |  | 86                                   |  | 0                                  |  | 0                                     |  | 5                                                 |  | $620,000  640,000    
|Seacove at the Waterfront, Huntington Beach |  | 2004                   |  | 77                                         |  | 0                                    |  | 0                                  |  | 77                                    |  | 0                                                 |  | $675,000  810,000    
|Riverside County                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Discovery, North Corona                     |  | 2004                   |  | 172                                        |  | 0                                    |  | 12                                 |  | 172                                   |  | 0                                                 |  | $360,000  395,000    
|Bounty, North Corona                        |  | 2003                   |  | 167                                        |  | 25                                   |  | 34                                 |  | 142                                   |  | 25                                                |  | $405,000  435,000    



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|                                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|---------------------------------------------- |  | ---------------------- |  | ------------------------------------------ |  | ------------------------------------ |  | ---------------------------------- |  | ------------------------------------- |  | ------------------------------------------------- |  | ----------------------
|Project (County) Product                       |  | Year of First Delivery |  | Estimated Number of Homes at Completion(1) |  | Units Closed as of December 31, 2003 |  | Backlog at December 31, 2003(2)(3) |  | Lots Owned as of December 31, 2003(4) |  | Homes Closed for the Year Ended December 31, 2003 |  | Sales Price Range(5)  
|Ventura County                                 |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Quintana, Thousand Oaks                        |  | 2001                   |  | 90                                         |  | 90                                   |  | 0                                  |  | 0                                     |  | 33                                                |  | $555,000  650,000    
|Coronado, Oxnard                               |  | 2002                   |  | 110                                        |  | 110                                  |  | 0                                  |  | 0                                     |  | 36                                                |  | $435,000  460,000    
|Cantabria, Oxnard                              |  | 2002                   |  | 87                                         |  | 87                                   |  | 0                                  |  | 0                                     |  | 13                                                |  | $350,000  370,000    
|Los Angeles County                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Toscana, Moorpark                              |  | 2002                   |  | 70                                         |  | 70                                   |  | 0                                  |  | 0                                     |  | 44                                                |  | $518,000  553,000    
|Oakmont @ Westridge, Valencia                  |  | 2003                   |  | 87                                         |  | 16                                   |  | 31                                 |  | 71                                    |  | 16                                                |  | $915,000  1,025,000  
|Creekside, Valencia                            |  | 2004                   |  | 141                                        |  | 0                                    |  | 0                                  |  | 141                                   |  | 0                                                 |  | $320,000  370,000    
|                                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Total unconsolidated joint ventures.           |  |                        |  | 1,087                                      |  | 484                                  |  | 77                                 |  | 603                                   |  | 172                                               |  |                       
|                                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|SOUTHERN CALIFORNIA REGION TOTAL               |  |                        |  | 2,953                                      |  | 1,610                                |  | 197                                |  | 1,254                                 |  | 693                                               |  |                       
|                                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|                                              
|NORTHERN CALIFORNIA                           
|Consolidated:                                  |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|San Joaquin County                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Ironwood II, Lathrop                           |  | 2003                   |  | 88                                         |  | 64                                   |  | 21                                 |  | 24                                    |  | 64                                                |  | $276,000  317,000    
|Lyon Estates at Stonebridge, Lathrop           |  | 2001                   |  | 145                                        |  | 145                                  |  | 0                                  |  | 0                                     |  | 63                                                |  | $284,000  324,000    
|Lyon Estates at Stonebridge, (Unit 9), Lathrop |  | 2004                   |  | 72                                         |  | 0                                    |  | 46                                 |  | 72                                    |  | 0                                                 |  | $332,000  372,000    
|Contra Costa County                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|The Bluffs, Hercules                           |  | 2003                   |  | 80                                         |  | 43                                   |  | 33                                 |  | 37                                    |  | 43                                                |  | $622,000  674,000    
|The Shores, Hercules                           |  | 2003                   |  | 110                                        |  | 55                                   |  | 36                                 |  | 55                                    |  | 55                                                |  | $575,000  633,000    
|Sacramento County                              |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Lyon Palazzo, Natomas                          |  | 2001                   |  | 100                                        |  | 100                                  |  | 0                                  |  | 0                                     |  | 9                                                 |  | $273,000  322,000    
|Santa Clara County                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|The Ranch at Silver Creek, San Jose:           |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Provance                                       |  | 2003                   |  | 95                                         |  | 15                                   |  | 23                                 |  | 80                                    |  | 15                                                |  | $1,075,000  1,260,000
|Portofino                                      |  | 2003                   |  | 42                                         |  | 8                                    |  | 26                                 |  | 34                                    |  | 8                                                 |  | $1,245,000  1,395,000
|Mariposa                                       |  | 2003                   |  | 78                                         |  | 18                                   |  | 14                                 |  | 60                                    |  | 18                                                |  | $620,000  720,000    
|Siena                                          |  | 2003                   |  | 61                                         |  | 17                                   |  | 20                                 |  | 44                                    |  | 17                                                |  | $725,000  840,000    
|Casa Bella                                     |  | 2003                   |  | 56                                         |  | 3                                    |  | 17                                 |  | 53                                    |  | 3                                                 |  | $560,000  665,000    
|Esperanza                                      |  | 2004                   |  | 74                                         |  | 0                                    |  | 0                                  |  | 74                                    |  | 0                                                 |  | $710,000  845,000    
|Montesa                                        |  | 2004                   |  | 54                                         |  | 0                                    |  | 0                                  |  | 54                                    |  | 0                                                 |  | $775,000  900,000    
|Hacienda                                       |  | 2004                   |  | 34                                         |  | 0                                    |  | 0                                  |  | 34                                    |  | 0                                                 |  | $1,250,000  1,339,000
|Tesoro                                         |  | 2004                   |  | 44                                         |  | 0                                    |  | 0                                  |  | 44                                    |  | 0                                                 |  | $657,000  699,000    
|                                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|                                               |  |                        |  | 538                                        |  | 61                                   |  | 100                                |  | 477                                   |  | 61                                                |  |                       
|                                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Stanislaus County                              |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Lyon Seasons, Modesto                          |  | 2002                   |  | 71                                         |  | 71                                   |  | 0                                  |  | 0                                     |  | 26                                                |  | $296,000  339,000    
|Sonterra at Walker Ranch, Patterson            |  | 2003                   |  | 119                                        |  | 18                                   |  | 7                                  |  | 101                                   |  | 18                                                |  | $305,000  385,000    
|                                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Total consolidated                             |  |                        |  | 1,323                                      |  | 557                                  |  | 243                                |  | 766                                   |  | 339                                               |  |                       
|                                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Unconsolidated joint ventures:                 |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Contra Costa County                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                       
|Lyon Dorado, San Ramon                         |  | 2001                   |  | 54                                         |  | 54                                   |  | 0                                  |  | 0                                     |  | 1                                                 |  | $788,000  1,003,000  
|Olde Ivy, Brentwood                            |  | 2003                   |  | 77                                         |  | 20                                   |  | 20                                 |  | 57                                    |  | 20                                                |  | $323,000  358,000    
|Heartland, Brentwood                           |  | 2003                   |  | 76                                         |  | 20                                   |  | 19                                 |  | 56                                    |  | 20                                                |  | $329,000  356,000    
|Gables, Brentwood                              |  | 2003                   |  | 99                                         |  | 20                                   |  | 20                                 |  | 79                                    |  | 20                                                |  | $335,000  394,000    
|Overlook, Hercules                             |  | 2003                   |  | 133                                        |  | 26                                   |  | 34                                 |  | 107                                   |  | 26                                                |  | $545,000  587,000    



7



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##### Table of Contents

|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|------------------------------------------- |  | ---------------------- |  | ------------------------------------------ |  | ------------------------------------ |  | ---------------------------------- |  | ------------------------------------- |  | ------------------------------------------------- |  | --------------------
|Project (County) Product                    |  | Year of First Delivery |  | Estimated Number of Homes at Completion(1) |  | Units Closed as of December 31, 2003 |  | Backlog at December 31, 2003(2)(3) |  | Lots Owned as of December 31, 2003(4) |  | Homes Closed for the Year Ended December 31, 2003 |  | Sales Price Range(5)
|Solano County                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Cascade/Paradise Valley, Fairfield          |  | 2003                   |  | 9                                          |  | 9                                    |  | 0                                  |  | 0                                     |  | 9                                                 |  | $586,000  626,000  
|Brook, Fairfield                            |  | 2001                   |  | 121                                        |  | 121                                  |  | 0                                  |  | 0                                     |  | 7                                                 |  | $312,000  359,000  
|El Dorado County                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Lyon Casina, El Dorado Hills                |  | 2001                   |  | 123                                        |  | 100                                  |  | 20                                 |  | 23                                    |  | 60                                                |  | $365,000  405,000  
|Lyon Prima, El Dorado Hills                 |  | 2001                   |  | 137                                        |  | 86                                   |  | 22                                 |  | 51                                    |  | 47                                                |  | $405,000  481,000  
|Placer County                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Pinehurst at Morgan Creek                   |  | 2003                   |  | 117                                        |  | 12                                   |  | 13                                 |  | 105                                   |  | 12                                                |  | $491,000  583,000  
|Cypress at Morgan Creek                     |  | 2003                   |  | 73                                         |  | 12                                   |  | 12                                 |  | 61                                    |  | 12                                                |  | $456,000  516,000  
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Total unconsolidated joint ventures         |  |                        |  | 1,019                                      |  | 480                                  |  | 160                                |  | 539                                   |  | 234                                               |  |                     
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|NORTHERN CALIFORNIA REGION TOTAL            |  |                        |  | 2,342                                      |  | 1,037                                |  | 403                                |  | 1,305                                 |  | 573                                               |  |                     
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|                                           
|SAN DIEGO                                  
|Consolidated:                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Riverside County                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Horsethief Canyon RanchSeries 400, Corona |  | 1995                   |  | 554                                        |  | 554                                  |  | 0                                  |  | 0                                     |  | 1                                                 |  | $280,000  307,000  
|Sycamore Ranch, Fallbrook                   |  | 1997                   |  | 195                                        |  | 195                                  |  | 0                                  |  | 0                                     |  | 37                                                |  | $509,000  690,000  
|Bridle Creek,, Corona                       |  | 2003                   |  | 274                                        |  | 18                                   |  | 23                                 |  | 172                                   |  | 18                                                |  | $508,000  570,000  
|Willow Glen, Temecula                       |  | 2003                   |  | 74                                         |  | 59                                   |  | 13                                 |  | 15                                    |  | 59                                                |  | $342,000  383,000  
|Tessera, Beaumont                           |  | 2003                   |  | 168                                        |  | 66                                   |  | 34                                 |  | 72                                    |  | 66                                                |  | $223,000  262,000  
|Sedona, Murietta                            |  | 2003                   |  | 138                                        |  | 42                                   |  | 28                                 |  | 65                                    |  | 42                                                |  | $385,000  478,000  
|Cabrillo at Montecito Ranch, Corona         |  | 2004                   |  | 83                                         |  | 0                                    |  | 37                                 |  | 83                                    |  | 0                                                 |  | $483,000  515,000  
|San Diego County                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|The Groves, Escondido                       |  | 2001                   |  | 92                                         |  | 92                                   |  | 0                                  |  | 0                                     |  | 25                                                |  | $367,000  382,000  
|The Orchards, Escondido                     |  | 2002                   |  | 79                                         |  | 79                                   |  | 0                                  |  | 0                                     |  | 57                                                |  | $413,000  432,000  
|Vineyards, Escondido                        |  | 2002                   |  | 73                                         |  | 27                                   |  | 30                                 |  | 46                                    |  | 27                                                |  | $529,000  546,000  
|Meadows, Escondido                          |  | 2004                   |  | 44                                         |  | 0                                    |  | 21                                 |  | 44                                    |  | 0                                                 |  | $477,000  536,000  
|Sonora Ridge, Chula Vista                   |  | 2003                   |  | 168                                        |  | 79                                   |  | 40                                 |  | 49                                    |  | 79                                                |  | $386,000  422,000  
|Boardwalk, San Diego                        |  | 2004                   |  | 90                                         |  | 0                                    |  | 0                                  |  | 90                                    |  | 0                                                 |  | $447,000  500,000  
|San Miguel Village, Chula Vista             |  | 2005                   |  | 195                                        |  | 0                                    |  | 0                                  |  | 195                                   |  | 0                                                 |  | $298,000  326,000  
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Total consolidated                          |  |                        |  | 2,227                                      |  | 1,211                                |  | 226                                |  | 831                                   |  | 411                                               |  |                     
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Unconsolidated joint ventures:              |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|San Diego County                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Providence, San Diego                       |  | 2001                   |  | 123                                        |  | 123                                  |  | 0                                  |  | 0                                     |  | 49                                                |  | $587,000  627,000  
|Tanglewood, San Diego                       |  | 2002                   |  | 161                                        |  | 161                                  |  | 0                                  |  | 0                                     |  | 132                                               |  | $413,000  474,000  
|Summerwood, San Diego                       |  | 2002                   |  | 95                                         |  | 95                                   |  | 0                                  |  | 0                                     |  | 68                                                |  | $430,000  473,000  
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Total unconsolidated joint ventures         |  |                        |  | 379                                        |  | 379                                  |  | 0                                  |  | 0                                     |  | 249                                               |  |                     
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|SAN DIEGO REGION TOTAL                      |  |                        |  | 2,606                                      |  | 1,590                                |  | 226                                |  | 831                                   |  | 660                                               |  |                     
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|                                           
|ARIZONA                                    
|Consolidated:                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Maricopa County                             |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Sage Creek  Arcadia, Avondale              |  | 2000                   |  | 167                                        |  | 167                                  |  | 0                                  |  | 0                                     |  | 1                                                 |  | $137,000  160,000  
|Mesquite Grove  Parada, Chandler           |  | 2001                   |  | 112                                        |  | 104                                  |  | 6                                  |  | 8                                     |  | 66                                                |  | $189,000  233,000  



8



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##### Table of Contents

|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|------------------------------------------- |  | ---------------------- |  | ------------------------------------------ |  | ------------------------------------ |  | ---------------------------------- |  | ------------------------------------- |  | ------------------------------------------------- |  | --------------------
|Project (County) Product                    |  | Year of First Delivery |  | Estimated Number of Homes at Completion(1) |  | Units Closed as of December 31, 2003 |  | Backlog at December 31, 2003(2)(3) |  | Lots Owned as of December 31, 2003(4) |  | Homes Closed for the Year Ended December 31, 2003 |  | Sales Price Range(5)
|Mesquite Grove  Estates, Chandler          |  | 2001                   |  | 93                                         |  | 64                                   |  | 24                                 |  | 29                                    |  | 32                                                |  | $294,000  330,000  
|Dove Wing at Power Ranch, Gilbert           |  | 2001                   |  | 103                                        |  | 100                                  |  | 3                                  |  | 3                                     |  | 49                                                |  | $177,000  235,000  
|Aubergine at Tramonto, Phoenix              |  | 2001                   |  | 76                                         |  | 76                                   |  | 0                                  |  | 0                                     |  | 44                                                |  | $191,000  254,000  
|Morgan Creek at Country Place, Tolleson     |  | 2001                   |  | 115                                        |  | 112                                  |  | 3                                  |  | 3                                     |  | 83                                                |  | $119,000  141,000  
|Oakcrest at Gateway Crossing, Gilbert       |  | 2003                   |  | 236                                        |  | 42                                   |  | 68                                 |  | 114                                   |  | 42                                                |  | $132,000  171,000  
|Woodridge at Gateway Crossing, Gilbert      |  | 2003                   |  | 165                                        |  | 2                                    |  | 28                                 |  | 66                                    |  | 2                                                 |  | $148,000  188,000  
|Sonoran Foothills, PhoenixDesert Crown      |  | 2004                   |  | 124                                        |  | 0                                    |  | 0                                  |  | 13                                    |  | 0                                                 |  | $259,000  340,000  
|Desert Sierra                               |  | 2004                   |  | 212                                        |  | 0                                    |  | 0                                  |  | 20                                    |  | 0                                                 |  | $160,000  191,000  
|Cooley Station, Gilbert                     |  | 2004                   |  | 548                                        |  | 0                                    |  | 0                                  |  | 548                                   |  | 0                                                 |  |                     
|Copper Canyon Ranch, Surprise Rancho Vistas |  | 2004                   |  | 212                                        |  | 0                                    |  | 75                                 |  | 212                                   |  | 0                                                 |  | $278,000  362,000  
|Sunset Point                                |  | 2004                   |  | 282                                        |  | 0                                    |  | 0                                  |  | 282                                   |  | 0                                                 |  | $131,000  195,000  
|El Sendero Hills                            |  | 2004                   |  | 188                                        |  | 0                                    |  | 0                                  |  | 188                                   |  | 0                                                 |  | $186,000  238,000  
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|ARIZONA REGION TOTAL                        |  |                        |  | 2,633                                      |  | 667                                  |  | 207                                |  | 1,486                                 |  | 319                                               |  |                     
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|                                           
|NEVADA                                     
|Consolidated:                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Clark County                                |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Topaz Ridge at Summerlin,Las Vegas          |  | 2002                   |  | 89                                         |  | 80                                   |  | 9                                  |  | 9                                     |  | 41                                                |  | $577,000  630,000  
|Annendale, North Las Vegas                  |  | 2001                   |  | 194                                        |  | 193                                  |  | 1                                  |  | 1                                     |  | 107                                               |  | $181,000  204,000  
|Santalina at Summerlin,Las Vegas            |  | 2002                   |  | 74                                         |  | 74                                   |  | 0                                  |  | 0                                     |  | 73                                                |  | $265,000  291,000  
|Encanto at Summerlin,Las Vegas              |  | 2003                   |  | 79                                         |  | 79                                   |  | 0                                  |  | 0                                     |  | 79                                                |  | $363,000  386,000  
|Calimesa, North Las Vegas                   |  | 2003                   |  | 90                                         |  | 90                                   |  | 0                                  |  | 0                                     |  | 90                                                |  | $165,000  181,000  
|Iron Mountain, Las Vegas                    |  | 2003                   |  | 70                                         |  | 44                                   |  | 26                                 |  | 26                                    |  | 44                                                |  | $363,000  416,000  
|Vista Verde at Summerlin,Las Vegas          |  | 2003                   |  | 122                                        |  | 15                                   |  | 37                                 |  | 107                                   |  | 15                                                |  | $298,000  340,000  
|Miraleste at Summerlin,Las Vegas            |  | 2003                   |  | 122                                        |  | 7                                    |  | 44                                 |  | 115                                   |  | 7                                                 |  | $401,000  444,000  
|The Classics, North Las Vegas               |  | 2003                   |  | 227                                        |  | 52                                   |  | 29                                 |  | 175                                   |  | 52                                                |  | $190,000  214,000  
|The Springs, North Las Vegas                |  | 2003                   |  | 209                                        |  | 27                                   |  | 29                                 |  | 182                                   |  | 27                                                |  | $170,000  203,000  
|The Estates, North Las Vegas                |  | 2003                   |  | 176                                        |  | 24                                   |  | 33                                 |  | 152                                   |  | 24                                                |  | $204,000  228,000  
|The Cottages, North Las Vegas               |  | 2004                   |  | 360                                        |  | 0                                    |  | 25                                 |  | 360                                   |  | 0                                                 |  | $150,000  167,000  
|Granada at Summerlin,Las Vegas              |  | 2004                   |  | 144                                        |  | 0                                    |  | 0                                  |  | 144                                   |  | 0                                                 |  | $350,000  395,000  
|Palomar at Summerlin,Las Vegas              |  | 2005                   |  | 27                                         |  | 0                                    |  | 0                                  |  | 27                                    |  | 0                                                 |  | $399,000  432,000  
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|NEVADA REGION TOTAL                         |  |                        |  | 1,983                                      |  | 685                                  |  | 233                                |  | 1,298                                 |  | 559                                               |  |                     
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|GRAND TOTALS:                               |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|Consolidated                                |  |                        |  | 10,032                                     |  | 4,246                                |  | 1,029                              |  | 5,032                                 |  | 2,149                                             |  |                     
|Unconsolidated joint ventures               |  |                        |  | 2,485                                      |  | 1,343                                |  | 237                                |  | 1,142                                 |  | 655                                               |  |                     
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     
|                                            |  |                        |  | 12,517                                     |  | 5,589                                |  | 1,266                              |  | 6,174                                 |  | 2,804                                             |  |                     
|                                            |  |                        |  |                                            |  |                                      |  |                                    |  |                                       |  |                                                   |  |                     

---

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



9



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##### Table of Contents

|(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, 2003, 1,127 represent homes completed or under construction and 139 represent homes not yet
under construction.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Lots owned as of December 31, 2003 include lots in backlog at December 31, 2003.
|--- |  | --------------------------------------------------------------------------------

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



Sales and Marketing



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



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



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



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



The
Companys homes are typically sold before or during construction through sales contracts which are usually accompanied by a small cash deposit. Such sales contracts are usually subject to certain contingencies such as the buyers ability
to qualify for financing. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company and its joint ventures projects was approximately 18% during 2003. Cancellation rates are subject to a variety of
factors beyond the Companys control such as adverse economic conditions and increases in mortgage interest rates. The Company and its joint ventures inventory of completed and unsold homes was 6 homes as of December 31, 2003.



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



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##### Table of Contents

which the Company builds. The limited warranty covering construction defects is transferable to subsequent buyers not under direct contract with the Company
and requires that homebuyers agree to the definitions and procedures set forth in the warranty, including the submission of unresolved construction-related disputes to binding arbitration. The Company began providing this limited warranty at the end
of 2001.



In connection with the limited warranty covering
construction defects, the Company obtained a three-year insurance policy in November 2001. The Company has been informed by the insurance carrier that this insurance policy will respond to construction defect claims on homes that close during each
policy period for the duration of the Companys legal liability and that the policy will respond to potential losses relating to construction, including soil subsidence. The insurance policy provides a single policy of insurance to the Company
and the subcontractors enrolled in its insurance program. As a result, the Company is no longer required to obtain proof of insurance from these subcontractors nor be named as an additional insured under their individual insurance policies. The
Company still requires that subcontractors not enrolled in the insurance program provide proof of insurance and name the Company as an additional insured under their insurance policy. Furthermore, the Company generally requires that its
subcontractors provide the Company with an indemnity prior to receiving payment for their work.



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



Sale of Lots and Land



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



Customer Financing  Duxford Financial, Inc.



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



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



Information Systems and Controls



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



11



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##### Table of Contents

Regulation



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



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



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



Competition



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



Corporate Organization and Personnel



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



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



12



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##### Table of Contents

As of December 31, 2003, the Company employed 660 full-time and 27 part-time employees,
including corporate staff, supervisory personnel of construction projects, maintenance crews to service completed projects, as well as persons engaged in administrative, finance and accounting, mortgage, engineering, land acquisition, sales and
marketing activities.



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



Available Information



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



13



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##### Table of Contents

PART II



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, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 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, 2001, 2000 and 1999 and for the years ended December 31, 2000 and 1999 have been derived from the Companys audited financial statements for such years, which are not included herein. The selected historical
consolidated financial data set forth below are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under the heading Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the historical consolidated financial statements and accompanying notes included elsewhere herein.



|                                                                      |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|--------------------------------------------------------------------- |  | ------------------------------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ------- | -------- | - |  | - | -------- | -
|                                                                      |  | As of and for the Year Ended December 31,        |         
|                                                                      |  | 2003                                             |          |   | 2002 |   |          | 2001 |  |   | 2000     |   |  | 1999(1) |         
|                                                                      |  | (dollars in thousands, except per share amounts) |         
|Statement of Income Data:                                             |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Operating revenue                                                     |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Home sales                                                            |  | $                                                | 866,657  |   |      | $ | 593,762  |      |  | $ | 452,002  |   |  | $       | 403,850  |   |  | $ | 426,839  |  
|Lots, land and other sales                                            |  |                                                  | 21,656   |   |      |   | 8,648    |      |  |   | 7,054    |   |  |         | 3,016    |   |  |   | 13,142   |  
|Management fees                                                       |  |                                                  | 9,490    |   |      |   | 10,892   |      |  |   | 9,127    |   |  |         | 10,456   |   |  |   | 4,825    |  
|                                                                      |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|                                                                      |  |                                                  | 897,803  |   |      |   | 613,302  |      |  |   | 468,183  |   |  |         | 417,322  |   |  |   | 444,806  |  
|                                                                      |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Operating costs                                                       |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Cost of saleshomes                                                   |  |                                                  | (714,385 | ) |      |   | (504,330 | )    |  |   | (382,608 | ) |  |         | (335,891 | ) |  |   | (357,153 | )
|Cost of saleslots, land and other                                    |  |                                                  | (13,269  | ) |      |   | (9,404   | )    |  |   | (5,158   | ) |  |         | (3,378   | ) |  |   | (13,223  | )
|Sales and marketing                                                   |  |                                                  | (31,252  | ) |      |   | (22,862  | )    |  |   | (18,149  | ) |  |         | (16,515  | ) |  |   | (19,387  | )
|General and administrative                                            |  |                                                  | (50,315  | ) |      |   | (39,366  | )    |  |   | (37,171  | ) |  |         | (35,348  | ) |  |   | (24,193  | )
|Other                                                                 |  |                                                  | (1,834   | ) |      |   | (2,284   | )    |  |   |         |   |  |         |         |   |  |   |         |  
|Amortization of goodwill(2)                                           |  |                                                  |         |   |      |   |         |      |  |   | (1,242   | ) |  |         | (1,244   | ) |  |   | (307     | )
|                                                                      |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|                                                                      |  |                                                  | (811,055 | ) |      |   | (578,246 | )    |  |   | (444,328 | ) |  |         | (392,376 | ) |  |   | (414,263 | )
|                                                                      |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Equity in income of unconsolidated joint ventures                     |  |                                                  | 31,236   |   |      |   | 27,748   |      |  |   | 22,384   |   |  |         | 24,416   |   |  |   | 17,859   |  
|                                                                      |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Minority equity in income of consolidated entities                    |  |                                                  | (429     | ) |      |   |         |      |  |   |         |   |  |         |         |   |  |   |         |  
|                                                                      |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Operating income                                                      |  |                                                  | 117,555  |   |      |   | 62,804   |      |  |   | 46,239   |   |  |         | 49,362   |   |  |   | 48,402   |  
|Interest expense, net of amounts capitalized                          |  |                                                  |         |   |      |   |         |      |  |   | (227     | ) |  |         | (5,557   | ) |  |   | (6,153   | )
|Financial advisory expenses                                           |  |                                                  |         |   |      |   |         |      |  |   |         |   |  |         |         |   |  |   | (2,197   | )
|Other income, net(3)                                                  |  |                                                  | 6,397    |   |      |   | 4,977    |      |  |   | 7,513    |   |  |         | 7,940    |   |  |   | 7,666    |  
|                                                                      |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Income before provision for income taxes                              |  |                                                  | 123,952  |   |      |   | 67,781   |      |  |   | 53,525   |   |  |         | 51,745   |   |  |   | 47,718   |  
|Provision for income taxes                                            |  |                                                  | (51,815  | ) |      |   | (18,270  | )    |  |   | (5,847   | ) |  |         | (12,477  | ) |  |   | (241     | )
|                                                                      |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Net income                                                            |  | $                                                | 72,137   |   |      | $ | 49,511   |      |  | $ | 47,678   |   |  | $       | 39,268   |   |  | $ | 47,477   |  
|                                                                      |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Earnings per common share                                             |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Basic                                                                 |  | $                                                | 7.37     |   |      | $ | 4.85     |      |  | $ | 4.50     |   |  | $       | 3.74     |   |  | $ | 4.55     |  
|                                                                      |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Diluted                                                               |  | $                                                | 7.27     |   |      | $ | 4.73     |      |  | $ | 4.44     |   |  | $       | 3.74     |   |  | $ | 4.55     |  
|                                                                      |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Balance Sheet Data:                                                   |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Cash and cash equivalents                                             |  | $                                                | 24,137   |   |      | $ | 16,694   |      |  | $ | 19,751   |   |  | $       | 14,711   |   |  | $ | 2,154    |  
|Real estate inventories                                               |  |                                                  | 698,047  |   |      |   | 491,952  |      |  |   | 307,335  |   |  |         | 233,700  |   |  |   | 199,430  |  
|Investments in and advances to unconsolidated joint ventures          |  |                                                  | 45,613   |   |      |   | 65,404   |      |  |   | 66,753   |   |  |         | 49,966   |   |  |   | 50,282   |  
|Total assets                                                          |  |                                                  | 839,715  |   |      |   | 617,581  |      |  |   | 433,709  |   |  |         | 330,280  |   |  |   | 278,483  |  
|Total debt                                                            |  |                                                  | 326,737  |   |      |   | 266,065  |      |  |   | 221,470  |   |  |         | 166,910  |   |  |   | 176,630  |  
|Minority interest                                                     |  |                                                  | 142,496  |   |      |   | 80,647   |      |  |   | 784      |   |  |         |         |   |  |   |         |  
|Stockholders equity                                                  |  |                                                  | 252,040  |   |      |   | 181,676  |      |  |   | 150,617  |   |  |         | 102,512  |   |  |   | 53,301   |  
|                                                                      |  |                                                  |          |   |     
|Operating Data (including unconsolidated joint ventures) (unaudited): |  |                                                  |          |   |      |   |          |      |  |   |          |   |  |         |          |   |  |   |          |  
|Number of net new home orders                                         |  |                                                  | 3,443    |   |      |   | 2,607    |      |  |   | 2,541    |   |  |         | 2,603    |   |  |   | 2,303    |  
|Number of homes closed                                                |  |                                                  | 2,804    |   |      |   | 2,522    |      |  |   | 2,566    |   |  |         | 2,666    |   |  |   | 2,618    |  
|Average sales price of homes closed                                   |  | $                                                | 422      |   |      | $ | 379      |      |  | $ | 299      |   |  | $       | 289      |   |  | $ | 241      |  
|Backlog at end of period, number of homes(4)                          |  |                                                  | 1,266    |   |      |   | 627      |      |  |   | 542      |   |  |         | 567      |   |  |   | 630      |  
|Backlog at end of period, aggregate sales value(4)                    |  | $                                                | 595,180  |   |      | $ | 259,123  |      |  | $ | 176,531  |   |  | $       | 171,650  |   |  | $ | 185,800  |  



14



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##### Table of Contents

---

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



|(2) |  | The amount paid for business acquisitions over the net fair value of assets acquired and liabilities assumed is reflected as goodwill and, until January 1, 2002, was being amortized
on a straight-line basis over seven years. Accumulated amortization was $2,793,000 as of December 31, 2001. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (Statement No. 142), effective for fiscal years beginning after December 15, 2001. Under the new rule, goodwill is no longer amortized but is subject to impairment tests in accordance with Statement No. 142. The
Company performed its required annual impairment test of goodwill as of December 31, 2003 and determined that there have been no indicators of impairment. If Statement No. 142 had been adopted effective January 1, 1999, the pro forma impact of
the non-amortization of goodwill on the results for the subsequent periods would have been as follows (in thousands except per share data):
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                        |  |                         |        |      |   |        |  |      |        |      |   |        |  |   |       
|--------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                        |  | Year Ended December 31,
|                                        |  | 2003                    |        | 2002 |   | 2001   |  | 2000 |        | 1999
|                                        |  | (dollars in thousands) 
|Net income, as reported                 |  | $                       | 72,137 |      | $ | 49,511 |  | $    | 47,678 |      | $ | 39,268 |  | $ | 47,477
|Amortization of goodwill, net of tax    |  |                         |       |      |   |       |  |      | 1,106  |      |   | 943    |  |   | 305   
|                                        |  |                         |        |      |   |        |  |      |        |      |   |        |  |   |       
|Net income, as adjusted                 |  | $                       | 72,137 |      | $ | 49,511 |  | $    | 48,784 |      | $ | 40,211 |  | $ | 47,782
|                                        |  |                         |        |      |   |        |  |      |        |      |   |        |  |   |       
|Earnings per common share, as adjusted: |  |                         |        |      |   |        |  |      |        |      |   |        |  |   |       
|Basic                                   |  | $                       | 7.37   |      | $ | 4.85   |  | $    | 4.61   |      | $ | 3.83   |  | $ | 4.58  
|                                        |  |                         |        |      |   |        |  |      |        |      |   |        |  |   |       
|Diluted                                 |  | $                       | 7.27   |      | $ | 4.73   |  | $    | 4.54   |      | $ | 3.83   |  | $ | 4.58  
|                                        |  |                         |        |      |   |        |  |      |        |      |   |        |  |   |       



|(3) |  | In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, Recission of SFAS Nos. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections (Statement No. 145). Statement No. 145 prevents gains or losses on extinguishment of debt not meeting the criteria of APB 30 to be treated as extraordinary. Statement No. 145 is
effective for fiscal years beginning after March 15, 2002. Upon adoption of Statement No. 145, the Companys previously reported extraordinary items related to gain from retirement of debt were reclassified to other income and not
reported as extraordinary items.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | 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, 2003, 1,127 represent homes under construction and
139 represent homes not yet under construction. Backlog as of all dates is unaudited.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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 59,000 homes. The Company conducts its homebuilding operations through five geographic divisions: Southern California, San Diego, Northern California, Arizona and Nevada. The Company believes that it is well positioned
for future growth in all of its markets. For the year ended December 31, 2003, on a consolidated basis the Company had revenues from homes sales of $866.7 million and delivered 2,149 homes. In addition, for the year ended December 31, 2003 the
Companys unconsolidated joint ventures had revenues from homes sales of $317.1 million and delivered 655 homes. The Company presents information related to its unconsolidated joint ventures as such information represents an important aspect of
the Companys business as well as a substantial portion of its operating income; however, the financial statements of the unconsolidated joint ventures are not combined or consolidated with the Companys consolidated financial statements.



15



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##### Table of Contents

As of December 31, 2003, the Company and certain of its subsidiaries were general partners or members in
joint ventures involved in the development and sale of residential projects. As described more fully in Note 2 to Notes to Consolidated Financial Statements, in accordance with Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, as amended (Interpretation No. 46), six joint ventures created after January 31, 2003 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 six joint ventures have been consolidated with the Companys financial statements as of December 31, 2003 and for the period then ended.



The financial statements of joint ventures in which the Company has a 50% or
less voting or economic interest (and thus are not controlled by the Company) and which were created prior to February 1, 2003, and the financial statements of joint ventures which have not been determined to be variable interest entities in which
the Company is considered the primary beneficiary are not consolidated with the Companys financial statements. The Companys investments in unconsolidated joint ventures are accounted for using the equity method. Income allocations and
cash distributions to the Company from joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after
partners priority returns and returns of partners capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of Notes to Consolidated Financial Statements for condensed combined financial
information for the six joint ventures whose financial statements have been consolidated with the Companys financial statements. See Note 5 of Notes to Consolidated Financial Statements for condensed combined financial information
for the unconsolidated joint ventures. Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing
obtained by the joint ventures.



16



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##### Table of Contents

Results of Operations



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



|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|----------------------------------------------------- |  | --------------------------------------------- | -------- | - | ---------------------------- | - | -------- | ------------- |  | - | -------
|                                                      |  | As of and for the year endedDecember 31, 2003
|                                                      |  | Consolidated                                  |          |   | UnconsolidatedJoint Ventures |   |          | CombinedTotal
|Selected Financial Information (dollars in thousands) |  |                                               |          |   |                              |   |          |               |  |   |        
|Homes closed                                          |  |                                               | 2,149    |   |                              |   | 655      |               |  |   |        
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Home sales revenue                                    |  | $                                             | 866,657  |   |                              | $ | 317,109  |               |  |   |        
|Cost of sales                                         |  |                                               | (714,385 | ) |                              |   | (248,252 | )             |  |   |        
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Gross margin                                          |  | $                                             | 152,272  |   |                              | $ | 68,857   |               |  |   |        
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Gross margin percentage                               |  |                                               | 17.6     | % |                              |   | 21.7     | %             |  |   |        
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Number of homes closed                                |  |                                               |          |   |                              |   |          |               |  |   |        
|California                                            |  |                                               | 1,271    |   |                              |   | 655      |               |  |   | 1,926  
|Arizona                                               |  |                                               | 319      |   |                              |   |         |               |  |   | 319    
|Nevada                                                |  |                                               | 559      |   |                              |   |         |               |  |   | 559    
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Total                                                 |  |                                               | 2,149    |   |                              |   | 655      |               |  |   | 2,804  
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Average sales price                                   |  |                                               |          |   |                              |   |          |               |  |   |        
|California                                            |  | $                                             | 498,700  |   |                              | $ | 484,100  |               |  | $ | 493,800
|Arizona                                               |  |                                               | 211,300  |   |                              |   |         |               |  |   | 211,300
|Nevada                                                |  |                                               | 295,900  |   |                              |   |         |               |  |   | 295,900
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Total                                                 |  | $                                             | 403,300  |   |                              | $ | 484,100  |               |  | $ | 422,200
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Number of net new home orders                         |  |                                               |          |   |                              |   |          |               |  |   |        
|California                                            |  |                                               | 1,660    |   |                              |   | 697      |               |  |   | 2,357  
|Arizona                                               |  |                                               | 389      |   |                              |   |         |               |  |   | 389    
|Nevada                                                |  |                                               | 697      |   |                              |   |         |               |  |   | 697    
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Total                                                 |  |                                               | 2,746    |   |                              |   | 697      |               |  |   | 3,443  
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Average number of sales locations during period       |  |                                               |          |   |                              |   |          |               |  |   |        
|California                                            |  |                                               | 19       |   |                              |   | 9        |               |  |   | 28     
|Arizona                                               |  |                                               | 6        |   |                              |   |         |               |  |   | 6      
|Nevada                                                |  |                                               | 6        |   |                              |   |         |               |  |   | 6      
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Total                                                 |  |                                               | 31       |   |                              |   | 9        |               |  |   | 40     
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        



17



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|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|-------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | ---------------------------- | - | ------------- |  | - | -------
|                                                                                             |  | As of and for the year endedDecember 31, 2003
|                                                                                             |  | Consolidated                                  |         | UnconsolidatedJoint Ventures |   | CombinedTotal
|Backlog of homes sold but not closed at end of period                                        |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  |                                               | 589     |                              |   | 237           |  |   | 826    
|Arizona                                                                                      |  |                                               | 207     |                              |   |              |  |   | 207    
|Nevada                                                                                       |  |                                               | 233     |                              |   |              |  |   | 233    
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  |                                               | 1,029   |                              |   | 237           |  |   | 1,266  
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Dollar amount of backlog of homes sold but not closed at end ofperiod (dollars in thousands) |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  | $                                             | 355,128 |                              | $ | 119,509       |  | $ | 474,637
|Arizona                                                                                      |  |                                               | 47,228  |                              |   |              |  |   | 47,228 
|Nevada                                                                                       |  |                                               | 73,315  |                              |   |              |  |   | 73,315 
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  | $                                             | 475,671 |                              | $ | 119,509       |  | $ | 595,180
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Lots controlled at end of year                                                               |  |                                               |         |                              |   |               |  |   |        
|Owned lots                                                                                   |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  |                                               | 2,248   |                              |   | 1,142         |  |   | 3,390  
|Arizona                                                                                      |  |                                               | 1,486   |                              |   |              |  |   | 1,486  
|Nevada                                                                                       |  |                                               | 1,298   |                              |   |              |  |   | 1,298  
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  |                                               | 5,032   |                              |   | 1,142         |  |   | 6,174  
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Optioned lots(1)                                                                             |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  |                                               |         |                              |   |               |  |   | 4,835  
|Arizona                                                                                      |  |                                               |         |                              |   |               |  |   | 4,253  
|Nevada                                                                                       |  |                                               |         |                              |   |               |  |   | 2,910  
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  |                                               |         |                              |   |               |  |   | 11,998 
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total lots controlled                                                                        |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  |                                               |         |                              |   |               |  |   | 8,225  
|Arizona                                                                                      |  |                                               |         |                              |   |               |  |   | 5,739  
|Nevada                                                                                       |  |                                               |         |                              |   |               |  |   | 4,208  
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  |                                               |         |                              |   |               |  |   | 18,172 
|                                                                                             |  |                                               |         |                              |   |               |  |   |        



18



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|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|----------------------------------------------------- |  | --------------------------------------------- | -------- | - | ---------------------------- | - | -------- | ------------- |  | - | -------
|                                                      |  | As of and for the year endedDecember 31, 2002
|                                                      |  | Consolidated                                  |          |   | UnconsolidatedJoint Ventures |   |          | CombinedTotal
|Selected Financial Information (dollars in thousands) |  |                                               |          |   |                              |   |          |               |  |   |        
|Homes closed                                          |  |                                               | 1,740    |   |                              |   | 782      |               |  |   |        
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Home sales revenue                                    |  | $                                             | 593,762  |   |                              | $ | 362,697  |               |  |   |        
|Cost of sales                                         |  |                                               | (504,330 | ) |                              |   | (298,838 | )             |  |   |        
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Gross margin                                          |  | $                                             | 89,432   |   |                              | $ | 63,859   |               |  |   |        
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Gross margin percentage                               |  |                                               | 15.1     | % |                              |   | 17.6     | %             |  |   |        
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Number of homes closed                                |  |                                               |          |   |                              |   |          |               |  |   |        
|California                                            |  |                                               | 1,116    |   |                              |   | 782      |               |  |   | 1,898  
|Arizona                                               |  |                                               | 270      |   |                              |   |         |               |  |   | 270    
|Nevada                                                |  |                                               | 354      |   |                              |   |         |               |  |   | 354    
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Total                                                 |  |                                               | 1,740    |   |                              |   | 782      |               |  |   | 2,522  
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Average sales price                                   |  |                                               |          |   |                              |   |          |               |  |   |        
|California                                            |  | $                                             | 387,900  |   |                              | $ | 463,800  |               |  | $ | 419,200
|Arizona                                               |  |                                               | 212,800  |   |                              |   |         |               |  |   | 212,800
|Nevada                                                |  |                                               | 292,200  |   |                              |   |         |               |  |   | 292,200
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Total                                                 |  | $                                             | 341,200  |   |                              | $ | 463,800  |               |  | $ | 379,200
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Number of net new home orders                         |  |                                               |          |   |                              |   |          |               |  |   |        
|California                                            |  |                                               | 1,117    |   |                              |   | 880      |               |  |   | 1,997  
|Arizona                                               |  |                                               | 289      |   |                              |   |         |               |  |   | 289    
|Nevada                                                |  |                                               | 321      |   |                              |   |         |               |  |   | 321    
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Total                                                 |  |                                               | 1,727    |   |                              |   | 880      |               |  |   | 2,607  
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Average number of sales locations during period       |  |                                               |          |   |                              |   |          |               |  |   |        
|California                                            |  |                                               | 15       |   |                              |   | 10       |               |  |   | 25     
|Arizona                                               |  |                                               | 6        |   |                              |   |         |               |  |   | 6      
|Nevada                                                |  |                                               | 4        |   |                              |   |         |               |  |   | 4      
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        
|Total                                                 |  |                                               | 25       |   |                              |   | 10       |               |  |   | 35     
|                                                      |  |                                               |          |   |                              |   |          |               |  |   |        



19



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|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|-------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | ---------------------------- | - | ------------- |  | - | -------
|                                                                                             |  | As of and for the year endedDecember 31, 2002
|                                                                                             |  | Consolidated                                  |         | UnconsolidatedJoint Ventures |   | CombinedTotal
|Backlog of homes sold but not closed at end of period                                        |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  |                                               | 200     |                              |   | 195           |  |   | 395    
|Arizona                                                                                      |  |                                               | 137     |                              |   |              |  |   | 137    
|Nevada                                                                                       |  |                                               | 95      |                              |   |              |  |   | 95     
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  |                                               | 432     |                              |   | 195           |  |   | 627    
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Dollar amount of backlog of homes sold but not closed at end ofperiod (dollars in thousands) |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  | $                                             | 99,078  |                              | $ | 96,160        |  | $ | 195,238
|Arizona                                                                                      |  |                                               | 30,206  |                              |   |              |  |   | 30,206 
|Nevada                                                                                       |  |                                               | 33,679  |                              |   |              |  |   | 33,679 
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  | $                                             | 162,963 |                              | $ | 96,160        |  | $ | 259,123
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Lots controlled at end of year                                                               |  |                                               |         |                              |   |               |  |   |        
|Owned lots                                                                                   |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  |                                               | 2,174   |                              |   | 1,439         |  |   | 3,613  
|Arizona                                                                                      |  |                                               | 963     |                              |   |              |  |   | 963    
|Nevada                                                                                       |  |                                               | 1,534   |                              |   |              |  |   | 1,534  
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  |                                               | 4,671   |                              |   | 1,439         |  |   | 6,110  
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Optioned lots(1)                                                                             |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  |                                               |         |                              |   |               |  |   | 2,953  
|Arizona                                                                                      |  |                                               |         |                              |   |               |  |   | 4,462  
|Nevada                                                                                       |  |                                               |         |                              |   |               |  |   | 198    
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  |                                               |         |                              |   |               |  |   | 7,613  
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total lots controlled                                                                        |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  |                                               |         |                              |   |               |  |   | 6,566  
|Arizona                                                                                      |  |                                               |         |                              |   |               |  |   | 5,425  
|Nevada                                                                                       |  |                                               |         |                              |   |               |  |   | 1,732  
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  |                                               |         |                              |   |               |  |   | 13,723 
|                                                                                             |  |                                               |         |                              |   |               |  |   |        



20



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##### Table of Contents

|                                                      |  |                                                |          |   |                               |   |          |                |  |   |        
|----------------------------------------------------- |  | ---------------------------------------------- | -------- | - | ----------------------------- | - | -------- | -------------- |  | - | -------
|                                                      |  | As of and for the year ended December 31, 2001
|                                                      |  | Consolidated                                   |          |   | Unconsolidated Joint Ventures |   |          | Combined Total
|Selected Financial Information (dollars in thousands) |  |                                                |          |   |                               |   |          |                |  |   |        
|Homes closed                                          |  |                                                | 1,861    |   |                               |   | 705      |                |  |   |        
|                                                      |  |                                                |          |   |                               |   |          |                |  |   |        
|Home sales revenue                                    |  | $                                              | 452,002  |   |                               | $ | 316,098  |                |  |   |        
|Cost of sales                                         |  |                                                | (382,608 | ) |                               |   | (258,997 | )              |  |   |        
|                                                      |  |                                                |          |   |                               |   |          |                |  |   |        
|Gross margin                                          |  | $                                              | 69,394   |   |                               | $ | 57,101   |                |  |   |        
|                                                      |  |                                                |          |   |                               |   |          |                |  |   |        
|Gross margin percentage                               |  |                                                | 15.4     | % |                               |   | 18.1     | %              |  |   |        
|                                                      |  |                                                |          |   |                               |   |          |                |  |   |        
|Number of homes closed                                |  |                                                |          |   |                               |   |          |                |  |   |        
|California                                            |  |                                                | 1,087    |   |                               |   | 705      |                |  |   | 1,792  
|Arizona                                               |  |                                                | 298      |   |                               |   |         |                |  |   | 298    
|Nevada                                                |  |                                                | 476      |   |                               |   |         |                |  |   | 476    
|                                                      |  |                                                |          |   |                               |   |          |                |  |   |        
|Total                                                 |  |                                                | 1,861    |   |                               |   | 705      |                |  |   | 2,566  
|                                                      |  |                                                |          |   |                               |   |          |                |  |   |        
|Average sales price                                   |  |                                                |          |   |                               |   |          |                |  |   |        
|California                                            |  | $                                              | 281,300  |   |                               | $ | 448,400  |                |  | $ | 347,100
|Arizona                                               |  |                                                | 150,200  |   |                               |   |         |                |  |   | 150,200
|Nevada                                                |  |                                                | 213,100  |   |                               |   |         |                |  |   | 213,100
|                                                      |  |                                                |          |   |                               |   |          |                |  |   |        
|Total                                                 |  | $                                              | 242,900  |   |                               | $ | 448,400  |                |  | $ | 299,300
|                                                      |  |                                                |          |   |                               |   |          |                |  |   |        
|Number of net new home orders                         |  |                                                |          |   |                               |   |          |                |  |   |        
|California                                            |  |                                                | 1,080    |   |                               |   | 618      |                |  |   | 1,698  
|Arizona                                               |  |                                                | 336      |   |                               |   |         |                |  |   | 336    
|Nevada                                                |  |                                                | 507      |   |                               |   |         |                |  |   | 507    
|                                                      |  |                                                |          |   |                               |   |          |                |  |   |        
|Total                                                 |  |                                                | 1,923    |   |                               |   | 618      |                |  |   | 2,541  
|                                                      |  |                                                |          |   |                               |   |          |                |  |   |        
|Average number of sales locations during period       |  |                                                |          |   |                               |   |          |                |  |   |        
|California                                            |  |                                                | 15       |   |                               |   | 13       |                |  |   | 28     
|Arizona                                               |  |                                                | 6        |   |                               |   |         |                |  |   | 6      
|Nevada                                                |  |                                                | 6        |   |                               |   |         |                |  |   | 6      
|                                                      |  |                                                |          |   |                               |   |          |                |  |   |        
|Total                                                 |  |                                                | 27       |   |                               |   | 13       |                |  |   | 40     
|                                                      |  |                                                |          |   |                               |   |          |                |  |   |        



21



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##### Table of Contents

|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|-------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | ---------------------------- | - | ------------- |  | - | -------
|                                                                                             |  | As of and for the year endedDecember 31, 2001
|                                                                                             |  | Consolidated                                  |         | UnconsolidatedJoint Ventures |   | CombinedTotal
|Backlog of homes sold but not closed at end of period                                        |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  |                                               | 199     |                              |   | 97            |  |   | 296    
|Arizona                                                                                      |  |                                               | 118     |                              |   |              |  |   | 118    
|Nevada                                                                                       |  |                                               | 128     |                              |   |              |  |   | 128    
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  |                                               | 445     |                              |   | 97            |  |   | 542    
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Dollar amount of backlog of homes sold but not closed at endof period (dollars in thousands) |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  | $                                             | 68,013  |                              | $ | 50,115        |  | $ | 118,128
|Arizona                                                                                      |  |                                               | 24,523  |                              |   |              |  |   | 24,523 
|Nevada                                                                                       |  |                                               | 33,880  |                              |   |              |  |   | 33,880 
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  | $                                             | 126,416 |                              | $ | 50,115        |  | $ | 176,531
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Lots controlled at end of year                                                               |  |                                               |         |                              |   |               |  |   |        
|Owned lots                                                                                   |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  |                                               | 1,578   |                              |   | 2,027         |  |   | 3,605  
|Arizona                                                                                      |  |                                               | 923     |                              |   |              |  |   | 923    
|Nevada                                                                                       |  |                                               | 378     |                              |   |              |  |   | 378    
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  |                                               | 2,879   |                              |   | 2,027         |  |   | 4,906  
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Optioned lots(1)                                                                             |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  |                                               |         |                              |   |               |  |   | 1,156  
|Arizona                                                                                      |  |                                               |         |                              |   |               |  |   | 1,859  
|Nevada                                                                                       |  |                                               |         |                              |   |               |  |   | 446    
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  |                                               |         |                              |   |               |  |   | 3,461  
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total lots controlled                                                                        |  |                                               |         |                              |   |               |  |   |        
|California                                                                                   |  |                                               |         |                              |   |               |  |   | 4,761  
|Arizona                                                                                      |  |                                               |         |                              |   |               |  |   | 2,782  
|Nevada                                                                                       |  |                                               |         |                              |   |               |  |   | 824    
|                                                                                             |  |                                               |         |                              |   |               |  |   |        
|Total                                                                                        |  |                                               |         |                              |   |               |  |   | 8,367  
|                                                                                             |  |                                               |         |                              |   |               |  |   |        

---

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



On a combined basis, the number of net new home orders for the year ended
December 31, 2003 increased 32.1% to 3,443 homes from 2,607 homes for the year ended December 31, 2002. The number of homes closed for the year ended December 31, 2003 increased 11.2% to 2,804 homes from 2,522 homes for the year ended December 31,
2002. The backlog of homes sold but not closed as of December 31, 2003 was 1,266 homes, up 102.0% from 627 homes as of December 31, 2002.



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



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, 2003 was $595.2 million, up 130% from $259.1 million as of December 31, 2002.
The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Companys projects was approximately 18% during 2003 and 19% during 2002. The inventory of completed and unsold homes was 6 homes as of December 31,
2003.



The Company believes that the increase in the number of
net new home orders and homes closed during 2003, as described above, are indications of an improving economy in 2003. In addition, in most of the markets



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in which the Company operates, the demand for housing exceeds the current supply of housing. The increase in the number of net new home orders and the
decrease in cancellation rate during 2003 and 2002 (as compared to 2001), were indications of an improving economy in 2003 and 2002, subsequent to the weakened economic conditions following the unprecedented and tragic events of September 11, 2001.



Comparisons of Years Ended December 31, 2003 and
2002.    Operating revenue for the year ended December 31, 2003 was $897.8 million, an increase of $284.5 million (46.4%), from operating revenue of $613.3 million for the year ended December 31, 2002. Revenue from sales
of homes increased $272.9 million (46.0%) to $866.7 million in 2003 from $593.8 million in 2002. This increase was due primarily to an increase in the average sales prices of consolidated homes to $403,300 in 2003 from $341,200 in 2002 and an
increase in the number of consolidated homes closed to 2,149 in 2003 from 1,740 in 2002. Revenues from sales of lots, land and other increased to $21.7 million in 2003 from $8.6 million in 2002, due to the bulk sale of land in one of the
Companys developments. Management fee income decreased by $1.4 million to $9.5 million in 2003 from $10.9 million in 2002 as a result of a decrease in the number of homes closed in unconsolidated joint ventures to 655 in 2003 from 782 in 2002.
Equity in income of unconsolidated joint ventures amounting to $31.2 million was recognized in 2003, compared to $27.7 million in 2002 as a result of the increase in gross margin percentage of the unconsolidated joint ventures to 21.7% in 2003 from
17.6% in 2002.



Total operating income increased to $117.6
million in 2003 from $62.8 million in 2002. The excess of revenue from sales of homes over the related cost of sales (gross margin) increased by $62.9 million to $152.3 million in 2003 from $89.4 million in 2002. This increase was primarily due
to an increase in the average sales prices to $403,300 in 2003 from $341,200 in 2002 (18.2%) and an increase in the number of consolidated homes closed to 2,149 in 2003 from 1,740 in 2002 (23.5%). Gross margin percentages increased by 2.5% to 17.6%
in 2003 from 15.1% in 2002. Sales and marketing expenses increased by $8.4 million (36.7%) to $31.3 million in 2003 from $22.9 million in 2002 primarily due to increased sales locations, increased marketing fees paid to developers of
master-planned communities and sales commissions as a result of increased revenue from sales of homes. General and administrative expenses increased by $10.9 million to $50.3 million in 2003 from $39.4 million in 2002, primarily as a result of
increased salaries and related benefits due to an increase in the number of employees and additional employee bonuses based on improved operating results of the Company. Other operating costs consist of initial start-up losses realized by a golf
course operation at one of the Companys projects which decreased to $1.8 million in 2003 from $2.3 million in 2002.



Total interest incurred during 2003 increased $20.4 million to $47.2 million from $26.8 million in 2002 as a result of an increase in the average amount
of outstanding debt including the issuance of the 103/4% Senior Notes, offset by decreases in interest rates.
There was no net interest expense recognized in 2003 or 2002 as a result of the increasing amount of real estate inventories available for capitalization of interest.



Other income (expense), net increased to $6.4 million in 2003 from $5.0 million in 2002 primarily as a result of
increases in mortgage company operations and other miscellaneous income.



Minority interest in income of subsidiaries of $0.4 million during the year ended December 31, 2003 is related to the consolidation of the outside partners equity in income of an entity consolidated as defined
in Financial Accounting Standards Board Interpretation No. 46 Consolidation of Variable Interest Entities. See Note 2 of Notes to Consolidated Financial Statements.



The estimated overall effective rate for the year ending December 31, 2003 is
41.8%. During the year ended December 31, 2003, income tax benefits of $3.1 million related to stock option exercises were excluded from the results of operations and credited to additional paid-in capital. The elimination during 2002 of the
remaining valuation allowances for deferred tax assets reduced the Companys estimated overall effective tax rate for the year ended December 31, 2002 from 39.3% to 27.0%. At December 31, 2003, the Company has net operating loss
carryforwards for Federal tax purposes of approximately $2.0 million, which expire in 2009. In addition, unused recognized built-in losses in the amount of $23.9 million are available to offset future income and expire between 2009 and 2011.
The utilization of these losses is limited to offset $3.2 million of taxable income per year; however, any unused losses in any year may be carried forward for utilization in future years through 2011.



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The Companys ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be further limited under
certain circumstances.



As a result of the foregoing factors,
net income increased to $72.1 million in the 2003 period from $49.5 million in the 2002 period.



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



Total
operating income increased to $62.8 million in 2002 from $46.2 million in 2001. The excess of revenue from sales of homes over the related cost of sales (gross margin) increased by $20.0 million to $89.4 million in 2002 from $69.4 million in
2001. This increase was primarily due to an increase in the average sales prices to $341,200 in 2002 from $242,900 in 2001 (a 40.5% increase), offset by a decrease in the number of consolidated homes closed to 1,740 in 2002 from 1,861 in 2001 (a
6.5% decrease). Gross margin percentages decreased by 0.3% to 15.1% in 2002 from 15.4% in 2001. Sales and marketing expenses increased by $4.8 million (26.5%) to $22.9 million in 2002 from $18.1 million in 2001 primarily due to increased
marketing fees paid to developers of master-planned communities and sales commissions as a result of increased revenue from sales of homes. General and administrative expenses increased by $2.2 million to $39.4 million in 2002 from $37.2
million in 2001, primarily as a result of increased salaries and related benefits and additional employee bonuses based on improved operating results of the Company. Other operating costs consist of initial start-up losses of $2.3 million realized
by a golf course operation at one of the Companys projects.



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



Other income (expense), net decreased to $5.0 million in 2002 from $7.5
million in 2001 primarily as a result of decreases in other miscellaneous income, partially offset by increases in income from mortgage company operations.



As of December 31, 2000, the Company had substantial net operating loss carryforwards for Federal tax purposes which were utilized to reduce taxable
income during the year ended December 31, 2001. As a result of the reduction in the valuation allowance associated with such utilized net operating loss carryforwards, the Companys overall effective tax rate for the year ended December 31,
2001 was approximately 10.9%. The elimination during 2002 of the remaining valuation allowances for deferred tax assets reduced the Companys estimated overall effective tax rate for the year ended December 31, 2002 from 39.3% to 27.0%. At
December 31, 2002, the Company had net operating loss carryforwards for Federal tax purposes of approximately $5.2 million, which expire in 2009. In addition, unused recognized built-in losses in the amount of $23.9 million are available
to offset future income and expire between 2009 and 2011. The utilization of these losses is limited to offset $3.2 million of taxable income per year; however, any unused losses in any year may be carried forward for utilization in future years
through 2011. The Companys ability to utilize the foregoing tax benefits will depend upon the amount of its future taxable income and may be further limited under certain circumstances.



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



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



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



Financial Condition and Liquidity



The Company provides for its ongoing cash requirements principally from internally generated funds from the sales of real estate, outside borrowings and
by forming new joint ventures with venture partners that provide a substantial portion of the capital required for certain projects. The Company currently has outstanding 103/4% Senior Notes and 71/2% Senior Notes
(issued on February 6, 2004 as discussed below) and maintains secured revolving credit facilities (Revolving Credit Facilities). The Company has financed, and may in the future finance, certain projects and land acquisitions with
construction loans secured by real estate inventories, seller-provided financing and land banking transactions. In March 2003, the Company repaid its 121/2% Senior Notes due 2003 with the proceeds of the 103/4% Senior
Notes.



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



103/4%
Senior Notes



The Companys 100% owned
subsidiary, William Lyon Homes, Inc., a California corporation, (California Lyon) filed a Registration Statement on Form S-3 with the Securities and Exchange Commission for the sale of $250.0 million of 103/4% Senior Notes which became effective on March 12, 2003. The offering closed on March 17, 2003 and was fully
subscribed and issued. The notes were issued at a price of 98.493% to the public, resulting in net proceeds to the Company of approximately $246.2 million. The purchase price reflected a discount to yield 11% under the effective interest method and
the notes have been reflected net of the unamortized discount in the consolidated balance sheet.



The 103/4% Senior
Notes due April 1, 2013 are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation (Delaware Lyon) and the parent company of California
Lyon, and all of Delaware Lyons existing and certain of its future restricted subsidiaries. The notes and the guarantees rank senior to all of the Companys and the guarantors debt that is expressly subordinated to the notes and the
guarantees, but are effectively subordinated to



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all of the Companys and the guarantors senior secured indebtedness to the extent of the value of the assets securing that indebtedness. At
December 31, 2003, the Company had approximately $80.3 million of secured indebtedness and approximately $205.5 million of additional secured indebtedness available to be borrowed under the Companys credit facilities, as limited by the
Companys borrowing base formulas. Interest on the 103/4% Senior Notes is payable on April 1 and October 1
of each year.



Except as set forth in the Indenture
governing the 103/4% Senior Notes (103/4% Senior Notes Indenture), the 103/4% Senior Notes are not redeemable prior to April 1, 2008. Thereafter, the 103/4% Senior Notes
will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before April
1, 2006, California Lyon may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 110.75% of the principal amount, plus accrued and unpaid interest, if any.



Upon a change of control as
described in the 103/4% Senior Notes Indenture, California Lyon may be required to offer to purchase the notes
at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.



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



The 103/4% Senior Notes Indenture contains covenants that limit the ability of Delaware Lyon and its restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions or
repurchase its stock; (iii) make investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of Delaware Lyons restricted subsidiaries (other than California Lyon) to pay dividends; (vii) enter into
transactions with affiliates; and (ix) consolidate, merge or sell all or substantially all of Delaware Lyons and California Lyons assets. These covenants are subject to a number of important exceptions and qualifications as described in
the 103/4% Senior Notes Indenture.



The foregoing summary is not a complete description of the terms of the 103/4% Senior Notes and is qualified in its entirety by reference to the 103/4% Senior Notes Indenture.



The net proceeds of the offering were used as follows (dollars in thousands):



|                                                            |  |   |        
|----------------------------------------------------------- |  | - | -------
|Repayment of revolving credit facilities                    |  | $ | 104,354
|Repayment of 121/2% Senior Notes                            |  |   | 70,279 
|Repayment of construction notes payable                     |  |   | 28,000 
|Repayment of purchase money notes payableland acquisitions |  |   | 26,000 
|Repayment of unsecured line of credit                       |  |   | 9,500  
|Underwriting discount                                       |  |   | 6,875  
|Offering costs                                              |  |   | 1,225  
|                                                            |  |   |        
|                                                            |  | $ | 246,233
|                                                            |  |   |        



As of December 31,
2003, the outstanding 103/4% Senior Notes with a face value of $246.4 million had a fair value of approximately
$284.0 million, based on quotes from industry sources.



121/2% Senior Notes



As of December 31, 2002, $70.3 million aggregate principal amount of the Companys 121/2% Senior Notes was outstanding. On May 1, 2001, the Company completed a consent solicitation with respect to the
121/2%



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



In June 2001, General William Lyon, Chairman and Chief Executive Officer of the Company, and a trust for which his son William H. Lyon is a beneficiary,
purchased from the Company at par $30.0 million of the 121/2% Senior Notes. William H. Lyon is also an employee
and a Director of the Company. Effective in July 2001, William H. McFarland, another member of the Companys Board of Directors, purchased from the Company at par $1.0 million of the 121/2% Senior Notes. In parity with holders consenting during the consent solicitation, these Directors received a consent fee of 4% of the principal balance
and consented to the amendments effected by the Companys consent solicitation statement dated February 28, 2001.



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



The remaining 121/2% Senior Notes were repaid on March 17, 2003 from the proceeds of the 103/4% Senior Notes.



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



71/2% Senior Notes



On February 6, 2004, California Lyon closed its offering of $150.0 million principal amount of 71/2% Senior Notes due 2014. The notes were sold pursuant to Rule 144A and outside the United States to non-U.S.
persons in reliance on Regulation S. The notes have not and will not be registered under the Securities Act of 1933 and, unless so registered, may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the Securities Act and applicable state securities laws. The notes were issued at par, resulting in net proceeds to the Company of approximately $147.6 million. California Lyon agreed to file a
registration statement with the Securities and Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes (Exchange Notes) having substantially identical terms. If California Lyon does not comply with its
agreement regarding the registration and exchange of the notes with the Exchange Notes, additional interest on the notes will be payable on the interest payment dates.



The 71/2% Senior Notes due February 15, 2014 are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by Delaware Lyon and all of Delaware Lyons existing and certain of
its future restricted subsidiaries. The notes and the guarantees rank senior to all of the Companys and the guarantors debt that is expressly subordinated to the 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. Interest on the 71/2% Senior Notes is payable on February 15 and August 15 of each year.



Except as set forth in the Indenture governing the 71/2% Senior Notes (71/2% Senior Notes Indenture), the
71/2% Senior Notes are not redeemable prior to February 15, 2009. Thereafter, the 71/2% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price
equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before February 15, 2007, California Lyon may redeem up to 35% of the aggregate principal amount of the
notes with the proceeds of qualified equity offerings at a redemption price equal to 107.50% of the principal amount, plus accrued and unpaid interest, if any.



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Upon a change of control as described in the 71/2% Senior Notes Indenture, California Lyon may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus
accrued and unpaid interest, if any.



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



The 71/2% Senior Notes Indenture contains covenants that limit the ability of Delaware Lyon and its
restricted subsidiaries to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase its stock; (iii) make investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements
restricting the ability of Delaware Lyons restricted subsidiaries (other than California Lyon) to pay dividends; (vii) enter into transactions with affiliates; and (ix) consolidate, merge or sell all or substantially all of Delaware
Lyons and California Lyons assets. These covenants are subject to a number of important exceptions and qualifications as described in the 71/2% Senior Notes Indenture.



The foregoing summary is not a complete description of the terms of the 71/2%
Senior Notes and is qualified in its entirety by reference to the 71/2% Senior Notes Indenture.



The net proceeds of the offering were used to
repay $70.0 million of the outstanding balance on the revolving credit facilities and $21.5 million of a construction note payable described below, together with $0.3 million of accrued interest. The remaining proceeds will be used for fees and
commissions related to the offering and other general corporate purposes.



Revolving Credit Facilities



As of December 31, 2003, the Company has three revolving credit facilities which have an aggregate maximum loan commitment of $325.0 million and mature at various dates through 2006. A $125.0 million revolving line of
credit expires in November 2004. After that date the Company may borrow amounts, subject to applicable borrowing base and concentration limitations, under this facility solely to complete the construction of residences begun prior to
such date in approved projects funded by disbursements under this facility. The final maturity date is the earlier of the date upon which the last residence, the construction of which was financed with proceeds of this loan, is sold or the date upon
which such last residence is excluded from the borrowing base by the passage of time under this facility. Of the $125.0 million maximum commitment amount, $25.0 million is not available for disbursement and the loan amount is limited to $100.0
million until the lender consents, which consent may be withheld in its sole discretion, to make such funds available. A $150.0 million revolving line of credit finally matures in September 2006, although after September 2004, advances under this
facility may only be made to complete projects approved on or before such date. A $50.0 million revolving line of credit initially matures in September 2004, after which the amounts available for borrowing begin to reduce with a
final maturity date of September 2006. Availability under each credit facility is subject not only to the maximum amount committed under the respective facility, but also to both various borrowing base and concentration limitations. The borrowing
base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases as the asset progresses from land under development to residence subject to contract of sale. Advances for each type of collateral
become due in whole or in part, subject to possible re-borrowing, and/or the collateral becomes excluded from the borrowing base, after a specified period or earlier upon sale. Concentration limitations further restrict availability under the credit
facilities. The effect of these borrowing base and concentration limitations essentially is to mandate minimum levels of the Companys investment in a project, with higher percentages of investment required at earlier phases of a project, and
with greater absolute dollar amounts of investment required as a project progresses. Each revolving credit facility is secured by deeds of trust on the real property and improvements thereon owned by the Company in the subdivision project(s)
approved by the respective lender, as well as pledges of all net sale proceeds, related contracts and other ancillary property. Also, each credit facility includes financial covenants, which may limit the



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amount that may be borrowed thereunder. Outstanding advances bear interest at various rates, which approximate the prime rate. As of December 31, 2003, $49.2
million was outstanding under these credit facilities, with a weighted-average interest rate of 4.375%, and the undrawn availability was $205.5 million as limited by the borrowing base formulas. Delaware Lyon has guaranteed on an unsecured basis
California Lyons obligations under certain of the revolving credit facilities and has provided an unsecured environmental indemnity in favor of the lender under the $125.0 million bank line of credit. The Company is required to comply with a
number of covenants under these revolving credit facilities. See Note 6 of Notes to Consolidated Financial Statements for additional information relating to these covenants.



Construction Notes Payable



At December 31, 2003, the Company had a construction note payable amounting to $21.5 million related to a real estate
project. The construction note was due on or before April 2, 2004 with interest at a rate of prime plus 0.5% at December 31, 2003. See Note 6 of Notes to Consolidated Financial Statements. A portion of the net proceeds of the offering of
71/2% Senior Notes (see above) was used to repay this note in full.



Revolving Mortgage Warehouse Credit Facilities



The Company, through its mortgage subsidiary and one of its unconsolidated
joint ventures, has entered into two revolving mortgage warehouse credit facilities with banks to fund its mortgage origination operations. The original credit facility, which matures in May 2004, provides for revolving loans of up to $20.0 million
outstanding, $10.0 million of which is committed (lender obligated to lend if stated conditions are satisfied) and $10.0 million is not committed (lender advances are optional even if stated conditions are otherwise satisfied). On August 29, 2003,
the Companys mortgage subsidiary and one of its unconsolidated joint ventures entered into an additional $10.0 million credit facility which matures in August 2004. Mortgage loans are generally held for a short period of time and are typically
sold to investors within 7 to 15 days following funding. The facilities are secured by substantially all of the assets of each of the borrowers, including the mortgage loans held for sale, all rights of each of the borrowers with respect to
contractual obligations of third party investors to purchase such mortgage loans, and all proceeds of sale of such mortgage loans. The facilities, which have LIBOR based pricing, also contain certain financial covenants requiring the borrowers to
maintain minimum tangible net worth, leverage, profitability and liquidity. These facilities are non-recourse and are not guaranteed by the Company. At December 31, 2003 the outstanding balance under these facilities was $9.6 million.



Land Banking Arrangements



The Company enters into purchase agreements with various land sellers. In
some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Companys revolving credit facilities and other corporate financing sources and limiting the Companys risk, the Company
transfers the Companys right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the
lots. The entities grant the Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit equal to 20% or less of the total purchase price. Additionally, the Company may be
subject to other penalties if lots are not acquired. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots were not purchased. The Company does not have
legal title to these entities or their assets and has not guaranteed their liabilities. As described in Note 2 of Notes to Consolidated Financial Statements, a recently adopted accounting interpretation required the consolidation of the
assets, liabilities and operations of one of the Companys land banking arrangements created after January 31, 2003. As of March 31, 2004, the interpretation will likely require the consolidation of the assets, liabilities and operations on a
prospective basis of the six remaining land banking arrangements created prior to February 1, 2003 (see Notes 2 and 5 of Notes to Consolidated Financial Statements). The deposits and penalties related to the six land banking projects
have been recorded in the accompanying consolidated balance sheet. The financial statements of these six entities are not consolidated with



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the Companys consolidated financial statements. These land banking arrangements help the Company manage the financial and market risk associated with
land holdings. The use of these land banking arrangements is dependent on, among other things, the availability of capital to the option provider, general housing market conditions and geographic preferences. Summary information with respect to the
Companys unconsolidated land banking arrangements is as follows as of December 31, 2003 (dollars in thousands):



|                                                           |  |   |        
|---------------------------------------------------------- |  | - | -------
|Total number of unconsolidated land banking projects       |  |   | 6      
|                                                           |  |   |        
|Total number of lots                                       |  |   | 1,149  
|                                                           |  |   |        
|Total purchase price                                       |  | $ | 108,958
|                                                           |  |   |        
|Balance of lots still under option and not purchased:      |  |   |        
|Number of lots                                             |  |   | 588    
|                                                           |  |   |        
|Purchase price                                             |  | $ | 41,997 
|                                                           |  |   |        
|Forfeited deposits and penalties if lots are not purchased |  | $ | 18,107 
|                                                           |  |   |        



Joint Venture
Financing



As of December 31, 2003, the Company and
certain of its subsidiaries were general partners or members in joint ventures involved in the development and sale of residential projects. As described more fully in Recently Issued Accounting Standards, in accordance with Financial
Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (Interpretation No. 46) six joint ventures created after January 31, 2003 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 six joint ventures have been consolidated with the Companys financial statements as of December 31, 2003 and for
the period then ended. The Company has not yet determined the anticipated impact of adopting Interpretation No. 46 for arrangements existing as of January 31, 2003. However, such adoption will likely require the consolidation in the Companys
financial statements as of March 31, 2004 of the assets, liabilities and operations of certain existing joint ventures, option agreements or land banking arrangements. Because the Company already recognizes its proportionate share of joint venture
earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 will not affect the Companys consolidated net income.



The financial statements of joint ventures in which the Company has a 50% or less voting or economic interest (and thus are
not controlled by the Company) and which were created prior to February 1, 2003, and the financial statements of joint ventures which have not been determined to be variable interest entities in which the Company is considered the primary
beneficiary are not consolidated with the Companys financial statements. The Companys investments in unconsolidated joint ventures are accounted for using the equity method. Income allocations and cash distributions to the Company from
the joint ventures are based on predetermined formulas between the Company and its joint venture partners as specified in the applicable partnership or operating agreements. The Company generally receives, after partners priority returns and
returns of partners capital, approximately 50% of the profits and cash flows from joint ventures. See Note 2 of Notes to Consolidated Financial Statements for condensed combined financial information for the six joint ventures
whose financial statements have been consolidated with the Companys financial statements. See Note 5 of Notes to Consolidated Financial Statements for condensed combined financial information for the unconsolidated joint ventures.
Based upon current estimates, substantially all future development and construction costs incurred by the joint ventures will be funded by the venture partners or from the proceeds of construction financing obtained by the joint ventures.



The six joint ventures created after January 31, 2003 which
have been determined to be variable interest entities are each engaged in homebuilding and land development activities which will result in an estimated total of 562 homes at completion. The homes are expected to be constructed and sold in phases
over a two-to-three



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year period with approximate base sales prices ranging from $298,000 to $1,059,000. As of December 31, 2003, 98 homes have been sold and 21 homes have
closed. 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 variable interest entities have
no recourse against the general credit of the Company.



As of
December 31, 2003, the Companys investment in and advances to the unconsolidated joint ventures was $45.6 million and the venture partners investment in such joint ventures was $51.1 million. Certain of these joint ventures are in
the form of limited partnerships of which the Company or one of its subsidiaries is general partner. As of December 31, 2003, these joint ventures had obtained financing from construction lenders which amounted to $90.3 million of outstanding
indebtedness. While historically all liabilities of these partnerships have been satisfied out of the assets of such partnerships and while the Company believes that this will continue in the future, the Company or one of its subsidiaries, as
general partner, is potentially responsible for all liabilities and indebtedness of these partnerships. In addition, Delaware Lyon has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships.
Delaware Lyon has also provided completion guarantees for some of the limited partnerships under their credit facilities.



During the year ended December 31, 2002, one of the Companys joint ventures (Existing Venture) was restructured such that the Company
was required to purchase the 538 lots owned by the Existing Venture on a specified takedown basis through October 15, 2003 at a purchase price equal to the future cost of such lots including a 20% preferred return on invested capital to the outside
partner of the Existing Venture. During the year ended December 31, 2002, the first 242 lots were purchased from the Existing Venture for $64.5 million, which includes a $12.5 million preferred return to the outside partner of the Existing
Venture. The 242 lots were purchased by a newly formed joint venture (New Venture) between the Company and an outside partner. The Company is required to purchase the 242 lots owned by the New Venture on a specified takedown basis
through May 15, 2004 at a purchase price equal to $74.2 million plus a 131/2% preferred return on invested
capital to the outside partner of the New Venture. Because the Company is required to purchase the lots owned by both the Existing Venture and the New Venture, and the Company now controls both ventures, the financial statements of both
ventures have been consolidated with the Companys financial statements as of December 31, 2003, including real estate inventories of $28.1 million and minority interest in consolidated joint ventures of $22.6 million. During the year
ended December 31, 2002, an additional 44 lots were purchased from the Existing Venture for $19.8 million, which included a $4.0 million preferred return to the outside partner of the Existing Venture, respectively. The 44 lots were purchased
through a land banking arrangement. During the year ended December 31, 2003, an additional 219 lots were purchased from the Existing Venture for $74.9 million, which included a $21.7 million preferred return to the outside partner of the
Existing Venture. These purchases included (i) 172 lots which were purchased from the Existing Venture under a land banking arrangement for $56.6 million, which included a $16.4 million preferred return to the outside partner of the Existing Venture
and (2) 47 lots which were purchased by the New Venture from the Existing Venture for $18.3 million, which included a $5.3 million preferred return to the outside partner of the Existing Venture. During the year ended December 31, 2003, the
Company purchased 175 lots from the New Venture for $54.5 million, all of which was paid to the outside partner as a return of capital. The intercompany sales and related profits have been eliminated in consolidation.



During the year ended December 31, 2003, California Lyon and two unaffiliated
parties formed a series of limited liability companies (Development LLCs) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and
developing the land into 1,910 residential homesites. The development process is anticipated to be completed by mid 2004 at which time California Lyon will be required under certain specific conditions to purchase approximately one half in value of
the lots. California Lyon has a 121/2% indirect, minority interest in the Development LLCs, which are the
borrowers under two secured lines of credit. Advances under the lines of credit are to be used to pay acquisition and development costs and expenses. The lines of credit are secured by deeds of trust on the real property and improvements thereon
owned by the applicable Development LLC, as well as pledges of all net



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sale proceeds, related contracts and other ancillary property. The maximum commitment amounts under the lines of credit are limited by specified agreed
loan-to-value ratios. The maximum commitment amount under the line of credit that closed in January 2003 (First Line of Credit) is $35.0 million. Subject to specified terms and conditions, California Lyon and the other direct and
indirect members of the Development LLC that is the borrower under the First Line of Credit, including certain affiliates of such other members, each (i) have guaranteed to the bank the repayment of the Development LLCs indebtedness under the
First Line of Credit, completion of certain infrastructure improvements to the land, payment of necessary loan remargining obligations, and the Development LLCs performance under its environmental indemnity and covenants, and (ii) have
agreed to take all actions and pay all amounts to assure that the Development LLC is in compliance with financial covenants. The First Line of Credit matures in January 2005, but may be extended to July 2005, subject to specified terms and
conditions. The maximum commitment amount under the line of credit that closed in March 2003 (Second Line of Credit) is $105.0 million. The Second Line of Credit matures in September 2004, but may be extended to September 2005,
subject to specified terms and conditions. Although the guarantee obligations of the other direct and indirect members of the Development LLC that is the borrower under the Second Line of Credit, and certain of their affiliates, are similar in
nature to those under the First Line of Credit, California Lyon does not have any such guarantee obligations to the banks under the Second Line of Credit. However, California Lyon has posted letters of credit equal to approximately
$24.6 million to secure its obligations as well as the Development LLCs obligations to the bank under both lines of credit. Further, California Lyon and the other direct and indirect members of the Development LLCs, including certain
affiliates of such other members, have entered into reimbursement and indemnity agreements to allocate any liability arising from each line of credit, including the related guarantees and letters of credit. Delaware Lyon has entered into joinder
agreements to be jointly and severally liable for California Lyons obligations under the reimbursement and indemnity agreements. While the reimbursement and indemnity agreements provide that liability is generally allocated in accordance with
the members percentage interests in the Development LLCs distributions, Delaware Lyon and California Lyon may be liable for the full amount of the obligations guaranteed to the banks under either or both of the lines of credit in certain
specified circumstances, such as those involving the default, willful misconduct or gross negligence of California Lyon. As of December 31, 2003, the outstanding indebtedness under the First Line of Credit was $33.6 million and the outstanding
indebtedness under the Second Line of Credit was $100.6 million.



Assessment District Bonds



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



Cash Flows  Comparison of Years Ended December 31, 2003 and 2002



Net cash (used in) provided by operating activities changed from a source of $12.0 million in 2002 to a use of $160.0 million in 2003. The
change was primarily a result of increased expenditures in real estate inventories in 2003, offset by an increase in operating income as a result of increased operating revenues. The successful issuance of the 103/4% Senior Notes in 2003, offset by the repayment of the 121/2% Senior Notes, (as described in financing activities below) provided the Company with increased financial resources. The increase in real estate
inventories resulted from (i) the Companys improved financial condition and its ability to finance more of its operations during 2003 as wholly-owned projects rather than being financed as unconsolidated joint venture projects and
(ii) the consolidation of variable interest entities in 2003 as described above. The risks inherent in purchasing and developing land increase as consumer demand for housing decreases. Thus, the Company may



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have bought and developed land on which it cannot profitably build and sell homes. The market value of land, building lots and housing inventories can
fluctuate significantly as a result of changing market conditions. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market
conditions, the Company may have to sell homes at significantly lower margins or at a loss.



Net cash provided by (used in) investing activities changed from a source of $15.3 million in 2002 to a source of $50.5 million in 2003
primarily as a result of an increase in net distributions from unconsolidated joint ventures in 2003.



Net cash provided by (used in) financing activities changed from a use of $30.3 million in 2002 to a source of $117.0 million in 2003 primarily as a
result of the issuance of the 103/4% Senior Notes in 2003, offset by the repayment of the 121/2% Senior Notes.



Cash Flows  Comparison of Years Ended December 31, 2002 and 2001



Net cash provided by (used in) operating activities changed from a use
of $8.2 million in 2001 to a source of $12.0 million in 2002. The change was primarily a result of an increase in operating income as a result of increased operating revenues in 2002.



Net cash provided by (used in) investing activities changed from a source
of $1.8 million in 2001 to a source of $15.3 million in 2002 primarily as a result of an increase in net distributions from unconsolidated joint ventures in 2002.



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



Off-Balance Sheet Arrangements



The Company
enters into certain off-balance sheet arrangements including joint venture financing, option agreements, land banking arrangements and variable interests in consolidated and unconsolidated entities. These arrangements are more fully described above
and in Notes 2, 5 and 10 of Notes to Consolidated Financial Statements.



Contractual Obligations



The Companys
contractual obligations consisted of the following at December 31, 2003 (in thousands):



|                                      |  |                        |           |                 |   |           |  |           |         |                  |   |        |  |   |        
|------------------------------------- |  | ---------------------- | --------- | --------------- | - | --------- |  | --------- | ------- | ---------------- | - | ------ |  | - | -------
|                                      |  | Payments due by period
|Contractual obligations               |  | Total                  |           | Less than1 year |   | 1-3 years |  | 3-5 years |         | More than5 years
|103/4% Senior Notes                   |  | $                      | 498,594   |                 | $ | 26,875    |  | $         | 53,750  |                  | $ | 53,750 |  | $ | 364,219
|Revolving credit facilities           |  |                        | 59,781    |                 |   | 59,781    |  |           |        |                  |   |       |  |   |       
|Construction notes payable            |  |                        | 21,783    |                 |   | 21,783    |  |           |        |                  |   |       |  |   |       
|Operating leases                      |  |                        | 8,890     |                 |   | 2,290     |  |           | 4,900   |                  |   | 1,700  |  |   |       
|Purchase obligations:                 |  |                        |           |                 |   |           |  |           |         |                  |   |        |  |   |        
|Land purchases and option commitments |  |                        | 568,346   |                 |   | 388,743   |  |           | 163,550 |                  |   | 8,067  |  |   | 7,986  
|Project commitments                   |  |                        | 163,818   |                 |   | 139,879   |  |           | 17,954  |                  |   | 5,985  |  |   |       
|                                      |  |                        |           |                 |   |           |  |           |         |                  |   |        |  |   |        
|Total                                 |  | $                      | 1,321,212 |                 | $ | 639,351   |  | $         | 240,154 |                  | $ | 69,502 |  | $ | 372,205
|                                      |  |                        |           |                 |   |           |  |           |         |                  |   |        |  |   |        



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.



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Critical Accounting Policies



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



Real Estate Inventories and Cost of Sales



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



Impairment of Real Estate Inventories



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



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losses to be recorded on assets to be held and used by the Company when indicators of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of the assets. The estimation process used in determining the undiscounted cash flows of the assets is inherently uncertain because it involves estimates of future revenues and costs. As
described more fully above in the section entitled Real Estate Inventories and Cost of Sales, estimates of revenues and costs are supported by the Companys budgeting process. When an impairment loss is required for assets to be
held and used by the Company, the related assets are adjusted to their estimated fair value.



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



Sales and Profit Recognition



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



Variable Interest Entities



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



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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.



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



Related Party Transactions



See Item 13 and Note 9 of the Notes to Consolidated Financial
Statements for a description of the Companys transactions with related parties.



Impact of New Accounting Pronouncements



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



In November 2002, the Financial Accounting Standards Board
issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(Interpretation No. 45). The disclosure requirements of
Interpretation No. 45 are effective as of December 31, 2002. The initial recognition and measurement requirements of Interpretation No. 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002. However, in the
case of a guarantee issued as part of a transaction with multiple elements with an unrelated party, Interpretation No. 45 generally requires the recording at inception of the guarantee of a liability equal to the guarantees estimated fair
value. In the absence of observable transactions for identical or similar guarantees, estimated fair value will likely be based on the expected present value which is the sum of the estimated probability-weighted range of contingent payments under
the guarantee arrangement. The recording of a liability could have a corresponding effect on various of the Companys financial ratios and other financial and operational indicators. The application of Interpretation No. 45 beginning on January
1, 2003 did not have a material impact on the Companys financial statements with respect to any guarantees issued or modified by the Company after December 31, 2002. See Notes 5, 6 and 10 of Notes to Consolidated Financial
Statements for additional information related to the Companys guarantees.



In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (Interpretation No. 46), which applies to arrangements
created after January 31, 2003. Interpretation No. 46 applies to arrangements created before February 1, 2003 beginning on March 31, 2004. As of December 31, 2003, the Company is considered to be the primary beneficiary in six joint
ventures created after January 31, 2003, which have been determined to be variable interest entities. Accordingly, the assets, liabilities and operations of these six joint ventures have been consolidated with the Companys financial
statements as of December 31, 2003 and for the period then ended. The Company has not yet determined the anticipated impact of adopting Interpretation No. 46 for arrangements existing as of January 31, 2003. However, such adoption will
likely require the consolidation of certain of the Companys joint ventures, option agreements and land banking arrangements in the Companys financial statements as of March 31, 2004. The consolidation of the assets, liabilities and
operations of any joint venture, option agreements or land banking arrangements would have a corresponding effect on various of the Companys financial ratios and other financial and operational indicators. See Note 2 of Notes to
Consolidated Financial Statements for additional information regarding variable interest entities. See Notes 5 and 10 of Notes to Consolidated Financial Statements for additional information regarding joint venture and land
banking arrangements.



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Forward Looking Statements



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



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



Item 8.Financial Statements and Supplementary Data



The consolidated financial statements of William Lyon Homes and the financial statements of the Significant Subsidiaries of William Lyon Homes, together
with the reports of the independent registered public accounting firm, listed under Item 15, are submitted as a separate section of this report beginning on page 44 and are incorporated herein by reference.



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PART IV



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



(a)(1)  Financial Statements



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



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|William Lyon Homes                                      |  |     
|Report of Independent Registered Public Accounting Firm |  | 45  
|Consolidated Balance Sheets                             |  | 46  
|Consolidated Statements of Income                       |  | 47  
|Consolidated Statements of Stockholders Equity         |  | 48  
|Consolidated Statements of Cash Flows                   |  | 49  
|Notes to Consolidated Financial Statements              |  | 50  
|                                                        | 
|Significant Subsidiaries of William Lyon Homes          |  |     
|Report of Independent Registered Public Accounting Firm |  | 88  
|Combined Balance Sheet                                  |  | 89  
|Combined Statement of Income                            |  | 90  
|Combined Statement of Members Capital                  |  | 91  
|Combined Statement of Cash Flows                        |  | 92  
|Notes to Combined Financial Statements                  |  | 93  



(2)  Financial Statement Schedules:



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



(3)  Listing of Exhibits:



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|2.1(1)        |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|3.1(2)        |  | Certificate of Incorporation of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              | 
|3.3(2)        |  | Bylaws of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              | 
|4.1(2)        |  | Specimen certificate of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              | 
|4.2(3)        |  | Indenture dated as of March 17, 2003 governing the 103/4% Senior Notes due 2013 among William Lyon Homes, Inc. as Issuer, William Lyon Homes, California Equity Funding, Inc., Carmel Mountain Ranch, Duxford Financial, Inc., HSP Inc., Mountain Gate Ventures, Inc., OX I Oxnard, L.P., PH-LP
Ventures, PH-Rielly Ventures, PH VenturesSan Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc. and William Lyon Southwest, Inc. as Guarantors and U.S. Bank National Association, as
Trustee.
|              | 
|4.3(3)        |  | Form of 103/4% Senior Notes (included in Exhibit
4.2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              | 
|4.4(3)        |  | Form of Notation of Guarantee (included in Exhibit 4.2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|              | 
|4.5(15)       |  | Indenture dated as of February 6, 2004 governing the 71/2% Senior Notes due 2014 among William Lyon Homes, Inc. as Issuer, William Lyon Homes, California Equity Funding, Inc., Duxford Financial, Inc., HSP Inc., Lyon Montecito, LLC, OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH
VenturesSan Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc., The Ranch Golf Club Co. and William Lyon Southwest, Inc. as Guarantors and U.S. Bank National Association, as
Trustee.      
|              | 
|4.6(15)       |  | Form of 71/2% Senior Note (included in Exhibit
4.5).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|4.7(15)       |  | Form of Notation of Guarantee (included in Exhibit 4.5).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



38



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|              |  |                                                                                                                                                                                                                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                       
|              | 
|10.1(4)       |  | Form of Indemnity Agreement, between the Company and the Directors and Officers of the Company.                                                                                                                                                                                                                                                                   
|              | 
|10.2(2)       |  | Purchase Agreement and Escrow Instructions dated October 7, 1999 among The Presley Companies, Presley Homes, William Lyon Homes, Inc., William Lyon and William H. Lyon.                                                                                                                                                                                          
|              | 
|10.3(4)       |  | Property Management Agreement between Corporate Enterprises, Inc., a California corporation (Owner) and William Lyon Homes, Inc., a California corporation (Manager) dated and effective
November 5, 1999.                                                                                                                                                        
|              | 
|10.4(4)       |  | Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5,
1999.                                                                                                                                                                             
|              | 
|10.5(5)       |  | Loan Agreement dated as of September 25, 2000 between William Lyon Homes, Inc., a California corporation, the Borrower, and Residential Funding Corporation, a Delaware
corporation, Lender.                                                                                                                                                                  
|              | 
|10.6(6)       |  | First Amendment to Loan Agreement, dated as of July 13, 2001, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware
corporation, as lender.                                                                                                                                                     
|              | 
|10.7(6)       |  | Second Amendment to Loan Agreement and to Other Loan Documents, dated as of March 28, 2002, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction
Funding Corp., a Delaware corporation, as lender.                                                                                                                       
|              | 
|10.8(6)       |  | Third Amendment to Loan Agreement and to Other Loan Documents, dated as of January 10, 2003, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction
Funding Corp., a Delaware corporation, as lender.                                                                                                                      
|              | 
|10.9(6)       |  | Fourth Amendment to Loan Agreement, dated as of January 23, 2003, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware
corporation, as lender.                                                                                                                                                 
|              | 
|10.10(5)      |  | Master Loan Agreement dated as of August 31, 2000 by and between William Lyon Homes, Inc., a California corporation (Borrower) and Guaranty Federal Bank, F.S.B., a federal savings
bank organized and existing under the laws of the United States (Lender).                                                                                                 
|              | 
|10.11(7)      |  | Agreement for First Modification of Deeds of Trust and Other Loan Instruments, dated as of June 8, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.     
|              | 
|10.12(6)      |  | Agreement for Second Modification of Deeds of Trust and Other Loan Instruments, dated as of July 23, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.   
|              | 
|10.13(6)      |  | Agreement for Third Modification of Deeds of Trust and Other Loan Instruments, dated as of December 19, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.
|              | 
|10.14(6)      |  | Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments, dated as of May 29, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.    
|10.15(8)      |  | Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.      



39



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|10.16(15)     |  | Agreement for Sixth Modification of Deeds of Trust and Other Loan Agreements, dated as of November 14, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.                                                                                                                                                                 
|              | 
|10.17(5)      |  | Revolving Line of Credit Loan Agreement (Borrowing Base Loan) by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California
corporation, dated as of September 21, 2000.                                                                                                                                                                                                                                                                                                   
|              | 
|10.18(9)      |  | Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of September 18, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
California Bank & Trust, a California banking corporation, as lender.                                                                                                                                                                                                                                                                  
|              | 
|10.19(6)      |  | Second Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of December 13, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and California Bank & Trust, a California banking corporation, as lender.                                                                                                                                                                                                                                                            
|              | 
|10.20(15)     |  | Third Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of January 26, 2004, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
California Bank & Trust, a California banking corporation, as lender.                                                                                                                                                                                                                                                              
|              | 
|10.21(5)      |  | 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.                                                                                                                                                                                                                                                                                                                                  
|              | 
|10.22(10)     |  | William Lyon Homes 2000 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              | 
|10.23(11)     |  | Form of Stock Option Agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              | 
|10.24(11)     |  | William Lyon Homes, Inc. 2000 Cash Bonus Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              | 
|10.25(11)     |  | Standard Industrial/Commercial Single-Tenant Lease  Net Between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.                                                                                                                                                                                                                                                                                                                                                                           
|              | 
|10.26(12)     |  | William Lyon Homes Executive Deferred Compensation Plan effective as of February 11, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              | 
|10.27(13)     |  | William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                
|              | 
|10.28(6)      |  | The Presley Companies Non-Qualified Retirement Plan for Outside Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              | 
|10.29(15)     |  | Underwriting Agreement dated as of March 12, 2003 among William Lyon Homes, Inc. as Company, William Lyon Homes, California Equity Funding, Inc., Carmel Mountain Ranch, Duxford Financial,
Inc., HSP Inc., Mountain Gate Ventures, Inc., OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH VenturesSan Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc. and William Lyon Southwest, Inc.
as Guarantors and UBS Warburg, LLC and Salomon Smith Barney Inc. as Underwriters.
|              | 
|10.30(8)      |  | Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and first Tennessee Bank as
Lender.                                                                                                                                                                                                                                                                                                                                               
|              | 
|10.31(14)     |  | Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                                                                                                                                                                                                                                                                                        
|              | 
|10.32(15)     |  | Amendment No. 1 to Credit Agreement dated as of January 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                                                                                                                                                                                                                                                              
|10.33(15)     |  | Purchase Agreement dated as of January 28, 2004 among William Lyon Homes, Inc. as Company, William Lyon Homes, California Equity Funding, Inc., Duxford Financial, Inc., HSP Inc., Lyon
Montecito, LLC, OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH VenturesSan Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc., The Ranch Golf Club Co. and William Lyon Southwest, Inc. as
Guarantors and UBS Securities LLC, as Initial Purchaser.                               



40



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              | 
|10.34(15)     |  | Registration Rights Agreement dated as of February 6, 2004 among William Lyon Homes, Inc. as Company, William Lyon Homes, California Equity Funding, Inc., Duxford Financial, Inc., HSP Inc.,
Lyon Montecito, LLC, OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH VenturesSan Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc., The Ranch Golf Club Co. and William Lyon Southwest, Inc.
as Guarantors and UBS Securities, LLC, as Initial Purchaser.
|              | 
|12.1(15)      |  | Statement of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              | 
|21.1(15)      |  | List of Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              | 
|31.1          |  | Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                            
|              | 
|31.2          |  | Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                            
|              | 
|32.1          |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                             
|              | 
|32.2          |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                             

---

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



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



|(3) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 and incorporated herein by this reference.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



|(7) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 and incorporated herein by this reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|(9) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 and incorporated herein by this reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(10) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-8 (SEC Registration No. 333-50232) filed on November 17, 2000 and incorporated herein by
this reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|(12) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-8 (SEC Registration No. 333-82448) filed on February 8, 2002 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, 2001 and incorporated herein by this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



41



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##### Table of Contents

|(14) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003 and incorporated herein by this reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(15) |  | 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 this reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



(b)  Reports on Form 8-K



October 8, 2003.    A Current
Report on Form 8-K was furnished by the Company in reference to a press release announcing the Companys preliminary net new home orders and backlog for the fiscal quarter ended September 30, 2003.



November 20, 2003.    A Current Report on Form 8-K
was furnished by the Company in reference to a press release announcing the Companys financial results for the fiscal quarter ended September 30, 2003.



42



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##### Table of Contents

SIGNATURES



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



|              |  |  |  |                    |  |                                      
|------------- |  |  |  | ------------------ |  | -------------------------------------
|              |  |  |  | WILLIAM LYON HOMES
|              |  |  | 
|July 14, 2004 |  |  |  | By:                |  | /s/    MICHAEL D.
GRUBBS             
|              |  |  |  |                    |  | Michael D. Grubbs                    
|              |  |  |  |                    |  | Senior Vice President,               
|              |  |  |  |                    |  | Chief Financial Officer and Treasurer



43



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##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



|                                                       |  |     
|------------------------------------------------------ |  | ----
|                                                       |  | Page
|                                                       | 
|William Lyon Homes                                     |  |     
|                                                       | 
|Report of IndependentRegistered Public Accounting Firm |  | 45  
|Consolidated Balance Sheets                            |  | 46  
|Consolidated Statements of Income                      |  | 47  
|Consolidated Statements of Stockholders Equity        |  | 48  
|Consolidated Statements of Cash Flows                  |  | 49  
|Notes to Consolidated Financial Statements             |  | 50  
|                                                       | 
|Significant Subsidiaries of William Lyon Homes         |  |     
|Report of IndependentRegistered Public Accounting Firm |  | 88  
|Combined Balance Sheet                                 |  | 89  
|Combined Statement of Income                           |  | 90  
|Combined Statement of Members Capital                 |  | 91  
|Combined Statement of Cash Flows                       |  | 92  
|Notes to Combined Financial Statements                 |  | 93  



REQUIRED SCHEDULES



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



44



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders

William Lyon Homes



We have audited the accompanying consolidated balance sheets of William Lyon Homes as of December 31, 2003 and 2002,
and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2003. 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of William Lyon Homes at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,
2003, in conformity with U.S. generally accepted accounting principles.



As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest
Entities, as amended (Interpretation No. 46) effective January 31, 2003. During the year ended December 31, 2003, the adoption of Interpretation No. 46 resulted in the Company consolidating the assets, liabilities and operations of
variable interest entities in which the Company was determined to be the primary beneficiary.



/S/    ERNST & YOUNG LLP



Irvine, California

February 13, 2004



45



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##### Table of Contents

WILLIAM LYON HOMES



CONSOLIDATED BALANCE SHEETS

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



|                                                                                                                                                                       |  |              |         |      |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                                                                                                                                                       |  | December 31,
|                                                                                                                                                                       |  | 2003         |         | 2002
|ASSETS                                                                                                                                                                
|Cash and cash equivalents                                                                                                                                              |  | $            | 24,137  |      | $ | 16,694 
|Receivables  Note 3                                                                                                                                                   |  |              | 46,211  |      |   | 28,734 
|Real estate inventories  Notes 2 and 4                                                                                                                                |  |              | 698,047 |      |   | 491,952
|Investments in and advances to unconsolidated joint ventures  Note 5                                                                                                  |  |              | 45,613  |      |   | 65,404 
|Property and equipment, less accumulated depreciation of $6,517 and $5,435 at December 31, 2003 and 2002,
respectively                                                 |  |              | 1,625   |      |   | 2,131  
|Deferred loan costs                                                                                                                                                    |  |              | 9,041   |      |   | 1,341  
|Goodwill  Note 1                                                                                                                                                      |  |              | 5,896   |      |   | 5,896  
|Other assets                                                                                                                                                           |  |              | 9,145   |      |   | 5,429  
|                                                                                                                                                                       |  |              |         |      |   |        
|                                                                                                                                                                       |  | $            | 839,715 |      | $ | 617,581
|                                                                                                                                                                       |  |              |         |      |   |        
|                                                                                                                                                                      
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                  
|Accounts payable                                                                                                                                                       |  | $            | 35,697  |      | $ | 34,881 
|Accrued expenses                                                                                                                                                       |  |              | 82,745  |      |   | 54,312 
|Notes payable  Note 6                                                                                                                                                 |  |              | 80,331  |      |   | 195,786
|103/4% Senior Notes due April 1, 2013  Note 6                                                                                                                         |  |              | 246,406 |      |   |       
|121/2% Senior Notes due July 1, 2003  Note 6                                                                                                                          |  |              |        |      |   | 70,279 
|                                                                                                                                                                       |  |              |         |      |   |        
|                                                                                                                                                                       |  |              | 445,179 |      |   | 355,258
|                                                                                                                                                                       |  |              |         |      |   |        
|Minority interest in consolidated entities  Note 2                                                                                                                    |  |              | 142,496 |      |   | 80,647 
|                                                                                                                                                                       |  |              |         |      |   |        
|Commitments and contingencies  Note 10                                                                                                                                |  |              |         |      |   |        
|                                                                                                                                                                       |  |             
|Stockholders equity  Note 7                                                                                                                                          |  |              |         |      |   |        
|Common stock, par value $.01 per share; 30,000,000 shares authorized;9,787,440 and 9,728,747 shares issued and outstanding at December 31,
2003 and 2002, respectively |  |              | 98      |      |   | 97     
|Additional paid-in capital                                                                                                                                             |  |              | 106,818 |      |   | 108,592
|Retained earnings                                                                                                                                                      |  |              | 145,124 |      |   | 72,987 
|                                                                                                                                                                       |  |              |         |      |   |        
|                                                                                                                                                                       |  |              | 252,040 |      |   | 181,676
|                                                                                                                                                                       |  |              |         |      |   |        
|                                                                                                                                                                       |  | $            | 839,715 |      | $ | 617,581
|                                                                                                                                                                       |  |              |         |      |   |        



See accompanying notes.



46



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##### Table of Contents

WILLIAM LYON HOMES



CONSOLIDATED
STATEMENTS OF INCOME

(in thousands except per common share amounts)



|                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                            |  | Year Ended December 31, |         
|                                                            |  | 2003                    |          |   | 2002 |   |          | 2001 | 
|Operating revenue                                           |  |                         |          |   |      |   |          |      |  |   |          |  
|Home sales                                                  |  | $                       | 866,657  |   |      | $ | 593,762  |      |  | $ | 452,002  |  
|Lots, land and other sales                                  |  |                         | 21,656   |   |      |   | 8,648    |      |  |   | 7,054    |  
|Management fees  Note 1                                    |  |                         | 9,490    |   |      |   | 10,892   |      |  |   | 9,127    |  
|                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|                                                            |  |                         | 897,803  |   |      |   | 613,302  |      |  |   | 468,183  |  
|                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Operating costs                                             |  |                         |          |   |      |   |          |      |  |   |          |  
|Cost of sales  homes                                       |  |                         | (714,385 | ) |      |   | (504,330 | )    |  |   | (382,608 | )
|Cost of sales  lots, land and other                        |  |                         | (13,269  | ) |      |   | (9,404   | )    |  |   | (5,158   | )
|Sales and marketing                                         |  |                         | (31,252  | ) |      |   | (22,862  | )    |  |   | (18,149  | )
|General and administrative                                  |  |                         | (50,315  | ) |      |   | (39,366  | )    |  |   | (37,171  | )
|Other                                                       |  |                         | (1,834   | ) |      |   | (2,284   | )    |  |   |         |  
|Amortization of goodwill  Note 1                           |  |                         |         |   |      |   |         |      |  |   | (1,242   | )
|                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|                                                            |  |                         | (811,055 | ) |      |   | (578,246 | )    |  |   | (444,328 | )
|                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Equity in income of unconsolidated joint ventures  Note 5  |  |                         | 31,236   |   |      |   | 27,748   |      |  |   | 22,384   |  
|                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Minority equity in income of consolidated entities  Note 2 |  |                         | (429     | ) |      |   |         |      |  |   |         |  
|                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Operating income                                            |  |                         | 117,555  |   |      |   | 62,804   |      |  |   | 46,239   |  
|Interest expense, net of amounts capitalized  Note 6       |  |                         |         |   |      |   |         |      |  |   | (227     | )
|Other income, net                                           |  |                         | 6,397    |   |      |   | 4,977    |      |  |   | 7,513    |  
|                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Income before provision for income taxes                    |  |                         | 123,952  |   |      |   | 67,781   |      |  |   | 53,525   |  
|Provision for income taxes  Note 8                         |  |                         | (51,815  | ) |      |   | (18,270  | )    |  |   | (5,847   | )
|                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Net income                                                  |  | $                       | 72,137   |   |      | $ | 49,511   |      |  | $ | 47,678   |  
|                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Earnings per common share  Note 1                          |  |                         |          |   |      |   |          |      |  |   |          |  
|Basic                                                       |  | $                       | 7.37     |   |      | $ | 4.85     |      |  | $ | 4.50     |  
|                                                            |  |                         |          |   |      |   |          |      |  |   |          |  
|Diluted                                                     |  | $                       | 7.27     |   |      | $ | 4.73     |      |  | $ | 4.44     |  
|                                                            |  |                         |          |   |      |   |          |      |  |   |          |  





See accompanying notes.



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WILLIAM LYON HOMES



CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)



|                                                                                                     |  |              |   |  |                           |     |   |                                         |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ------------ | - |  | ------------------------- | --- | - | --------------------------------------- | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                     |  | Common Stock |   |  | Additional Paid-InCapital |     |   | Retained Earnings (Accumulated Deficit) |   |         |   | 
|                                                                                                     |  | Shares       |   |  | Amount                    |     |   |                                         |   | Total   |  
|                                                                                                     |  |              |   |  |                          
|BalanceDecember 31, 2000                                                                            |  | 10,570       |   |  | $                         | 106 |   |                                         | $ | 126,608 |   |  | $ | (24,202 | ) |  | $ | 102,512 |  
|Issuance of common stock upon exercise of stock optionsNote 7                                       |  | 49           |   |  |                           |    |   |                                         |   | 427     |   |  |   |        |   |  |   | 427     |  
|Net income for the year                                                                              |  |             |   |  |                           |    |   |                                         |   |        |   |  |   | 47,678  |   |  |   | 47,678  |  
|                                                                                                     |  |              |   |  |                           |     |   |                                         |   |         |   |  |   |         |   |  |   |         |  
|                                                                                                     |  |              |   |  |                          
|BalanceDecember 31, 2001                                                                            |  | 10,619       |   |  |                           | 106 |   |                                         |   | 127,035 |   |  |   | 23,476  |   |  |   | 150,617 |  
|Issuance of common stock upon exercise of stock optionsNote 7                                       |  | 128          |   |  |                           | 1   |   |                                         |   | 1,117   |   |  |   |        |   |  |   | 1,118   |  
|Purchase and retirement of common stockNote 7                                                       |  | (1,018       | ) |  |                           | (10 | ) |                                         |   | (19,560 | ) |  |   |        |   |  |   | (19,570 | )
|Net income for the year                                                                              |  |             |   |  |                           |    |   |                                         |   |        |   |  |   | 49,511  |   |  |   | 49,511  |  
|                                                                                                     |  |              |   |  |                           |     |   |                                         |   |         |   |  |   |         |   |  |   |         |  
|                                                                                                     |  |              |   |  |                          
|BalanceDecember 31, 2002                                                                            |  | 9,729        |   |  |                           | 97  |   |                                         |   | 108,592 |   |  |   | 72,987  |   |  |   | 181,676 |  
|Issuance of common stock upon exercise of stock options and related income tax benefitNotes 7 and 8 |  | 258          |   |  |                           | 3   |   |                                         |   | 5,404   |   |  |   |        |   |  |   | 5,407   |  
|Purchase and retirement of common stockNote 7                                                       |  | (200         | ) |  |                           | (2  | ) |                                         |   | (7,178  | ) |  |   |        |   |  |   | (7,180  | )
|Net income for the year                                                                              |  |             |   |  |                           |    |   |                                         |   |        |   |  |   | 72,137  |   |  |   | 72,137  |  
|                                                                                                     |  |              |   |  |                           |     |   |                                         |   |         |   |  |   |         |   |  |   |         |  
|                                                                                                     |  |              |   |  |                          
|BalanceDecember 31, 2003                                                                            |  | 9,787        |   |  | $                         | 98  |   |                                         | $ | 106,818 |   |  | $ | 145,124 |   |  | $ | 252,040 |  
|                                                                                                     |  |              |   |  |                           |     |   |                                         |   |         |   |  |   |         |   |  |   |         |  



See accompanying notes.



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WILLIAM LYON HOMES



CONSOLIDATED
STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                    |  |                         |            |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                    |  | Year Ended December 31, |           
|                                                                                                    |  | 2003                    |            |   | 2002 |   |          | 2001 | 
|Operating activities                                                                                |  |                         |            |   |      |   |          |      |  |   |          |  
|Net income                                                                                          |  | $                       | 72,137     |   |      | $ | 49,511   |      |  | $ | 47,678   |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities:         |  |                         |            |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                                       |  |                         | 1,082      |   |      |   | 1,355    |      |  |   | 2,519    |  
|Equity in income of unconsolidated joint ventures                                                   |  |                         | (31,236    | ) |      |   | (27,748  | )    |  |   | (22,384  | )
|Minority equity in income of consolidated entities                                                  |  |                         | 429        |   |      |   |         |      |  |   |         |  
|Provision for income taxes                                                                          |  |                         | 51,815     |   |      |   | 18,270   |      |  |   | 5,847    |  
|Net changes in operating assets and liabilities:                                                    |  |                         |            |   |      |   |          |      |  |   |          |  
|Receivables                                                                                         |  |                         | (17,477    | ) |      |   | (7,975   | )    |  |   | (3,389   | )
|Real estate inventories                                                                             |  |                         | (205,922   | ) |      |   | (23,126  | )    |  |   | (31,185  | )
|Deferred loan costs                                                                                 |  |                         | (7,700     | ) |      |   | 1,490    |      |  |   | (2,077   | )
|Other assets                                                                                        |  |                         | (3,716     | ) |      |   | (2,681   | )    |  |   | (93      | )
|Accounts payable                                                                                    |  |                         | 816        |   |      |   | 8,467    |      |  |   | (6,416   | )
|Accrued expenses                                                                                    |  |                         | (20,269    | ) |      |   | (5,580   | )    |  |   | 1,333    |  
|                                                                                                    |  |                         |            |   |      |   |          |      |  |   |          |  
|Net cash (used in) provided by operating activities                                                 |  |                         | (160,041   | ) |      |   | 11,983   |      |  |   | (8,167   | )
|                                                                                                    |  |                         |            |   |      |   |          |      |  |   |          |  
|Investing activities                                                                                |  |                         |            |   |      |   |          |      |  |   |          |  
|Investment in and advances to unconsolidated joint ventures                                         |  |                         | (8,493     | ) |      |   | (26,475  | )    |  |   | (30,547  | )
|Distributions of income from unconsolidated joint ventures                                          |  |                         | 37,501     |   |      |   | 24,621   |      |  |   | 18,404   |  
|Distributions of capital from unconsolidated joint ventures                                         |  |                         | 22,019     |   |      |   | 18,453   |      |  |   | 14,543   |  
|Purchases of property and equipment                                                                 |  |                         | (576       | ) |      |   | (1,315   | )    |  |   | (630     | )
|                                                                                                    |  |                         |            |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                                                 |  |                         | 50,451     |   |      |   | 15,284   |      |  |   | 1,770    |  
|                                                                                                    |  |                         |            |   |      |   |          |      |  |   |          |  
|Financing activities                                                                                |  |                         |            |   |      |   |          |      |  |   |          |  
|Proceeds from borrowings on notes payable                                                           |  |                         | 1,105,464  |   |      |   | 913,599  |      |  |   | 687,641  |  
|Principal payments on notes payable                                                                 |  |                         | (1,220,919 | ) |      |   | (920,029 | )    |  |   | (669,709 | )
|Repurchase of 121/2% Senior Notes                                                                   |  |                         |           |   |      |   |         |      |  |   | (51,637  | )
|Reissuance of 121/2% Senior Notes                                                                   |  |                         |           |   |      |   |         |      |  |   | 44,715   |  
|Repayment of 121/2% Senior Notes                                                                    |  |                         | (70,279    | ) |      |   |         |      |  |   |         |  
|Issuance of 103/4% Senior Notes                                                                     |  |                         | 246,233    |   |      |   |         |      |  |   |         |  
|Minority interest contributions (distributions), net                                                |  |                         | 61,420     |   |      |   | (5,442   | )    |  |   |         |  
|Common stock issued for exercised options                                                           |  |                         | 2,294      |   |      |   | 1,118    |      |  |   | 427      |  
|Common stock purchased                                                                              |  |                         | (7,180     | ) |      |   | (19,570  | )    |  |   |         |  
|                                                                                                    |  |                         |            |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                                                 |  |                         | 117,033    |   |      |   | (30,324  | )    |  |   | 11,437   |  
|                                                                                                    |  |                         |            |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                                |  |                         | 7,443      |   |      |   | (3,057   | )    |  |   | 5,040    |  
|Cash and cash equivalentsbeginning of year                                                         |  |                         | 16,694     |   |      |   | 19,751   |      |  |   | 14,711   |  
|                                                                                                    |  |                         |            |   |      |   |          |      |  |   |          |  
|Cash and cash equivalentsend of year                                                               |  | $                       | 24,137     |   |      | $ | 16,694   |      |  | $ | 19,751   |  
|                                                                                                    |  |                         |            |   |      |   |          |      |  |   |          |  
|Supplemental disclosures of cash flow and non-cash activities                                       |  |                         |            |   |      |   |          |      |  |   |          |  
|Cash paid for interest, net of amounts capitalized                                                  |  | $                       |           |   |      | $ |         |      |  | $ |         |  
|                                                                                                    |  |                         |            |   |      |   |          |      |  |   |          |  
|Issuance of notes payable for land acquisitions                                                     |  | $                       | 21,534     |   |      | $ | 51,025   |      |  | $ | 43,550   |  
|                                                                                                    |  |                         |            |   |      |   |          |      |  |   |          |  
|Investment in joint venture in connection with contribution of land to joint venture                |  | $                       |           |   |      | $ | 2,000    |      |  | $ | 1,100    |  
|                                                                                                    |  |                         |            |   |      |   |          |      |  |   |          |  
|Income tax benefit credited to additional paid-in capital in connection with stock option exercises |  | $                       | 3,113      |   |      | $ |         |      |  | $ |         |  
|                                                                                                    |  |                         |            |   |      |   |          |      |  |   |          |  



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 created after January 31, 2003 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 in which
the Company has a 50% or less voting or economic interest (and thus are not controlled by the Company) and which were created prior to February 1, 2003 and 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. The accounting policies of the joint ventures are substantially the same as those of the Company. All significant intercompany accounts
and transactions have been eliminated in consolidation.



Segment Information



The Company designs,
constructs and sells a wide range of homes designed to meet the specific needs of each of its markets. For internal reporting purposes, the Company is organized into five geographic home building regions and its mortgage origination operation.
Because each of the Companys geographic home building regions has similar economic characteristics, housing products and class of prospective buyers, the geographic home building regions have been aggregated into a single home building
segment.



The Company evaluates performance and
allocates resources primarily based on the operating income of individual home building projects. Operating income is defined by the Company as operating revenue less operating costs plus equity in income of unconsolidated joint ventures.
Accordingly, operating income excludes certain expenses included in the determination of net income. Operating income from home building operations totaled $117.6 million, $62.8 million and $46.2 million for the years ended December 31, 2003,
2002 and 2001, respectively.



All revenues are from
external customers. There were no customers that contributed 10% or more of the Companys total revenues during the years ended December 31, 2003, 2002 or 2001.



Real Estate Inventories and Related Indebtedness



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



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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



|                                      |  |              |        |   |      |   |        |      |  |   |        |  
|------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                      |  | December 31, |       
|                                      |  | 2003         |        |   | 2002 |   |        | 2001 | 
|                                      |  |              |        |   |      |   |        |      | 
|Warranty liability, beginning of year |  | $            | 4,287  |   |      | $ | 2,598  |      |  | $ | 2,885  |  
|Warranty provision during year        |  |              | 9,279  |   |      |   | 5,167  |      |  |   | 4,156  |  
|Warranty settlements during year      |  |              | (6,299 | ) |      |   | (3,478 | )    |  |   | (4,443 | )
|                                      |  |              |        |   |      |   |        |      |  |   |        |  
|Warranty liability, end of year       |  | $            | 7,267  |   |      | $ | 4,287  |      |  | $ | 2,598  |  
|                                      |  |              |        |   |      |   |        |      |  |   |        |  



Interest incurred
under the Revolving Credit Facilities, the 121/2% Senior Notes, the 103/4% Senior Notes and other notes payable, as more fully discussed in Note 6, is capitalized to qualifying real estate
projects under development. Any additional interest charges related to real estate projects not under development are expensed in the period incurred.



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



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



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 seven 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.



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Deferred Loan Costs



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



Goodwill



The amount paid for business acquisitions over the net fair value of assets
acquired and liabilities assumed is reflected as goodwill and, until January 1, 2002 was being amortized on a straight-line basis over seven years. Accumulated amortization was $2,793,000 as of December 31, 2001. In June 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement No. 142), effective for fiscal years beginning after December 15, 2001. Under this rule,
goodwill is no longer amortized but is subject to impairment tests in accordance with Statement No. 142. The Company performed its first required annual impairment test of goodwill as of January 1, 2002 and determined that goodwill was not impaired.
As of December 31, 2003, there have been no indicators of impairment related to the Companys goodwill. If Statement No. 142 had been adopted effective January 1, 2001, the pro forma impact of the nonamortization of goodwill on the results for
the subsequent period would have been as follows (in thousands except per common share data):



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



Sales and Profit
Recognition



A sale is recorded and profit recognized when
a sale is consummated, the buyers initial and continuing investments are adequate, any receivables are not subject to future subordination, and the usual risks and rewards of ownership have been transferred to the buyer in accordance with the
provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate (Statement No. 66). When it is determined that the earnings process is not complete, profit
is deferred for recognition in future periods. The Company accounts for sale-leaseback transactions in accordance with the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 98, Accounting for
Leases(Statement No. 98).



During the year
ended December 31, 2001, the Company completed the sale and related leaseback of 56 model homes for a sales price of $16,216,000, of which $13,938,000 was paid in cash and $2,278,000 of which was paid in the form of a partial recourse note
receivable. The sale was accounted for on the cost recovery method in accordance with Statement No. 66 and Statement No. 98, and as such deferred profits of $2,385,000 were recorded resulting in gross profits from the sale of $531,000. As of
December 31, 2003 and 2002, the partial recourse note receivable of $460,000 and $1,379,000 and related deferred profits of $460,000 and $1,486,000 are reflected in receivables and accrued expenses, respectively. The Company pays rent
on the related lease and earns income on the partial recourse note receivable at LIBOR plus 4.75% (5.90% at December 31, 2003).



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Income Taxes



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



Financial Instruments



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



For those instruments, as defined under
Financial Accounting Standards Board Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, for which it is practical to estimate fair value, management has determined that the carrying
amounts of the Companys financial instruments approximate their fair value at December 31, 2003, except for the 103/4% Senior Notes as described in Note 6.



The Company is an issuer of, or subject to, financial instruments with off-balance sheet risk in the normal course of business which exposes it to credit risks. These financial instruments include letters of credit and obligations in
connection with assessment district bonds. These off-balance sheet financial instruments are described in more detail in Note 10.



Cash and Cash Equivalents



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



Management Fees



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



Basic and Diluted Earnings Per Common Share



Earnings per share amounts for all periods presented conform to Financial Accounting Standards Board Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic and diluted earnings per
common share for the year ended December 31, 2003 are based on 9,782,928 and 9,928,733 shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the year ended December 31, 2002 are based on 10,203,497 and
10,474,868 shares of common stock outstanding, respectively. Basic and diluted earnings per common share for the year ended December 31, 2001 are based on 10,583,564 and 10,739,540 shares of common stock outstanding, respectively.



Stock-Based Compensation



At December 31, 2003, the Company had stock plans, which are described more
fully in Note 7. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25,



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Accounting for Stock Issued to Employees (APB No. 25) and related interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per common share if
the Company had applied the fair value recognition provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement No. 123) to stock-based
employee plans (in thousands, except per common share amounts):



|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                            |  | Year Ended December 31 |       
|                                                                                                                                            |  | 2003                   |        |   | 2002 |   |        | 2001 | 
|Net income, as reported                                                                                                                     |  | $                      | 72,137 |   |      | $ | 49,511 |      |  | $ | 47,678 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                        | (380   | ) |      |   | (937   | )    |  |   | (916   | )
|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|Net income, as adjusted                                                                                                                     |  | $                      | 71,757 |   |      | $ | 48,574 |      |  | $ | 46,762 |  
|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|Earnings per common share:                                                                                                                  |  |                        |        |   |      |   |        |      |  |   |        |  
|Basicas reported                                                                                                                           |  |                        | $7.37  |   |      |   | $4.85  |      |  |   | $4.50  |  
|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|Basicas adjusted                                                                                                                           |  |                        | $7.33  |   |      |   | $4.76  |      |  |   | $4.42  |  
|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|Dilutedas reported                                                                                                                         |  |                        | $7.27  |   |      |   | $4.73  |      |  |   | $4.44  |  
|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|Dilutedas adjusted                                                                                                                         |  |                        | $7.23  |   |      |   | $4.64  |      |  |   | $4.35  |  
|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  



Use of Estimates



The preparation of the Companys financial
statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 2003 and 2002 and
revenues and expenses for each of the three years in the period ended December 31, 2003. Accordingly, actual results could differ from those estimates in the near-term.



Impact of New Accounting Pronouncements



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



In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others(Interpretation No. 45). The disclosure requirements of Interpretation No. 45 are effective as of December 31, 2002. The initial recognition and measurement requirements of Interpretation No. 45 are effective on a
prospective basis to guarantees issued or modified after December 31, 2002. In the case of a guarantee issued as part of a transaction with multiple elements with an unrelated party, Interpretation No. 45 generally requires the recording at
inception of the guarantee of a liability equal to the guarantees estimated fair value. In the absence of observable transactions for identical or similar guarantees, estimated fair value will likely be based on the



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



expected present value which is the sum of the estimated probability-weighted range of contingent payments under the guarantee arrangement. The recording of
a liability could have a corresponding effect on various of the Companys financial ratios and other financial and operational indicators. The application of Interpretation No. 45 beginning on January 1, 2003 did not have a material impact on
the Companys financial statements with respect to any guarantees issued or modified by the Company after December 31, 2002. See Notes 5, 6 and 10 of Notes to Consolidated Financial Statements for additional information related to
the Companys guarantees.



In January 2003, the Financial
Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, as amended (Interpretation No. 46), which applies to arrangements created after January 31, 2003. Interpretation No. 46
applies to arrangements created before February 1, 2003 beginning on March 31, 2004. As of December 31, 2003, the Company is considered to be the primary beneficiary in six joint ventures and one land banking arrangement created after
January 31, 2003, which have been determined to be variable interest entities. Accordingly, the assets, liabilities and operations of these six joint ventures and one land banking arrangement have been consolidated with the Companys
financial statements as of December 31, 2003 and for the period then ended. The Company has not yet determined the anticipated impact of adopting Interpretation No. 46 for arrangements existing as of January 31, 2003. However such adoption will
likely require the consolidation of certain of the Companys joint ventures, option agreements and land banking arrangements in the Companys financial statements as of March 31, 2004. The consolidation of the assets, liabilities and
operations of any joint venture, option agreements or land banking arrangements would have a corresponding effect on various of the Companys financial ratios and other financial and operational indicators. See Note 2 for information regarding
variable interest entities. See Notes 5 and 10 for additional information regarding joint venture and land banking arrangements.



Reclassifications



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



Note 2  Consolidation of Variable Interest Entities



In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable
Interest Entities,as amended(Interpretation No. 46) which addresses the consolidation of variable interest entities (VIEs). Under Interpretation No. 46, arrangements that are not controlled through voting
or similar rights are accounted for as VIEs. An enterprise is required to consolidate a VIE if it is the primary beneficiary of the VIE. Interpretation No. 46 applies immediately to arrangements created after January 31, 2003 and, with respect to
arrangements created before February 1, 2003, the interpretation will apply to the Company as of March 31, 2004. Arrangements entered into subsequent to January 31, 2003 have been evaluated under Interpretation No. 46 and, if applicable,
accounted for in accordance with Interpretation No. 46.



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



Based on the provisions of Interpretation No. 46, the
Company has concluded that under certain circumstances when the Company (i) enters into option agreements for the purchase of land or lots from an entity and pays a non-refundable deposit, (ii) enters into land banking arrangements (see Note 10) or
(iii) enters into



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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



Based on the Companys analysis of arrangements created after January 31, 2003, no VIEs have been created for the period from February 1, 2003
through December 31, 2003 with respect to option agreements as identified under clause (i) of the previous paragraph. At December 31, 2003, six joint ventures and one land banking arrangement created after January 31, 2003 have been determined to be
VIEs under Interpretation No. 46 in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these six joint ventures and one land banking arrangement have been consolidated with the
Companys financial statements as of December 31, 2003 and for the period then ended. Supplemental consolidating financial information of the Company, specifically including information for the six joint ventures and one land banking
arrangement consolidated under Interpretation No. 46 and for two joint ventures which were previously consolidated (see Note 5), is presented below to allow investors to determine the nature of assets held and the operations of the consolidated
entities. Investments in consolidated joint ventures in the separate financial statements of wholly-owned entities are presented below using the equity method of accounting. Consolidated real estate inventories include land deposits under option
agreements or land banking arrangements (excluding the consolidated land banking arrangement as previously described in this paragraph) (see Note 10) of $37,293,000 and $37,443,000 at December 31, 2003 and 2002, respectively. As of December 31,
2003, the Companys remaining total contractual obligations for land purchases and option commitments was approximately $568,300,000.



The six joint ventures created after January 31, 2003 which have been determined to be VIEs are each engaged in homebuilding and land development
activities which will result in an estimated total of 562 homes at completion. The homes are expected to be constructed and sold in phases over a two-to-three year period with approximate base sales prices ranging from $298,000 to $1,059,000. As of
December 31, 2003, 98 homes have been sold and 21 homes have closed. These joint ventures have not obtained construction financing from outside lenders, but are financing their activities through equity contributions from each of the joint venture
partners. Creditors of these VIEs have no recourse against the general credit of the Company. Income allocations and cash distributions to the Company are based on predetermined formulas between the Company and the joint venture partners as
specified in the applicable partnership or operating agreements. The Company generally receives, after partners priority returns and return of partners capital, approximately 50% of the profits and cash flows from the joint ventures.



The land banking arrangement which has been determined to be a
VIE was entered into effective on September 29, 2003. Under this arrangement, the Company transferred to an entity owned by a third party the Companys right to purchase certain real estate assets (lots) from a joint venture whose financial
statements have previously been consolidated with the Companys financial statements (see Note 5). Concurrently, the Company entered into an option agreement with the entity owned by a third party whereby the Company agreed to acquire lots in
staged takedowns through August 15, 2005. The Company made a non-refundable deposit of $14,418,000 and the entity owned by a third party made an equity contribution of $42,214,000 to purchase the lots from the joint venture for a total price of
$56,632,000 (which included a $16,441,000 preferred return to the outside partner of the joint venture). The Company is under no obligation to purchase the lots, but would forfeit remaining deposits if the lots were not purchased. The Company does
not have legal title to the entity owned by a third party and has not guaranteed its liabilities. The total purchase price under the option agreement is $60,848,550 plus a 101/4% preferred return on invested capital to the outside third party. The property consists of



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



128 single-family lots and 22 high-density lots on which the Company expects to construct 128 single-family homes on the single-family lots and 44 duplex
condominium units on the high-density lots. The homes are expected to be constructed and sold in phases over a two-to-three year period with approximate base sales prices ranging from $680,000 to $930,000. As of December 31, 2003, 11 lots have been
taken down for a purchase price of $3,744,975 and no homes have closed. The intercompany sales and related profits have been eliminated in consolidation.



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)



|                                                             |  |                   |         |                                                       |   |                                      |  |                     |        |  |                    |          |   |  |   |        
|------------------------------------------------------------ |  | ----------------- | ------- | ----------------------------------------------------- | - | ------------------------------------ |  | ------------------- | ------ |  | ------------------ | -------- | - |  | - | -------
|                                                             |  | December 31, 2003
|                                                             |  |                   |         | Consolidated Entities                                 |   |                                      |  |                     |       
|                                                             |  | Wholly-Owned      |         | Variable InterestEntities Under Interpretation No. 46 |   | JointVenturesPreviously Consolidated |  | Elimination Entries |        |  | Consolidated Total
|                                                            
|ASSETS                                                      
|                                                             |  |                   |         |                                                       |  
|Cash and cash equivalents                                    |  | $                 | 18,893  |                                                       | $ | 4,775                                |  | $                   | 469    |  | $                  |         |   |  | $ | 24,137 
|Receivables                                                  |  |                   | 43,719  |                                                       |   | 2,492                                |  |                     |       |  |                    |         |   |  |   | 46,211 
|Real estate inventories                                      |  |                   | 515,984 |                                                       |   | 153,968                              |  |                     | 28,095 |  |                    |         |   |  |   | 698,047
|Investments in and advances to unconsolidated joint ventures |  |                   | 45,613  |                                                       |   |                                     |  |                     |       |  |                    |         |   |  |   | 45,613 
|Investments in consolidated entities                         |  |                   | 40,694  |                                                       |   |                                     |  |                     |       |  |                    | (40,694  | ) |  |   |       
|Other assets                                                 |  |                   | 25,707  |                                                       |   |                                     |  |                     |       |  |                    |         |   |  |   | 25,707 
|Intercompany receivables                                     |  |                   | 3,420   |                                                       |   |                                     |  |                     |       |  |                    | (3,420   | ) |  |   |       
|                                                             |  |                   |         |                                                       |   |                                      |  |                     |        |  |                    |          |   |  |   |        
|                                                             |  | $                 | 694,030 |                                                       | $ | 161,235                              |  | $                   | 28,564 |  | $                  | (44,114  | ) |  | $ | 839,715
|                                                             |  |                   |         |                                                       |   |                                      |  |                     |        |  |                    |          |   |  |   |        
|                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY                        
|                                                             |  |                   |         |                                                       |  
|Accounts payable and accrued expenses                        |  | $                 | 115,253 |                                                       | $ | 3,010                                |  | $                   | 179    |  | $                  |         |   |  | $ | 118,442
|Notes payable                                                |  |                   | 80,331  |                                                       |   |                                     |  |                     |       |  |                    |         |   |  |   | 80,331 
|103/4% Senior Notes due April 1, 2013                        |  |                   | 246,406 |                                                       |   |                                     |  |                     |       |  |                    |         |   |  |   | 246,406
|Intercompany payables                                        |  |                   |        |                                                       |   | 2,894                                |  |                     | 526    |  |                    | (3,420   | ) |  |   |       
|                                                             |  |                   |         |                                                       |   |                                      |  |                     |        |  |                    |          |   |  |   |        
|Total liabilities                                            |  |                   | 441,990 |                                                       |   | 5,904                                |  |                     | 705    |  |                    | (3,420   | ) |  |   | 445,179
|Minority interest in consolidated entities                   |  |                   |        |                                                       |   |                                     |  |                     |       |  |                    | 142,496  |   |  |   | 142,496
|Owners capital                                              |  |                   |         |                                                       |   |                                      |  |                     |        |  |                    |          |   |  |   |        
|William Lyon Homes                                           |  |                   |        |                                                       |   | 35,467                               |  |                     | 5,227  |  |                    | (40,694  | ) |  |   |       
|Others                                                       |  |                   |        |                                                       |   | 119,864                              |  |                     | 22,632 |  |                    | (142,496 | ) |  |   |       
|Stockholders equity                                         |  |                   | 252,040 |                                                       |   |                                     |  |                     |       |  |                    |         |   |  |   | 252,040
|                                                             |  |                   |         |                                                       |   |                                      |  |                     |        |  |                    |          |   |  |   |        
|                                                             |  | $                 | 694,030 |                                                       | $ | 161,235                              |  | $                   | 28,564 |  | $                  | (44,114  | ) |  | $ | 839,715
|                                                             |  |                   |         |                                                       |   |                                      |  |                     |        |  |                    |          |   |  |   |        



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)



|                                                             |  |                   |         |                                                       |   |                                      |  |                     |         |  |                    |         |   |  |   |        
|------------------------------------------------------------ |  | ----------------- | ------- | ----------------------------------------------------- | - | ------------------------------------ |  | ------------------- | ------- |  | ------------------ | ------- | - |  | - | -------
|                                                             |  | December 31, 2002
|                                                             |  |                   |         | Consolidated Entities                                 |   |                                      |  |                     |        
|                                                             |  | Wholly-Owned      |         | Variable InterestEntities Under Interpretation No. 46 |   | JointVenturesPreviously Consolidated |  | Elimination Entries |         |  | Consolidated Total
|                                                            
|ASSETS                                                      
|                                                             |  |                   |         |                                                       |  
|Cash and cash equivalents                                    |  | $                 | 14,404  |                                                       | $ |                                     |  | $                   | 2,290   |  | $                  |        |   |  | $ | 16,694 
|Receivables                                                  |  |                   | 28,734  |                                                       |   |                                     |  |                     |        |  |                    |        |   |  |   | 28,734 
|Real estate inventories                                      |  |                   | 390,103 |                                                       |   |                                     |  |                     | 101,849 |  |                    |        |   |  |   | 491,952
|Investments in and advances to unconsolidated joint ventures |  |                   | 65,404  |                                                       |   |                                     |  |                     |        |  |                    |        |   |  |   | 65,404 
|Investments in consolidated entities                         |  |                   | 19,937  |                                                       |   |                                     |  |                     |        |  |                    | (19,937 | ) |  |   |       
|Other assets                                                 |  |                   | 14,797  |                                                       |   |                                     |  |                     |        |  |                    |        |   |  |   | 14,797 
|Intercompany receivables                                     |  |                   |        |                                                       |   |                                     |  |                     | 951     |  |                    | (951    | ) |  |   |       
|                                                             |  |                   |         |                                                       |   |                                      |  |                     |         |  |                    |         |   |  |   |        
|                                                             |  | $                 | 533,379 |                                                       | $ |                                     |  | $                   | 105,090 |  | $                  | (20,888 | ) |  | $ | 617,581
|                                                             |  |                   |         |                                                       |   |                                      |  |                     |         |  |                    |         |   |  |   |        
|                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY                        
|                                                             |  |                   |         |                                                       |  
|Accounts payable and accrued expenses                        |  | $                 | 84,687  |                                                       | $ |                                     |  | $                   | 4,506   |  | $                  |        |   |  | $ | 89,193 
|Notes payable                                                |  |                   | 195,786 |                                                       |   |                                     |  |                     |        |  |                    |        |   |  |   | 195,786
|121/2% Senior Notes due July 1, 2003                         |  |                   | 70,279  |                                                       |   |                                     |  |                     |        |  |                    |        |   |  |   | 70,279 
|Intercompany payables                                        |  |                   | 951     |                                                       |   |                                     |  |                     |        |  |                    | (951    | ) |  |   |       
|                                                             |  |                   |         |                                                       |   |                                      |  |                     |         |  |                    |         |   |  |   |        
|Total liabilities                                            |  |                   | 351,703 |                                                       |   |                                     |  |                     | 4,506   |  |                    | (951    | ) |  |   | 355,258
|                                                             |  |                   |         |                                                       |   |                                      |  |                     |         |  |                    |         |   |  |   |        
|Minority interest in consolidated entities                   |  |                   |        |                                                       |   |                                     |  |                     |        |  |                    | 80,647  |   |  |   | 80,647 
|Owners capital                                              |  |                   |         |                                                       |   |                                      |  |                     |         |  |                    |         |   |  |   |        
|William Lyon Homes                                           |  |                   |        |                                                       |   |                                     |  |                     | 19,937  |  |                    | (19,937 | ) |  |   |       
|Others                                                       |  |                   |        |                                                       |   |                                     |  |                     | 80,647  |  |                    | (80,647 | ) |  |   |       
|Stockholders equity                                         |  |                   | 181,676 |                                                       |   |                                     |  |                     |        |  |                    |        |   |  |   | 181,676
|                                                             |  |                   |         |                                                       |   |                                      |  |                     |         |  |                    |         |   |  |   |        
|                                                             |  | $                 | 533,379 |                                                       | $ |                                     |  | $                   | 105,090 |  | $                  | (20,888 | ) |  | $ | 617,581
|                                                             |  |                   |         |                                                       |   |                                      |  |                     |         |  |                    |         |   |  |   |        



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP

(in thousands)



|                                                   |  |                              |          |   |                                                       |   |        |                                      |  |   |                     |   |  |                    |          |   |  |   |          |  
|-------------------------------------------------- |  | ---------------------------- | -------- | - | ----------------------------------------------------- | - | ------ | ------------------------------------ |  | - | ------------------- | - |  | ------------------ | -------- | - |  | - | -------- | -
|                                                   |  | Year Ended December 31, 2003 |         
|                                                   |  |                              |          |   | Consolidated Entities                                 |   |        |                                      |  |   |                     |  
|                                                   |  | Wholly-Owned                 |          |   | Variable InterestEntities Under Interpretation No. 46 |   |        | JointVenturesPreviously Consolidated |  |   | Elimination Entries |   |  | Consolidated Total |         
|Operating revenue                                  |  |                              |          |   |                                                       |   |        |                                      |  |   |                     |   |  |                    |          |   |  |   |          |  
|Sales                                              |  | $                            | 879,114  |   |                                                       | $ | 9,199  |                                      |  | $ | 129,439             |   |  | ($                 | 129,439  | ) |  | $ | 888,313  |  
|Management fees                                    |  |                              | 9,490    |   |                                                       |   |       |                                      |  |   |                    |   |  |                    |         |   |  |   | 9,490    |  
|                                                   |  |                              |          |   |                                                       |   |        |                                      |  |   |                     |   |  |                    |          |   |  |   |          |  
|                                                   |  |                              | 888,604  |   |                                                       |   | 9,199  |                                      |  |   | 129,439             |   |  |                    | (129,439 | ) |  |   | 897,803  |  
|                                                   |  |                              |          |   |                                                       |   |        |                                      |  |   |                     |   |  |                    |          |   |  |   |          |  
|Operating costs                                    |  |                              |          |   |                                                       |   |        |                                      |  |   |                     |   |  |                    |          |   |  |   |          |  
|Cost of sales                                      |  |                              | (719,750 | ) |                                                       |   | (7,904 | )                                    |  |   | (107,696            | ) |  |                    | 107,696  |   |  |   | (727,654 | )
|Sales and marketing                                |  |                              | (29,910  | ) |                                                       |   | (979   | )                                    |  |   | (363                | ) |  |                    |         |   |  |   | (31,252  | )
|General and administrative                         |  |                              | (50,315  | ) |                                                       |   |       |                                      |  |   |                    |   |  |                    |         |   |  |   | (50,315  | )
|Other                                              |  |                              | (1,834   | ) |                                                       |   |       |                                      |  |   |                    |   |  |                    |         |   |  |   | (1,834   | )
|                                                   |  |                              |          |   |                                                       |   |        |                                      |  |   |                     |   |  |                    |          |   |  |   |          |  
|                                                   |  |                              | (801,809 | ) |                                                       |   | (8,883 | )                                    |  |   | (108,059            | ) |  |                    | 107,696  |   |  |   | (811,055 | )
|                                                   |  |                              |          |   |                                                       |   |        |                                      |  |   |                     |   |  |                    |          |   |  |   |          |  
|Equity in income of unconsolidated joint ventures  |  |                              | 31,236   |   |                                                       |   |       |                                      |  |   |                    |   |  |                    |         |   |  |   | 31,236   |  
|                                                   |  |                              |          |   |                                                       |   |        |                                      |  |   |                     |   |  |                    |          |   |  |   |          |  
|Equity in loss of consolidated entities            |  |                              | (449     | ) |                                                       |   |       |                                      |  |   |                    |   |  |                    | 449      |   |  |   |         |  
|                                                   |  |                              |          |   |                                                       |   |        |                                      |  |   |                     |   |  |                    |          |   |  |   |          |  
|Minority equity in income of consolidated entities |  |                              |         |   |                                                       |   | (429   | )                                    |  |   | (21,743             | ) |  |                    | 21,743   |   |  |   | (429     | )
|                                                   |  |                              |          |   |                                                       |   |        |                                      |  |   |                     |   |  |                    |          |   |  |   |          |  
|Operating income                                   |  |                              | 117,582  |   |                                                       |   | (113   | )                                    |  |   | (363                | ) |  |                    | 449      |   |  |   | 117,555  |  
|Other income, net                                  |  |                              | 6,370    |   |                                                       |   | 6      |                                      |  |   | 21                  |   |  |                    |         |   |  |   | 6,397    |  
|                                                   |  |                              |          |   |                                                       |   |        |                                      |  |   |                     |   |  |                    |          |   |  |   |          |  
|Income (loss) before provision for income taxes    |  |                              | 123,952  |   |                                                       |   | (107   | )                                    |  |   | (342                | ) |  |                    | 449      |   |  |   | 123,952  |  
|Provision for income taxes                         |  |                              | (51,815  | ) |                                                       |   |       |                                      |  |   |                    |   |  |                    |         |   |  |   | (51,815  | )
|                                                   |  |                              |          |   |                                                       |   |        |                                      |  |   |                     |   |  |                    |          |   |  |   |          |  
|Net income (loss)                                  |  | $                            | 72,137   |   |                                                       | $ | (107   | )                                    |  | $ | (342                | ) |  | $                  | 449      |   |  | $ | 72,137   |  
|                                                   |  |                              |          |   |                                                       |   |        |                                      |  |   |                     |   |  |                    |          |   |  |   |          |  



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED CONSOLIDATING STATEMENT OF INCOME BY FORM OF OWNERSHIP

(in thousands)



The Company has not yet determined the anticipated impact of adopting Interpretation No. 46 for arrangements existing as of January 31, 2003. However,
such adoption will likely require the consolidation in the Companys financial statements as of March 31, 2004 of the assets, liabilities and operations on a prospective basis of certain existing joint ventures, option agreements or land
banking arrangements. Because the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 will not affect the Companys consolidated
net income.



Note 3  Receivables



Receivables consist of the following (in thousands):



|                                                                                                                               |  |              |        |      |   |       
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------ | ---- | - | ------
|                                                                                                                               |  | December 31,
|                                                                                                                               |  | 2003         |        | 2002
|Notes receivable:                                                                                                              |  |              |        |      |   |       
|First trust deed mortgage notes receivable, pledged as collateral for revolving mortgage warehouse credit facility             |  | $            | 20,498 |      | $ | 18,139
|Notes receivable from sale and related leaseback of 56 model homes which is accounted for on the cost recovery method (Note 1) |  |              | 471    |      |   | 1,379 
|                                                                                                                               |  |              |        |      |   |       
|                                                                                                                               |  |              | 20,969 |      |   | 19,518
|Receivables from affiliates for management fees, cost reimbursements and other                                                 |  |              | 115    |      |   | 3,226 
|Other receivablesprimarily escrow proceeds                                                                                    |  |              | 25,127 |      |   | 5,990 
|                                                                                                                               |  |              |        |      |   |       
|                                                                                                                               |  | $            | 46,211 |      | $ | 28,734
|                                                                                                                               |  |              |        |      |   |       



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 4  Real Estate Inventories



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



|                    |  |                   |        |      |   |                          |  |                                                                        |         |       |   |        |  |   |        
|------------------- |  | ----------------- | ------ | ---- | - | ------------------------ |  | ---------------------------------------------------------------------- | ------- | ----- | - | ------ |  | - | -------
|                    |  | December 31, 2003
|Division            |  | Deposits          |        | Land |   | Constructionin Progress  |  | CompletedInventory,Including Modelsand CompletedLots Held for Sale     |         | Total
|Southern California |  | $                 | 13,033 |      | $ | 54,532                   |  | $                                                                      | 119,518 |       | $ | 5,230  |  | $ | 192,313
|San Diego           |  |                   | 10,338 |      |   | 33,476                   |  |                                                                        | 90,327  |       |   | 7,718  |  |   | 141,859
|Northern California |  |                   | 7,086  |      |   | 16,882                   |  |                                                                        | 191,248 |       |   | 16,824 |  |   | 232,040
|Arizona             |  |                   | 6,386  |      |   | 28,298                   |  |                                                                        | 24,930  |       |   | 1,894  |  |   | 61,508 
|Nevada              |  |                   | 450    |      |   | 28,879                   |  |                                                                        | 40,828  |       |   | 170    |  |   | 70,327 
|                    |  |                   |        |      |   |                          |  |                                                                        |         |       |   |        |  |   |        
|                    |  | $                 | 37,293 |      | $ | 162,067                  |  | $                                                                      | 466,851 |       | $ | 31,836 |  | $ | 698,047
|                    |  |                   |        |      |   |                          |  |                                                                        |         |       |   |        |  |   |        
|                    | 
|                    |  | December 31, 2002
|Division            |  | Deposits          |        | Land |   | Construction In Progress |  | Completed Inventory, Including Models and Completed Lots Held for Sale |         | Total
|Southern California |  | $                 | 18,455 |      | $ | 44,172                   |  | $                                                                      | 45,549  |       | $ | 8,999  |  | $ | 117,175
|San Diego           |  |                   | 7,004  |      |   | 29,581                   |  |                                                                        | 47,114  |       |   | 2,847  |  |   | 86,546 
|Northern California |  |                   | 3,999  |      |   | 48,527                   |  |                                                                        | 120,254 |       |   | 9,801  |  |   | 182,581
|Arizona             |  |                   | 7,920  |      |   | 14,746                   |  |                                                                        | 16,998  |       |   | 2,001  |  |   | 41,665 
|Nevada              |  |                   | 65     |      |   | 38,695                   |  |                                                                        | 23,876  |       |   | 1,249  |  |   | 63,885 
|Other               |  |                   |       |      |   |                         |  |                                                                        | 100     |       |   |       |  |   | 100    
|                    |  |                   |        |      |   |                          |  |                                                                        |         |       |   |        |  |   |        
|                    |  | $                 | 37,443 |      | $ | 175,721                  |  | $                                                                      | 253,891 |       | $ | 24,897 |  | $ | 491,952
|                    |  |                   |        |      |   |                          |  |                                                                        |         |       |   |        |  |   |        



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 5  Investments in and Advances to Unconsolidated Joint Ventures



The Company and certain of its subsidiaries are general partners or members
in joint ventures involved in the development and sale of residential projects. The consolidated financial statements of the Company include the accounts of the Company and all majority-owned and controlled subsidiaries and joint ventures, and
certain joint ventures created after January 31, 2003 which have been determined to be variable interest entities in which the Company is considered the primary beneficiary (see Note 2). The financial statements of joint ventures in which the
Company has a 50% or less voting or economic interest (and thus are not controlled by the Company) and which were created prior to February 1, 2003 and the financial statements of joint ventures which have not been determined to be variable interest
entities in which the Company is considered the primary beneficiary are not consolidated with the Companys financial statements. The Companys investments in unconsolidated joint ventures are accounted for using the equity method.
Condensed combined financial information of these unconsolidated joint ventures as of December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003 are summarized as follows:



CONDENSED COMBINED BALANCE SHEETS

(In thousands)



|                                           |  |              |         |      |   |        
|------------------------------------------ |  | ------------ | ------- | ---- | - | -------
|                                           |  | December 31,
|                                           |  | 2003         |         | 2002
|ASSETS                                     |  |              |         |      |   |        
|Cash and cash equivalents                  |  | $            | 4,973   |      | $ | 18,023 
|Receivables                                |  |              | 2,339   |      |   | 13,017 
|Real estate inventories                    |  |              | 187,048 |      |   | 234,896
|Investment in unconsolidated joint venture |  |              | 22,804  |      |   |       
|                                           |  |              |         |      |   |        
|                                           |  | $            | 217,164 |      | $ | 265,936
|                                           |  |              |         |      |   |        
|LIABILITIES AND OWNERS CAPITAL            |  |              |         |      |   |        
|Accounts payable                           |  | $            | 6,408   |      | $ | 14,640 
|Accrued expenses                           |  |              | 2,645   |      |   | 1,309  
|Amounts payable to William Lyon Homes      |  |              | 115     |      |   | 3,226  
|Notes payable                              |  |              | 111,273 |      |   | 90,086 
|Advances from William Lyon Homes           |  |              | 2,668   |      |   | 7,498  
|                                           |  |              |         |      |   |        
|                                           |  |              | 123,109 |      |   | 116,759
|                                           |  |              |         |      |   |        
|Owners Capital                            |  |              |         |      |   |        
|William Lyon Homes                         |  |              | 42,945  |      |   | 57,906 
|Others                                     |  |              | 51,110  |      |   | 91,271 
|                                           |  |              |         |      |   |        
|                                           |  |              | 94,055  |      |   | 149,177
|                                           |  |              |         |      |   |        
|                                           |  | $            | 217,164 |      | $ | 265,936
|                                           |  |              |         |      |   |        



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONDENSED COMBINED STATEMENTS OF INCOME

(In thousands)



|                         |  |                         |          |   |      |   |          |      |  |   |          |  
|------------------------ |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                         |  | Year Ended December 31, |         
|                         |  | 2003                    |          |   | 2002 |   |          | 2001 | 
|Operating revenue        |  |                         |          |   |      |   |          |      |  |   |          |  
|Home sales               |  | $                       | 317,109  |   |      | $ | 362,697  |      |  | $ | 316,098  |  
|Land sale                |  |                         | 8,440    |   |      |   | 17,079   |      |  |   | 5,371    |  
|                         |  |                         |          |   |      |   |          |      |  |   |          |  
|                         |  |                         | 325,549  |   |      |   | 379,776  |      |  |   | 321,469  |  
|Operating costs          |  |                         |          |   |      |   |          |      |  |   |          |  
|Cost of sales  homes    |  |                         | (248,252 | ) |      |   | (298,838 | )    |  |   | (258,997 | )
|Cost of sales  land     |  |                         | (8,132   | ) |      |   | (13,542  | )    |  |   | (4,214   | )
|Sales and marketing      |  |                         | (9,431   | ) |      |   | (10,814  | )    |  |   | (10,609  | )
|                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Operating income         |  |                         | 59,734   |   |      |   | 56,582   |      |  |   | 47,649   |  
|Other income (loss), net |  |                         | (1,327   | ) |      |   | 83       |      |  |   | 295      |  
|                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Net income               |  | $                       | 58,407   |   |      | $ | 56,665   |      |  | $ | 47,944   |  
|                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Allocation to owners     |  |                         |          |   |      |   |          |      |  |   |          |  
|William Lyon Homes       |  | $                       | 31,236   |   |      | $ | 27,748   |      |  | $ | 22,384   |  
|Others                   |  |                         | 27,171   |   |      |   | 28,917   |      |  |   | 25,560   |  
|                         |  |                         |          |   |      |   |          |      |  |   |          |  
|                         |  | $                       | 58,407   |   |      | $ | 56,665   |      |  | $ | 47,944   |  
|                         |  |                         |          |   |      |   |          |      |  |   |          |  



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



Certain joint ventures have obtained financing from construction lenders which amounted to $111,273,000 at December 31, 2003. As common practice required
by commercial lenders, all of the joint ventures that have obtained financing are obligated to repay loans to a level such that they do not exceed certain required loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by
appraising the property securing the loan at the time. Either a decrease in the value of the property securing the loan or an increase in the construction costs could trigger this pay down obligation. The term of the obligation corresponds with the
term of the loan and is limited to the outstanding loan balance. Certain of the joint ventures that have obtained such financing are in the form of limited partnerships of which the Company is the general partner. While historically all liabilities
of these partnerships have been satisfied out of the assets of such partnerships and while the Company believes that this will continue in the future, the Company, as general partner, is potentially responsible for all liabilities and indebtedness
of these partnerships. In addition, the Company has provided unsecured environmental indemnities to some of the lenders who provide loans to the partnerships. The Company has also provided completion guarantees for some of the limited partnerships
under their credit facilities.



During the year ended December
31, 2003, one of the joint ventures in which the Company is a general partner completed a land sale to the Company for $8,440,000 resulting in no gain or loss to the joint venture. During the year ended December 31, 2002, one of the joint ventures
in which the Company is a general partner completed a land sale to the Company for $17,079,000 resulting in a profit of approximately $3,537,000, all of which was allocated to the Companys outside partner as preferred return in accordance with
the joint venture agreement.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



During the year ended December 31, 2002, one of the Companys joint ventures (Existing
Venture) was restructured such that the Company was required to purchase the 538 lots owned by the Existing Venture on a specified takedown basis through October 15, 2003 at a purchase price equal to the future cost of such lots including a
20% preferred return on invested capital to the outside partner of the Existing Venture. During the year ended December 31, 2002, the first 242 lots were purchased from the Existing Venture for $64,468,000, which includes a $12,493,000 preferred
return to the outside partner of the Existing Venture. The 242 lots were purchased by a newly formed joint venture (New Venture) between the Company and an outside partner. The Company is required to purchase the 242 lots owned by the
New Venture on a specified takedown basis through May 15, 2004 at a purchase price equal to $74,210,000 plus a 131/2% preferred return on invested capital to the outside partner of the New Venture. Because the Company is required to purchase the lots owned by both the Existing Venture and the New Venture, and the Company now controls both
ventures, the financial statements of both ventures have been consolidated with the Companys financial statements as of December 31, 2003, including real estate inventories of $28,095,000 and minority interest in consolidated joint
ventures of $22,632,000. During the year ended December 31, 2002, an additional 44 lots were purchased from the Existing Venture for $19,765,000, which included a $3,953,000 preferred return to the outside partner of the Existing Venture. The
44 lots were purchased through a land banking arrangement (see Note 10 for additional information regarding the Companys land banking arrangements). During the year ended December 31, 2003, an additional 219 lots were purchased from
the Existing Venture for $74,896,000, which included a $21,743,000 preferred return to the outside partner of the Existing Venture. These purchases included (1) 172 lots which were purchased from the Existing Venture under a land banking arrangement
(see Note 2) for $56,632,000, which included a $16,441,000 preferred return to the outside partner of the Existing Venture and (2) 47 lots which were purchased by the New Venture from the Existing Venture for $18,264,000, which included a $5,302,000
preferred return to the outside partner of the Existing Venture. During the year ended December 31, 2003 the Company purchased 175 lots from the New Venture for $54,543,000, all of which was paid to the outside partner as a return of capital.
The intercompany sales and related profits have been eliminated in consolidation.



During the year ended December 31, 2003, the Companys wholly-owned subsidiary William Lyon Homes Inc., a California corporation, (California Lyon), and two unaffiliated parties formed a series of
limited liability companies (Development LLCs) for the purpose of acquiring three parcels of land totaling 236 acres in Irvine and Tustin, California (formerly part of the Tustin Marine Corps Air Station) and developing the land into
1,910 residential homesites. The development process is anticipated to be completed by mid 2004 at which time California Lyon will be required under certain specific conditions to purchase approximately one half in value of the lots. California
Lyon has a 121/2% indirect, minority interest in the Development LLCs, which are the borrowers under two secured
lines of credit. Advances under the lines of credit are to be used to pay acquisition and development costs and expenses. The lines of credit are secured by deeds of trust on the real property and improvements thereon owned by the applicable
Development LLC, as well as pledges of all net sale proceeds, related contracts and other ancillary property. The maximum commitment amounts under the lines of credit are limited by specified agreed loan-to-value ratios. The maximum commitment
amount under the line of credit that closed in January 2003 (First Line of Credit) is $35,000,000. Subject to specified terms and conditions, California Lyon and the other direct and indirect members of the Development LLC that is the
borrower under the First Line of Credit, including certain affiliates of such other members, each (i) have guaranteed to the bank the repayment of the Development LLCs indebtedness under the First Line of Credit, completion of certain
infrastructure improvements to the land, payment of necessary loan remargining obligations, and the Development LLCs performance under its environmental indemnity and covenants, and (ii) have agreed to take all actions and pay all amounts
to assure that the Development LLC is in compliance with financial covenants. The First Line of Credit matures in January 2005, but may be extended to July 2005, subject to specified terms and conditions. The maximum commitment amount under the line
of credit that closed in March 2003 (Second Line of Credit) is $105,000,000. The Second Line of Credit matures in September 2004, but may be extended to



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



September 2005, subject to specified terms and conditions. Although the guarantee obligations of the other direct and indirect members of the Development LLC
that is the borrower under the Second Line of Credit, and certain of their affiliates, are similar in nature to those under the First Line of Credit, California Lyon does not have any such guarantee obligations to the banks under the Second Line of
Credit. However, California Lyon has posted letters of credit equal to approximately $24,600,000 to secure its obligations as well as the Development LLCs obligations to the banks under both lines of credit. Further, California Lyon and the
other direct and indirect members of the Development LLCs, including certain affiliates of such other members, have entered into reimbursement and indemnity agreements to allocate any liability arising from each line of credit, including the related
guarantees and letters of credit. California Lyons parent company, William Lyon Homes, a Delaware corporation (Delaware Lyon) has entered into joinder agreements to be jointly and severally liable for California Lyons
obligations under the reimbursement and indemnity agreements. While the reimbursement and indemnity agreements provide that liability is generally allocated in accordance with the members percentage interests in the Development LLCs
distributions, Delaware Lyon and California Lyon may be liable for the full amount of the obligations guaranteed to the banks under either or both of the lines of credit in certain specified circumstances, such as those involving the default,
willful misconduct or gross negligence of California Lyon. As of December 31, 2003, the outstanding indebtedness under the First Line of Credit was $33,600,000 and the outstanding indebtedness under the Second Line of Credit was $100,600,000.



Note 6  Notes Payable and Senior Notes



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



|                                                                                                                                                |  |              |         |      |   |        
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                                                                                                                                |  | December 31,
|                                                                                                                                                |  | 2003         |         | 2002
|Notes payable:                                                                                                                                  |  |              |         |      |   |        
|Revolving credit facilities                                                                                                                     |  | $            | 49,175  |      | $ | 118,068
|Construction notes payable                                                                                                                      |  |              | 21,534  |      |   | 25,218 
|Purchase money notes payableland acquisitions                                                                                                  |  |              |        |      |   | 28,861 
|Collateralized mortgage obligations under revolving mortgage warehouse credit facilities, secured by first trust deed mortgage notes
receivable |  |              | 9,622   |      |   | 18,139 
|Unsecured line of credit                                                                                                                        |  |              |        |      |   | 5,500  
|                                                                                                                                                |  |              |         |      |   |        
|                                                                                                                                                |  |              | 80,331  |      |   | 195,786
|103/4% Senior Notes due April 1, 2013                                                                                                           |  |              | 246,406 |      |   |       
|121/2% Senior Notes due July 1, 2003                                                                                                            |  |              |        |      |   | 70,279 
|                                                                                                                                                |  |              |         |      |   |        
|                                                                                                                                                |  | $            | 326,737 |      | $ | 266,065
|                                                                                                                                                |  |              |         |      |   |        



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



|                     |  |                         |         |   |      |   |         |      |  |   |         |  
|-------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                     |  | Year Ended December 31, |        
|                     |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|Interest incurred    |  | $                       | 47,188  |   |      | $ | 26,783  |      |  | $ | 21,908  |  
|Interest capitalized |  |                         | (47,188 | ) |      |   | (26,783 | )    |  |   | (21,681 | )
|                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Interest expense     |  | $                       |        |   |      | $ |        |      |  | $ | 227     |  
|                     |  |                         |         |   |      |   |         |      |  |   |         |  



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Maturities of the notes payable and 103/4% Senior Notes due April 1, 2013 are as follows as of December 31, 2003:



|                        |  |                |        
|----------------------- |  | -------------- | -------
|Year Ended December 31, |  | (in thousands)
|2004                    |  | $              | 80,331 
|2005                    |  |                |       
|2006                    |  |                |       
|2007                    |  |                |       
|2008                    |  |                |       
|Thereafter              |  |                | 246,406
|                        |  |                |        
|                        |  | $              | 326,737
|                        |  |                |        



103/4% Senior Notes



The Companys 100% owned subsidiary, William Lyon Homes, Inc., a California corporation (California Lyon), filed a Registration
Statement on Form S-3 with the Securities and Exchange Commission for the sale of $250,000,000 of Senior Notes which became effective on March 12, 2003. The offering closed on March 17, 2003 and was fully subscribed and issued. The notes
were issued at a price of 98.493% to the public, resulting in net proceeds to the Company of approximately $246,233,000. The purchase price reflected a discount to yield 11% under the effective interest method and the notes have been reflected net
of the unamortized discount in the accompanying consolidated balance sheet.



The 103/4% Senior Notes due 2013 are senior unsecured obligations of California
Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation (Delaware Lyon), which is the parent company of California Lyon, and all of Delaware Lyons existing and certain of
its future restricted subsidiaries. The notes and the guarantees rank senior to all of the Companys and the guarantors debt that is expressly subordinated to the 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. At December 31, 2003, the Company had approximately $80,331,000 of secured indebtedness and approximately
$205,500,000 of additional secured indebtedness available to be borrowed under the Companys credit facilities, as limited by the Companys borrowing base formulas. Interest on the 103/4% Senior Notes is payable on April 1 and October 1 of each year, commencing October 1, 2003.



Except as set forth in the Indenture governing the 103/4% Senior Notes (103/4% Senior Notes Indenture), the 103/4% Senior Notes are not
redeemable prior to April 1, 2008. Thereafter, the 103/4% Senior Notes will be redeemable at the option of
California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before April 1, 2006, California Lyon may redeem
up to 35% of the aggregate principal amount of the notes with the proceeds of qualified equity offerings at a redemption price equal to 110.75% of the principal amount, plus accrued and unpaid interest, if any.



Upon a change of control as
described in the 103/4% Senior Notes Indenture, California Lyon may be required to offer to purchase the notes
at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.



If the Companys consolidated tangible net worth falls below $75,000,000 for any two consecutive fiscal quarters, California Lyon will be required to
make an offer to purchase up to 10% of the notes originally issued at a purchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if any.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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



The 103/4% Senior Notes Indenture contains covenants that limit the ability of Delaware Lyon and its restricted subsidiaries
to, among other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase its stock; (iii) make investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements
restricting the ability of Delaware Lyons restricted subsidiaries (other than California Lyon) to pay dividends; (vii) enter into transactions with affiliates; and (ix) consolidate, merge or sell all or substantially all of Delaware
Lyons or California Lyons assets. These covenants are subject to a number of important exceptions and qualifications as described in the Indenture.



The foregoing summary is not a complete description of the terms of the 103/4% Senior Notes and is qualified in its entirety by reference to the 103/4% Senior Notes Indenture.



The net proceeds of the offering were used as follows (in thousands):



|                                                              |  |   |        
|------------------------------------------------------------- |  | - | -------
|Repayment of revolving credit facilities                      |  | $ | 104,354
|Repayment of 121/2% Senior Notes                              |  |   | 70,279 
|Repayment of construction notes payable                       |  |   | 28,000 
|Repayment of purchase money notes payable  land acquisitions |  |   | 26,000 
|Repayment of unsecured line of credit                         |  |   | 9,500  
|Underwriting discount                                         |  |   | 6,875  
|Offering costs                                                |  |   | 1,225  
|                                                              |  |   |        
|                                                              |  | $ | 246,233
|                                                              |  |   |        



As of December 31,
2003, the outstanding 103/4% Senior Notes with a face value of $246,406,000 had a fair value of approximately
$284,000,000, based on quotes from industry sources.



121/2% Senior Notes



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



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



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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



A portion of the net proceeds of the Companys offering of 103/4% Senior Notes (see above) was used to repay all of the Companys 121/2% Senior Notes, including $30,000,000 in principal amount held by General William Lyon, Chairman and Chief Executive Officer, and the trust of which his son, William H.
Lyon, is the sole beneficiary, $2,323,000 held by Wade H. Cable, President and Chief Operating Officer, and $1,000,000 held by William H. McFarland, a director.



71/2% Senior Notes



On
February 6, 2004, the Companys 100% owned subsidiary, William Lyon Homes, Inc., a California corporation, (California Lyon) closed its offering of $150,000,000 principal amount of 71/2% Senior Notes due 2014. The notes were sold pursuant to Rule 144A and outside the United States to non-U.S. persons in reliance on Regulation S. The notes
have not and will not be registered under the Securities Act of 1933 and, unless so registered, may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements
of the Securities Act and applicable state securities laws. The notes were issued at par, resulting in net proceeds to the Company of approximately $147,600,000. California Lyon agreed to file a registration statement with the Securities and
Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes (Exchange Notes) having substantially identical terms. If California Lyon does not comply with its agreement regarding the registration and
exchange of the notes with the Exchange Notes, additional interest on the notes will be payable on the interest payment dates.



The 71/2% Senior
Notes due February 15, 2004 are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by Delaware Lyon and all of Delaware Lyons existing and certain of its future restricted
subsidiaries. The notes and the guarantees rank senior to all of the Companys and the guarantors debt that is expressly subordinated to the 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. Interest on the 71/2% Senior Notes is payable on February 15 and August 15 of each year.



Except as set forth in the Indenture governing the 71/2% Senior Notes (71/2% Senior Notes Indenture), the
71/2% Senior Notes are not redeemable prior to February 15, 2009. Thereafter, the 71/2% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price
equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any. In addition, on or before February 15, 2007, California Lyon may redeem up to 35% of the aggregate principal amount of the notes
with the proceeds of qualified equity offerings at a redemption price equal to 107.50% of the principal amount, plus accrued and unpaid interest, if any.



Upon a change of control as described in the 71/2% Senior Notes Indenture, California Lyon may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid
interest, if any.



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



California Lyon
is 100% owned by Delaware Lyon. Each subsidiary guarantor is 100% owned by California Lyon or Delaware Lyon. All guarantees are full and unconditional and all guarantees are joint and



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



several. There are no significant restrictions on the ability of Delaware Lyon or any guarantor to obtain funds from subsidiaries by dividend or loan.



The 71/2% Senior Notes Indenture contains covenants that limit the ability of Delaware Lyon and its restricted subsidiaries to, among other things: (i) incur
additional indebtedness; (ii) pay dividends or make other distributions or repurchase its stock; (iii) make investments; (iv) sell assets; (v) incur liens; (vi) enter into agreements restricting the ability of Delaware Lyons restricted
subsidiaries (other than California Lyon) to pay dividends; (vii) enter into transactions with affiliates; and (ix) consolidate, merge or sell all or substantially all of Delaware Lyons and California Lyons assets. These covenants are
subject to a number of important exceptions and qualifications as described in the 71/2% Senior Notes Indenture.



The foregoing summary is not a complete
description of the 71/2% Senior Notes and is qualified in its entirety by reference to the 71/2% Senior Notes Indenture.



The net proceeds of the offering were used to repay $70,000,000 of the outstanding balance on the revolving credit
facilities and $21,500,000 of a construction note payable, together with $300,000 of accrued interest. The remaining proceeds will be used to pay fees and commissions related to the offering and for other general corporate purposes.



Supplemental consolidating financial information of the Company, specifically
including information for California Lyon, the issuer of the 103/4% Senior Notes and the 71/2% Senior Notes, and Delaware Lyon and the guarantor subsidiaries is presented below. Investments in subsidiaries
are presented using the equity method of accounting. Separate financial statements of California Lyon and the guarantor subsidiaries are not provided, as the consolidating financial information contained herein provides a more meaningful disclosure
to allow investors to determine the nature of assets held and the operations of the combined groups.



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING BALANCE SHEET



December 31, 2003

(in thousands)



|                                                             |  |                |         |                |   |                       |  |                           |        |                    |   |         |                     |   |          |   |  |   |        
|------------------------------------------------------------ |  | -------------- | ------- | -------------- | - | --------------------- |  | ------------------------- | ------ | ------------------ | - | ------- | ------------------- | - | -------- | - |  | - | -------
|                                                             |  | Unconsolidated |         |                |   |                       | 
|                                                             |  | DelawareLyon   |         | CaliforniaLyon |   | GuarantorSubsidiaries |  | Non-GuarantorSubsidiaries |        | EliminatingEntries |   |         | ConsolidatedCompany
|                                                             |  |                |         |                |   |                       |  |                           |        |                    |   |         |                    
|ASSETS                                                       |  |                |         |                |   |                       |  |                           |        |                    |   |         |                     |   |          |   |  |   |        
|Cash and cash equivalents                                    |  | $              |        |                | $ | 13,684                |  | $                         | 4,207  |                    | $ | 6,246   |                     | $ |         |   |  | $ | 24,137 
|Receivables                                                  |  |                |        |                |   | 22,215                |  |                           | 21,213 |                    |   | 2,783   |                     |   |         |   |  |   | 46,211 
|Real estate inventories                                      |  |                |        |                |   | 538,910               |  |                           | 1,094  |                    |   | 158,043 |                     |   |         |   |  |   | 698,047
|Investments in and advances to unconsolidated joint ventures |  |                |        |                |   | 45,613                |  |                           |       |                    |   |        |                     |   |         |   |  |   | 45,613 
|Property and equipment, net                                  |  |                |        |                |   | 800                   |  |                           | 825    |                    |   |        |                     |   |         |   |  |   | 1,625  
|Deferred loan costs                                          |  |                |        |                |   | 9,041                 |  |                           |       |                    |   |        |                     |   |         |   |  |   | 9,041  
|Goodwill                                                     |  |                |        |                |   | 5,896                 |  |                           |       |                    |   |        |                     |   |         |   |  |   | 5,896  
|Other assets                                                 |  |                |        |                |   | 7,975                 |  |                           | 1,170  |                    |   |        |                     |   |         |   |  |   | 9,145  
|Investments in subsidiaries                                  |  |                | 252,040 |                |   | 105,495               |  |                           |       |                    |   |        |                     |   | (357,535 | ) |  |   |       
|Intercompany receivables                                     |  |                |        |                |   | 1,190                 |  |                           | 69,830 |                    |   |        |                     |   | (71,020  | ) |  |   |       
|                                                             |  |                |         |                |   |                       |  |                           |        |                    |   |         |                     |   |          |   |  |   |        
|                                                             |  | $              | 252,040 |                | $ | 750,819               |  | $                         | 98,339 |                    | $ | 167,072 |                     | $ | (428,555 | ) |  | $ | 839,715
|                                                             |  |                |         |                |   |                       |  |                           |        |                    |   |         |                     |   |          |   |  |   |        
|                                                             |  |                |         |               
|LIABILITIES AND STOCKHOLDERS EQUITY                         |  |                |         |                |   |                       |  |                           |        |                    |   |         |                    
|Accounts payable                                             |  | $              |        |                | $ | 30,635                |  | $                         | 421    |                    | $ | 4,641   |                     | $ |         |   |  | $ | 35,697 
|Accrued expenses                                             |  |                |        |                |   | 77,888                |  |                           | 3,909  |                    |   | 948     |                     |   |         |   |  |   | 82,745 
|Notes payable                                                |  |                |        |                |   | 49,176                |  |                           | 9,621  |                    |   | 21,534  |                     |   |         |   |  |   | 80,331 
|103/4% Senior Notes                                          |  |                |        |                |   | 246,406               |  |                           |       |                    |   |        |                     |   |         |   |  |   | 246,406
|Intercompany payables                                        |  |                |        |                |   | 69,830                |  |                           | 1,190  |                    |   |        |                     |   | (71,020  | ) |  |   |       
|                                                             |  |                |         |                |   |                       |  |                           |        |                    |   |         |                     |   |          |   |  |   |        
|Total liabilities                                            |  |                |        |                |   | 473,935               |  |                           | 15,141 |                    |   | 27,123  |                     |   | (71,020  | ) |  |   | 445,179
|Minority interest in consolidated joint ventures             |  |                |        |                |   | 41,101                |  |                           |       |                    |   | 101,395 |                     |   |         |   |  |   | 142,496
|Stockholders equity                                         |  |                | 252,040 |                |   | 235,783               |  |                           | 83,198 |                    |   | 38,554  |                     |   | (357,535 | ) |  |   | 252,040
|                                                             |  |                |         |                |   |                       |  |                           |        |                    |   |         |                     |   |          |   |  |   |        
|                                                             |  | $              | 252,040 |                | $ | 750,819               |  | $                         | 98,339 |                    | $ | 167,072 |                     | $ | (428,555 | ) |  | $ | 839,715
|                                                             |  |                |         |                |   |                       |  |                           |        |                    |   |         |                     |   |          |   |  |   |        



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING BALANCE SHEET



December 31, 2002

(in thousands)



|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |        
|------------------------------------------------------------ |  | -------------- | ------- | -------------- | - | --------------------- |  | ------------------------- | ------- | ------------------ | - | ------- | ------------------- | - | -------- | - |  | - | -------
|                                                             |  | Unconsolidated |         |                |   |                       | 
|                                                             |  | DelawareLyon   |         | CaliforniaLyon |   | GuarantorSubsidiaries |  | Non-GuarantorSubsidiaries |         | EliminatingEntries |   |         | ConsolidatedCompany
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                    
|ASSETS                                                       |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |        
|Cash and cash equivalents                                    |  | $              |        |                | $ | 11,524                |  | $                         | 2,071   |                    | $ | 3,099   |                     | $ |         |   |  | $ | 16,694 
|Receivables                                                  |  |                |        |                |   | 8,657                 |  |                           | 19,941  |                    |   | 136     |                     |   |         |   |  |   | 28,734 
|Real estate inventories                                      |  |                |        |                |   | 389,010               |  |                           | 1,094   |                    |   | 101,848 |                     |   |         |   |  |   | 491,952
|Investments in and advances to unconsolidated joint ventures |  |                |        |                |   | 64,540                |  |                           | 864     |                    |   |        |                     |   |         |   |  |   | 65,404 
|Property and equipment, net                                  |  |                |        |                |   | 1,177                 |  |                           | 954     |                    |   |        |                     |   |         |   |  |   | 2,131  
|Deferred loan costs                                          |  |                | 586     |                |   | 755                   |  |                           |        |                    |   |        |                     |   |         |   |  |   | 1,341  
|Goodwill                                                     |  |                |        |                |   | 5,896                 |  |                           |        |                    |   |        |                     |   |         |   |  |   | 5,896  
|Other assets                                                 |  |                |        |                |   | 5,303                 |  |                           | 126     |                    |   |        |                     |   |         |   |  |   | 5,429  
|Investments in subsidiaries                                  |  |                | 180,033 |                |   | 83,834                |  |                           |        |                    |   |        |                     |   | (263,867 | ) |  |   |       
|Intercompany receivables                                     |  |                | 79,308  |                |   | 9,149                 |  |                           | 77,287  |                    |   |        |                     |   | (165,744 | ) |  |   |       
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |        
|                                                             |  | $              | 259,927 |                | $ | 579,845               |  | $                         | 102,337 |                    | $ | 105,083 |                     | $ | (429,611 | ) |  | $ | 617,581
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |        
|                                                             |  |                |         |               
|LIABILITIES AND STOCKHOLDERS EQUITY                         |  |                |         |                |   |                       |  |                           |         |                    |   |         |                    
|Accounts payable                                             |  | $              |        |                | $ | 28,363                |  | $                         | 1,574   |                    | $ | 4,944   |                     | $ |         |   |  | $ | 34,881 
|Accrued expenses                                             |  |                |        |                |   | 49,130                |  |                           | 5,007   |                    |   | 175     |                     |   |         |   |  |   | 54,312 
|Notes payable                                                |  |                |        |                |   | 177,647               |  |                           | 18,139  |                    |   |        |                     |   |         |   |  |   | 195,786
|121/2% Senior Notes                                          |  |                | 70,279  |                |   |                      |  |                           |        |                    |   |        |                     |   |         |   |  |   | 70,279 
|Intercompany payables                                        |  |                | 7,972   |                |   | 156,596               |  |                           | 1,176   |                    |   |        |                     |   | (165,744 | ) |  |   |       
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |        
|Total liabilities                                            |  |                | 78,251  |                |   | 411,736               |  |                           | 25,896  |                    |   | 5,119   |                     |   | (165,744 | ) |  |   | 355,258
|Minority interest in consolidated joint ventures             |  |                |        |                |   |                      |  |                           |        |                    |   | 80,647  |                     |   |         |   |  |   | 80,647 
|Stockholders equity                                         |  |                | 181,676 |                |   | 168,109               |  |                           | 76,441  |                    |   | 19,317  |                     |   | (263,867 | ) |  |   | 181,676
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |        
|                                                             |  | $              | 259,927 |                | $ | 579,845               |  | $                         | 102,337 |                    | $ | 105,083 |                     | $ | (429,611 | ) |  | $ | 617,581
|                                                             |  |                |         |                |   |                       |  |                           |         |                    |   |         |                     |   |          |   |  |   |        



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF INCOME



Year Ended December 31, 2003

(in thousands)



|                                                         |  |                |        |                 |   |          |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |          |  
|-------------------------------------------------------- |  | -------------- | ------ | --------------- | - | -------- | ---------------------- |  | - | ------------------------- | - |  | ------------------ | -------- | - | ------------------- | - | -------- | - |  | - | -------- | -
|                                                         |  | Unconsolidated |        |                 |   |          |                        |  |  
|                                                         |  | Delaware Lyon  |        | California Lyon |   |          | Guarantor Subsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |          |   | ConsolidatedCompany |  
|Operating revenue                                        |  |                |        |                 |   |          |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |          |  
|Sales                                                    |  | $              |       |                 | $ | 811,342  |                        |  | $ | 67,772                    |   |  | $                  | 138,638  |   |                     | $ | (129,439 | ) |  | $ | 888,313  |  
|Management fees                                          |  |                |       |                 |   | 9,490    |                        |  |   |                          |   |  |                    |         |   |                     |   |         |   |  |   | 9,490    |  
|                                                         |  |                |        |                 |   |          |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |          |  
|                                                         |  |                |       |                 |   | 820,832  |                        |  |   | 67,772                    |   |  |                    | 138,638  |   |                     |   | (129,439 | ) |  |   | 897,803  |  
|                                                         |  |                |        |                 |   |          |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |          |  
|Operating costs                                          |  |                |        |                 |   |          |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |          |  
|Cost of sales                                            |  |                |       |                 |   | (659,473 | )                      |  |   | (60,277                   | ) |  |                    | (115,600 | ) |                     |   | 107,696  |   |  |   | (727,654 | )
|Sales and marketing                                      |  |                |       |                 |   | (26,856  | )                      |  |   | (3,052                    | ) |  |                    | (1,344   | ) |                     |   |         |   |  |   | (31,252  | )
|General and administrative                               |  |                |       |                 |   | (50,105  | )                      |  |   | (210                      | ) |  |                    |         |   |                     |   |         |   |  |   | (50,315  | )
|Other                                                    |  |                |       |                 |   |         |                        |  |   | (1,834                    | ) |  |                    |         |   |                     |   |         |   |  |   | (1,834   | )
|                                                         |  |                |        |                 |   |          |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |          |  
|                                                         |  |                |       |                 |   | (736,434 | )                      |  |   | (65,373                   | ) |  |                    | (116,944 | ) |                     |   | 107,696  |   |  |   | (811,055 | )
|                                                         |  |                |        |                 |   |          |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |          |  
|Equity in income of unconsolidated joint ventures        |  |                |       |                 |   | 31,236   |                        |  |   |                          |   |  |                    |         |   |                     |   |         |   |  |   | 31,236   |  
|                                                         |  |                |        |                 |   |          |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |          |  
|Income from subsidiaries                                 |  |                | 72,137 |                 |   | 2,604    |                        |  |   |                          |   |  |                    |         |   |                     |   | (74,741  | ) |  |   |         |  
|                                                         |  |                |        |                 |   |          |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |          |  
|Minority equity in income of consolidated joint ventures |  |                |       |                 |   | (429     | )                      |  |   |                          |   |  |                    | (22,172  | ) |                     |   | 22,172   |   |  |   | (429     | )
|                                                         |  |                |        |                 |   |          |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |          |  
|Operating income                                         |  |                | 72,137 |                 |   | 117,809  |                        |  |   | 2,399                     |   |  |                    | (478     | ) |                     |   | (74,312  | ) |  |   | 117,555  |  
|Other income, net                                        |  |                |       |                 |   | 1,041    |                        |  |   | 4,358                     |   |  |                    | 998      |   |                     |   |         |   |  |   | 6,397    |  
|                                                         |  |                |        |                 |   |          |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |          |  
|Income before provision for income taxes                 |  |                | 72,137 |                 |   | 118,850  |                        |  |   | 6,757                     |   |  |                    | 520      |   |                     |   | (74,312  | ) |  |   | 123,952  |  
|Provision for income taxes                               |  |                |       |                 |   | (51,475  | )                      |  |   |                          |   |  |                    | (340     | ) |                     |   |         |   |  |   | (51,815  | )
|                                                         |  |                |        |                 |   |          |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |          |  
|Net income                                               |  | $              | 72,137 |                 | $ | 67,375   |                        |  | $ | 6,757                     |   |  | $                  | 180      |   |                     | $ | (74,312  | ) |  | $ | 72,137   |  
|                                                         |  |                |        |                 |   |          |                        |  |   |                           |   |  |                    |          |   |                     |   |          |   |  |   |          |  



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF INCOME



Year Ended December 31, 2002

(in thousands)



|                                                         |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|-------------------------------------------------------- |  | -------------- | ------ | -------------- | - | -------- | --------------------- |  | - | ------------------------- | - |  | ------------------ | ------- | - | ------------------- | - | ------- | - |  | - | -------- | -
|                                                         |  | Unconsolidated |        |                |   |          |                       |  |  
|                                                         |  | DelawareLyon   |        | CaliforniaLyon |   |          | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |         |   | ConsolidatedCompany |  
|Operating revenue                                        |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Sales                                                    |  | $              |       |                | $ | 427,492  |                       |  | $ | 85,550                    |   |  | $                  | 98,146  |   |                     | $ | (8,778  | ) |  | $ | 602,410  |  
|Management fees                                          |  |                |       |                |   | 10,892   |                       |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | 10,892   |  
|                                                         |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|                                                         |  |                |       |                |   | 438,384  |                       |  |   | 85,550                    |   |  |                    | 98,146  |   |                     |   | (8,778  | ) |  |   | 613,302  |  
|                                                         |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Operating costs                                          |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Cost of sales                                            |  |                |       |                |   | (367,757 | )                     |  |   | (73,057                   | ) |  |                    | (81,636 | ) |                     |   | 8,716   |   |  |   | (513,734 | )
|Sales and marketing                                      |  |                |       |                |   | (19,337  | )                     |  |   | (3,395                    | ) |  |                    | (130    | ) |                     |   |        |   |  |   | (22,862  | )
|General and administrative                               |  |                |       |                |   | (39,015  | )                     |  |   | (319                      | ) |  |                    | (32     | ) |                     |   |        |   |  |   | (39,366  | )
|Other                                                    |  |                |       |                |   |         |                       |  |   | (2,284                    | ) |  |                    |        |   |                     |   |        |   |  |   | (2,284   | )
|                                                         |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|                                                         |  |                |       |                |   | (426,109 | )                     |  |   | (79,055                   | ) |  |                    | (81,798 | ) |                     |   | 8,716   |   |  |   | (578,246 | )
|                                                         |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Equity in income of unconsolidated joint ventures        |  |                |       |                |   | 27,748   |                       |  |   |                          |   |  |                    |        |   |                     |   |        |   |  |   | 27,748   |  
|                                                         |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Income from subsidiaries                                 |  |                | 49,511 |                |   | 7,043    |                       |  |   |                          |   |  |                    |        |   |                     |   | (56,554 | ) |  |   |         |  
|                                                         |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Minority equity in income of consolidated joint ventures |  |                |       |                |   |         |                       |  |   |                          |   |  |                    | (16,447 | ) |                     |   | 16,447  |   |  |   |         |  
|                                                         |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Operating income                                         |  |                | 49,511 |                |   | 47,066   |                       |  |   | 6,495                     |   |  |                    | (99     | ) |                     |   | (40,169 | ) |  |   | 62,804   |  
|Other income, net                                        |  |                |       |                |   | (196     | )                     |  |   | 4,453                     |   |  |                    | 720     |   |                     |   |        |   |  |   | 4,977    |  
|                                                         |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Income before provision for income taxes                 |  |                | 49,511 |                |   | 46,870   |                       |  |   | 10,948                    |   |  |                    | 621     |   |                     |   | (40,169 | ) |  |   | 67,781   |  
|Provision for income taxes                               |  |                |       |                |   | (18,020  | )                     |  |   |                          |   |  |                    | (250    | ) |                     |   |        |   |  |   | (18,270  | )
|                                                         |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net income                                               |  | $              | 49,511 |                | $ | 28,850   |                       |  | $ | 10,948                    |   |  | $                  | 371     |   |                     | $ | (40,169 | ) |  | $ | 49,511   |  
|                                                         |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |         |   |                     |   |         |   |  |   |          |  



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF INCOME



Year Ended December 31, 2001

(in thousands)



|                                                  |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |      |   |                     |   |         |   |  |   |          |  
|------------------------------------------------- |  | -------------- | ------ | -------------- | - | -------- | --------------------- |  | - | ------------------------- | - |  | ------------------ | ---- | - | ------------------- | - | ------- | - |  | - | -------- | -
|                                                  |  | Unconsolidated |        |                |   |          |                       |  |  
|                                                  |  | DelawareLyon   |        | CaliforniaLyon |   |          | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiaries |   |  | EliminatingEntries |      |   | ConsolidatedCompany |  
|                                                  |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |      |   |                     |  
|Operating revenue                                 |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |      |   |                     |   |         |   |  |   |          |  
|Sales                                             |  | $              |       |                | $ | 404,000  |                       |  | $ | 55,056                    |   |  | $                  |     |   |                     | $ |        |   |  | $ | 459,056  |  
|Management fees                                   |  |                |       |                |   | 9,127    |                       |  |   |                          |   |  |                    |     |   |                     |   |        |   |  |   | 9,127    |  
|                                                  |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |      |   |                     |   |         |   |  |   |          |  
|                                                  |  |                |       |                |   | 413,127  |                       |  |   | 55,056                    |   |  |                    |     |   |                     |   |        |   |  |   | 468,183  |  
|                                                  |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |      |   |                     |   |         |   |  |   |          |  
|Operating costs                                   |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |      |   |                     |   |         |   |  |   |          |  
|Cost of sales                                     |  |                |       |                |   | (339,970 | )                     |  |   | (47,796                   | ) |  |                    |     |   |                     |   |        |   |  |   | (387,766 | )
|Sales and marketing                               |  |                |       |                |   | (15,747  | )                     |  |   | (2,398                    | ) |  |                    | (4   | ) |                     |   |        |   |  |   | (18,149  | )
|General and administrative                        |  |                |       |                |   | (36,872  | )                     |  |   | (297                      | ) |  |                    | (2   | ) |                     |   |        |   |  |   | (37,171  | )
|Amortization of goodwill                          |  |                |       |                |   | (1,242   | )                     |  |   |                          |   |  |                    |     |   |                     |   |        |   |  |   | (1,242   | )
|                                                  |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |      |   |                     |   |         |   |  |   |          |  
|                                                  |  |                |       |                |   | (393,831 | )                     |  |   | (50,491                   | ) |  |                    | (6   | ) |                     |   |        |   |  |   | (444,328 | )
|                                                  |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |      |   |                     |   |         |   |  |   |          |  
|Equity in income of unconsolidated joint ventures |  |                |       |                |   | 22,414   |                       |  |   | (30                       | ) |  |                    |     |   |                     |   |        |   |  |   | 22,384   |  
|                                                  |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |      |   |                     |   |         |   |  |   |          |  
|Income from subsidiaries                          |  |                | 47,678 |                |   | 4,614    |                       |  |   |                          |   |  |                    |     |   |                     |   | (52,292 | ) |  |   |         |  
|                                                  |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |      |   |                     |   |         |   |  |   |          |  
|Operating income (loss)                           |  |                | 47,678 |                |   | 46,324   |                       |  |   | 4,535                     |   |  |                    | (6   | ) |                     |   | (52,292 | ) |  |   | 46,239   |  
|Interest expense, net of amounts capitalized      |  |                |       |                |   | (227     | )                     |  |   |                          |   |  |                    |     |   |                     |   |        |   |  |   | (227     | )
|Other income, net                                 |  |                |       |                |   | 4,264    |                       |  |   | 2,752                     |   |  |                    | 497  |   |                     |   |        |   |  |   | 7,513    |  
|                                                  |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |      |   |                     |   |         |   |  |   |          |  
|Income (loss) before income taxes                 |  |                | 47,678 |                |   | 50,361   |                       |  |   | 7,287                     |   |  |                    | 491  |   |                     |   | (52,292 | ) |  |   | 53,525   |  
|Provision for income taxes                        |  |                |       |                |   | (5,648   | )                     |  |   |                          |   |  |                    | (199 | ) |                     |   |        |   |  |   | (5,847   | )
|                                                  |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |      |   |                     |   |         |   |  |   |          |  
|Net income                                        |  | $              | 47,678 |                | $ | 44,713   |                       |  | $ | 7,287                     |   |  | $                  | 292  |   |                     | $ | (52,292 | ) |  | $ | 47,678   |  
|                                                  |  |                |        |                |   |          |                       |  |   |                           |   |  |                    |      |   |                     |   |         |   |  |   |          |  



75



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##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF CASH FLOWS



Year Ended December 31, 2003

(in thousands)



|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  
|------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | -------------- | - | -------- | --------------------- |  | - | ----------------------------- | - |  | ------------------ | ------- | - | ------------------- | - | ------- | - |  | - | ---------- | -
|                                                                                            |  | Unconsolidated |         |   |                |   |          |                       | 
|                                                                                            |  | DelawareLyon   |         |   | CaliforniaLyon |   |          | GuarantorSubsidiaries |  |   | Non-Guarantor    Subsidiaries |   |  | EliminatingEntries |         |   | ConsolidatedCompany |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |  
|Operating activities:                                                                       |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  
|Net income                                                                                  |  | $              | 72,137  |   |                | $ | 67,375   |                       |  | $ | 6,757                         |   |  | $                  | 180     |   |                     | $ | (74,312 | ) |  | $ | 72,137     |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  
|Depreciation and amortization                                                               |  |                |        |   |                |   | 668      |                       |  |   | 414                           |   |  |                    |        |   |                     |   |        |   |  |   | 1,082      |  
|Equity in income of unconsolidated joint ventures                                           |  |                |        |   |                |   | (31,236  | )                     |  |   |                              |   |  |                    |        |   |                     |   |        |   |  |   | (31,236    | )
|Equity in earnings of subsidiaries                                                          |  |                | (72,137 | ) |                |   | (2,604   | )                     |  |   |                              |   |  |                    |        |   |                     |   | 74,741  |   |  |   |           |  
|Minority equity in income of consolidated joint ventures                                    |  |                |        |   |                |   | 429      |                       |  |   |                              |   |  |                    | 22,172  |   |                     |   | (22,172 | ) |  |   | 429        |  
|Provision for income taxes                                                                  |  |                |        |   |                |   | 51,475   |                       |  |   |                              |   |  |                    | 340     |   |                     |   |        |   |  |   | 51,815     |  
|Net changes in operating assets and liabilities:                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  
|Receivables                                                                                 |  |                |        |   |                |   | (13,558  | )                     |  |   | (1,272                        | ) |  |                    | (2,647  | ) |                     |   |        |   |  |   | (17,477    | )
|Intercompany receivables/payables                                                           |  |                | (586    | ) |                |   | 586      |                       |  |   | 7,457                         |   |  |                    |        |   |                     |   | (7,457  | ) |  |   |           |  
|Real estate inventories                                                                     |  |                |        |   |                |   | (171,261 | )                     |  |   |                              |   |  |                    | (34,661 | ) |                     |   |        |   |  |   | (205,922   | )
|Deferred loan costs                                                                         |  |                | 586     |   |                |   | (8,286   | )                     |  |   |                              |   |  |                    |        |   |                     |   |        |   |  |   | (7,700     | )
|Other assets                                                                                |  |                |        |   |                |   | (2,672   | )                     |  |   | (1,044                        | ) |  |                    |        |   |                     |   |        |   |  |   | (3,716     | )
|Accounts payable                                                                            |  |                |        |   |                |   | 2,272    |                       |  |   | (1,153                        | ) |  |                    | (303    | ) |                     |   |        |   |  |   | 816        |  
|Accrued expenses                                                                            |  |                |        |   |                |   | (19,603  | )                     |  |   | (1,098                        | ) |  |                    | 432     |   |                     |   |        |   |  |   | (20,269    | )
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  
|Net cash (used in) provided by operating activities                                         |  |                |        |   |                |   | (126,415 | )                     |  |   | 10,061                        |   |  |                    | (14,487 | ) |                     |   | (29,200 | ) |  |   | (160,041   | )
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  
|Investing activities:                                                                       |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  
|Net change in investments in and advances to unconsolidated joint ventures                  |  |                |        |   |                |   | 50,163   |                       |  |   | 864                           |   |  |                    |        |   |                     |   |        |   |  |   | 51,027     |  
|Purchases of property and equipment                                                         |  |                |        |   |                |   | (291     | )                     |  |   | (285                          | ) |  |                    |        |   |                     |   |        |   |  |   | (576       | )
|Investment in subsidiaries                                                                  |  |                |        |   |                |   | (19,058  | )                     |  |   |                              |   |  |                    |        |   |                     |   | 19,058  |   |  |   |           |  
|Advances from (to) affiliates                                                               |  |                | 75,165  |   |                |   | (82,207  | )                     |  |   |                              |   |  |                    |        |   |                     |   | 7,042   |   |  |   |           |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  
|Net cash provided by (used in) investing activities                                         |  |                | 75,165  |   |                |   | (51,393  | )                     |  |   | 579                           |   |  |                    |        |   |                     |   | 26,100  |   |  |   | 50,451     |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  
|Financing activities:                                                                       |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  
|Proceeds from borrowings on notes payable                                                   |  |                |        |   |                |   | 726,146  |                       |  |   | 379,318                       |   |  |                    |        |   |                     |   |        |   |  |   | 1,105,464  |  
|Principal payments on notes payable                                                         |  |                |        |   |                |   | (833,083 | )                     |  |   | (387,836                      | ) |  |                    |        |   |                     |   |        |   |  |   | (1,220,919 | )
|Repayment of 121/2% Senior Notes                                                            |  |                | (70,279 | ) |                |   |         |                       |  |   |                              |   |  |                    |        |   |                     |   |        |   |  |   | (70,279    | )
|Issuance of 103/4% Senior Notes                                                             |  |                |        |   |                |   | 246,233  |                       |  |   |                              |   |  |                    |        |   |                     |   |        |   |  |   | 246,233    |  
|Common stock issued for exercised options                                                   |  |                | 2,294   |   |                |   |         |                       |  |   |                              |   |  |                    |        |   |                     |   |        |   |  |   | 2,294      |  
|Common stock purchased                                                                      |  |                | (7,180  | ) |                |   |         |                       |  |   |                              |   |  |                    |        |   |                     |   |        |   |  |   | (7,180     | )
|Minority interest distributions, net                                                        |  |                |        |   |                |   | 40,672   |                       |  |   |                              |   |  |                    | (1,424  | ) |                     |   | 22,172  |   |  |   | 61,420     |  
|Advances from affiliates                                                                    |  |                |        |   |                |   |         |                       |  |   | 14                            |   |  |                    | 19,058  |   |                     |   | (19,072 | ) |  |   |           |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  
|Net cash (used in) provided by financing activities                                         |  |                | (75,165 | ) |                |   | 179,968  |                       |  |   | (8,504                        | ) |  |                    | 17,634  |   |                     |   | 3,100   |   |  |   | 117,033    |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  
|Net increase in cash and cash equivalents                                                   |  |                |        |   |                |   | 2,160    |                       |  |   | 2,136                         |   |  |                    | 3,147   |   |                     |   |        |   |  |   | 7,443      |  
|Cash and cash equivalents at beginning of year                                              |  |                |        |   |                |   | 11,524   |                       |  |   | 2,071                         |   |  |                    | 3,099   |   |                     |   |        |   |  |   | 16,694     |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  
|Cash and cash equivalents at end of year                                                    |  | $              |        |   |                | $ | 13,684   |                       |  | $ | 4,207                         |   |  | $                  | 6,246   |   |                     | $ |        |   |  | $ | 24,137     |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |            |  



76



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##### Table of Contents

WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF CASH FLOWS



Year Ended December 31, 2002

(in thousands)



|                                                                                            |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | --------------- | - | -------- | --------------------- |  | - | ----------------------------- | - |  | ------------------ | ------- | - | ------------------- | - | ------- | - |  | - | -------- | -
|                                                                                            |  | Unconsolidated |         |   |                 |   |          |                       | 
|                                                                                            |  | DelawareLyon   |         |   | California Lyon |   |          | GuarantorSubsidiaries |  |   | Non-Guarantor    Subsidiaries |   |  | EliminatingEntries |         |   | ConsolidatedCompany |  
|                                                                                            |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |  
|Operating activities:                                                                       |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net income                                                                                  |  | $              | 49,511  |   |                 | $ | 28,850   |                       |  | $ | 10,948                        |   |  | $                  | 371     |   |                     | $ | (40,169 | ) |  | $ | 49,511   |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Depreciation and amortization                                                               |  |                |        |   |                 |   | 983      |                       |  |   | 372                           |   |  |                    |        |   |                     |   |        |   |  |   | 1,355    |  
|Equity in income of unconsolidated joint ventures                                           |  |                |        |   |                 |   | (27,748  | )                     |  |   |                              |   |  |                    |        |   |                     |   |        |   |  |   | (27,748  | )
|Equity in earnings of subsidiaries                                                          |  |                | (49,511 | ) |                 |   | (7,043   | )                     |  |   |                              |   |  |                    |        |   |                     |   | 56,554  |   |  |   |         |  
|Provision for income taxes                                                                  |  |                |        |   |                 |   | 18,020   |                       |  |   |                              |   |  |                    | 250     |   |                     |   |        |   |  |   | 18,270   |  
|Net changes in operating assets and liabilities:                                            |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Receivables                                                                                 |  |                |        |   |                 |   | (293     | )                     |  |   | (7,729                        | ) |  |                    | 47      |   |                     |   |        |   |  |   | (7,975   | )
|Intercompany receivables/payables                                                           |  |                | (1,407  | ) |                 |   | 1,407    |                       |  |   | (27,920                       | ) |  |                    | 85,305  |   |                     |   | (57,385 | ) |  |   |         |  
|Real estate inventories                                                                     |  |                |        |   |                 |   | 63,826   |                       |  |   | 7,553                         |   |  |                    | (94,505 | ) |                     |   |        |   |  |   | (23,126  | )
|Deferred loan costs                                                                         |  |                | 1,407   |   |                 |   | 83       |                       |  |   |                              |   |  |                    |        |   |                     |   |        |   |  |   | 1,490    |  
|Other assets                                                                                |  |                |        |   |                 |   | (2,617   | )                     |  |   | (64                           | ) |  |                    |        |   |                     |   |        |   |  |   | (2,681   | )
|Accounts payable                                                                            |  |                |        |   |                 |   | 3,037    |                       |  |   | 494                           |   |  |                    | 4,936   |   |                     |   |        |   |  |   | 8,467    |  
|Accrued expenses                                                                            |  |                |        |   |                 |   | (8,621   | )                     |  |   | 3,402                         |   |  |                    | (361    | ) |                     |   |        |   |  |   | (5,580   | )
|                                                                                            |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net cash provided by (used in) operating activities                                         |  |                |        |   |                 |   | 69,884   |                       |  |   | (12,944                       | ) |  |                    | (3,957  | ) |                     |   | (41,000 | ) |  |   | 11,983   |  
|                                                                                            |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Investing activities:                                                                       |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net change in investments in and advances to unconsolidated joint ventures                  |  |                |        |   |                 |   | 17,000   |                       |  |   | (401                          | ) |  |                    |        |   |                     |   |        |   |  |   | 16,599   |  
|Purchases of property and equipment                                                         |  |                |        |   |                 |   | (248     | )                     |  |   | (1,067                        | ) |  |                    |        |   |                     |   |        |   |  |   | (1,315   | )
|Investment in subsidiaries                                                                  |  |                |        |   |                 |   | (26,442  | )                     |  |   |                              |   |  |                    |        |   |                     |   | 26,442  |   |  |   |         |  
|Advances from (to) affiliates                                                               |  |                | 18,452  |   |                 |   | (59,519  | )                     |  |   |                              |   |  |                    |        |   |                     |   | 41,067  |   |  |   |         |  
|                                                                                            |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net cash provided by (used in) investing activities                                         |  |                | 18,452  |   |                 |   | (69,209  | )                     |  |   | (1,468                        | ) |  |                    |        |   |                     |   | 67,509  |   |  |   | 15,284   |  
|                                                                                            |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Financing activities:                                                                       |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Proceeds from borrowings on notes payable                                                   |  |                |        |   |                 |   | 580,585  |                       |  |   | 333,014                       |   |  |                    |        |   |                     |   |        |   |  |   | 913,599  |  
|Principal payments on notes payable                                                         |  |                |        |   |                 |   | (585,268 | )                     |  |   | (333,723                      | ) |  |                    | (1,038  | ) |                     |   |        |   |  |   | (920,029 | )
|Common stock issued for exercised options                                                   |  |                | 1,118   |   |                 |   |         |                       |  |   |                              |   |  |                    |        |   |                     |   |        |   |  |   | 1,118    |  
|Common stock purchased                                                                      |  |                | (19,570 | ) |                 |   |         |                       |  |   |                              |   |  |                    |        |   |                     |   |        |   |  |   | (19,570  | )
|Minority interest distributions, net                                                        |  |                |        |   |                 |   |         |                       |  |   |                              |   |  |                    | (5,442  | ) |                     |   |        |   |  |   | (5,442   | )
|Advances from affiliates                                                                    |  |                |        |   |                 |   |         |                       |  |   | 13,333                        |   |  |                    | 13,176  |   |                     |   | (26,509 | ) |  |   |         |  
|                                                                                            |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net cash (used in) provided by financing activities                                         |  |                | (18,452 | ) |                 |   | (4,683   | )                     |  |   | 12,624                        |   |  |                    | 6,696   |   |                     |   | (26,509 | ) |  |   | (30,324  | )
|                                                                                            |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Net (decrease) increase in cash and cash equivalents                                        |  |                |        |   |                 |   | (4,008   | )                     |  |   | (1,788                        | ) |  |                    | 2,739   |   |                     |   |        |   |  |   | (3,057   | )
|Cash and cash equivalents at beginning of year                                              |  |                |        |   |                 |   | 15,532   |                       |  |   | 3,859                         |   |  |                    | 360     |   |                     |   |        |   |  |   | 19,751   |  
|                                                                                            |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  
|Cash and cash equivalents at end of year                                                    |  | $              |        |   |                 | $ | 11,524   |                       |  | $ | 2,071                         |   |  | $                  | 3,099   |   |                     | $ |        |   |  | $ | 16,694   |  
|                                                                                            |  |                |         |   |                 |   |          |                       |  |   |                               |   |  |                    |         |   |                     |   |         |   |  |   |          |  



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



CONSOLIDATING STATEMENT OF CASH FLOWS



Year Ended December 31, 2001

(in thousands)



|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | -------------- | - | -------- | --------------------- |  | - | ----------------------------- | - |  | ------------------ | ------ | - | ------------------- | - | ------- | - |  | - | -------- | -
|                                                                                            |  | Unconsolidated |         |   |                |   |          |                       | 
|                                                                                            |  | DelawareLyon   |         |   | CaliforniaLyon |   |          | GuarantorSubsidiaries |  |   | Non-Guarantor    Subsidiaries |   |  | EliminatingEntries |        |   | ConsolidatedCompany |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |  
|Operating activities:                                                                       |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Net income                                                                                  |  | $              | 47,678  |   |                | $ | 44,713   |                       |  | $ | 7,287                         |   |  | $                  | 292    |   |                     | $ | (52,292 | ) |  | $ | 47,678   |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Depreciation and amortization                                                               |  |                |        |   |                |   | 2,397    |                       |  |   | 122                           |   |  |                    |       |   |                     |   |        |   |  |   | 2,519    |  
|Equity in income of unconsolidated joint ventures                                           |  |                |        |   |                |   | (22,414  | )                     |  |   | 30                            |   |  |                    |       |   |                     |   |        |   |  |   | (22,384  | )
|Equity in earnings of subsidiaries                                                          |  |                | (47,678 | ) |                |   | (4,614   | )                     |  |   |                              |   |  |                    |       |   |                     |   | 52,292  |   |  |   |         |  
|Provision for income taxes                                                                  |  |                |        |   |                |   | 5,648    |                       |  |   |                              |   |  |                    | 199    |   |                     |   |        |   |  |   | 5,847    |  
|Net changes in operating assets and liabilities:                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Receivables                                                                                 |  |                |        |   |                |   | 1,124    |                       |  |   | (4,330                        | ) |  |                    | (183   | ) |                     |   |        |   |  |   | (3,389   | )
|Intercompany receivables/payables                                                           |  |                | 1,812   |   |                |   | (1,812   | )                     |  |   | (1,506                        | ) |  |                    | (8     | ) |                     |   | 1,514   |   |  |   |         |  
|Real estate inventories                                                                     |  |                |        |   |                |   | (16,289  | )                     |  |   | (7,553                        | ) |  |                    | (7,343 | ) |                     |   |        |   |  |   | (31,185  | )
|Deferred loan costs                                                                         |  |                | (1,812  | ) |                |   | (265     | )                     |  |   |                              |   |  |                    |       |   |                     |   |        |   |  |   | (2,077   | )
|Other assets                                                                                |  |                |        |   |                |   | (118     | )                     |  |   | 25                            |   |  |                    |       |   |                     |   |        |   |  |   | (93      | )
|Accounts payable                                                                            |  |                |        |   |                |   | (7,269   | )                     |  |   | 845                           |   |  |                    | 8      |   |                     |   |        |   |  |   | (6,416   | )
|Accrued expenses                                                                            |  |                |        |   |                |   | 977      |                       |  |   | (515                          | ) |  |                    | 871    |   |                     |   |        |   |  |   | 1,333    |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Net cash provided by (used in) operating activities                                         |  |                |        |   |                |   | 2,078    |                       |  |   | (5,595                        | ) |  |                    | (6,164 | ) |                     |   | 1,514   |   |  |   | (8,167   | )
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Investing activities:                                                                       |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Net change in investments in and advances to unconsolidated joint ventures                  |  |                |        |   |                |   | 2,893    |                       |  |   | (493                          | ) |  |                    |       |   |                     |   |        |   |  |   | 2,400    |  
|Purchases of property and equipment                                                         |  |                |        |   |                |   | (503     | )                     |  |   | (127                          | ) |  |                    |       |   |                     |   |        |   |  |   | (630     | )
|Investment in subsidiaries                                                                  |  |                |        |   |                |   | (1,732   | )                     |  |   |                              |   |  |                    |       |   |                     |   | 1,732   |   |  |   |         |  
|Advances from (to) affiliates                                                               |  |                | 6,495   |   |                |   | (4,959   | )                     |  |   |                              |   |  |                    |       |   |                     |   | (1,536  | ) |  |   |         |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Net cash provided by (used in) investing activities                                         |  |                | 6,495   |   |                |   | (4,301   | )                     |  |   | (620                          | ) |  |                    |       |   |                     |   | 196     |   |  |   | 1,770    |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Financing activities:                                                                       |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Proceeds from borrowings on notes payable                                                   |  |                |        |   |                |   | 468,144  |                       |  |   | 218,459                       |   |  |                    | 1,038  |   |                     |   |        |   |  |   | 687,641  |  
|Principal payments on notes payable                                                         |  |                |        |   |                |   | (462,935 | )                     |  |   | (206,774                      | ) |  |                    |       |   |                     |   |        |   |  |   | (669,709 | )
|Repurchase of 121/2% Senior Notes                                                           |  |                | (51,637 | ) |                |   |         |                       |  |   |                              |   |  |                    |       |   |                     |   |        |   |  |   | (51,637  | )
|Reissuance of 121/2% Senior Notes                                                           |  |                | 44,715  |   |                |   |         |                       |  |   |                              |   |  |                    |       |   |                     |   |        |   |  |   | 44,715   |  
|Common stock issued for exercised options                                                   |  |                | 427     |   |                |   |         |                       |  |   |                              |   |  |                    |       |   |                     |   |        |   |  |   | 427      |  
|Advances (to) from affiliates                                                               |  |                |        |   |                |   |         |                       |  |   | (3,454                        | ) |  |                    | 5,164  |   |                     |   | (1,710  | ) |  |   |         |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Net cash (used in) provided by financing activities                                         |  |                | (6,495  | ) |                |   | 5,209    |                       |  |   | 8,231                         |   |  |                    | 6,202  |   |                     |   | (1,710  | ) |  |   | 11,437   |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Net increase in cash and cash equivalents                                                   |  |                |        |   |                |   | 2,986    |                       |  |   | 2,016                         |   |  |                    | 38     |   |                     |   |        |   |  |   | 5,040    |  
|Cash and cash equivalents at beginning of year                                              |  |                |        |   |                |   | 12,546   |                       |  |   | 1,843                         |   |  |                    | 322    |   |                     |   |        |   |  |   | 14,711   |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  
|Cash and cash equivalents at end of year                                                    |  | $              |        |   |                | $ | 15,532   |                       |  | $ | 3,859                         |   |  | $                  | 360    |   |                     | $ |        |   |  | $ | 19,751   |  
|                                                                                            |  |                |         |   |                |   |          |                       |  |   |                               |   |  |                    |        |   |                     |   |         |   |  |   |          |  



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Revolving Credit Facilities



As of December 31, 2003, the Company has three revolving credit facilities which have an aggregate maximum loan commitment
of $325,000,000 and mature at various dates through 2006. A $125,000,000 revolving line of credit expires in November 2004. After that date the Company may borrow amounts, subject to applicable borrowing base and concentration
limitations, under this facility solely to complete the construction of residences begun prior to such date in approved projects funded by disbursements under this facility. The final maturity date is the earlier of the date upon which the last
residence, the construction of which was financed with proceeds of this loan, is sold or the date upon which such last residence is excluded from the borrowing base by the passage of time under this facility. Of the $125,000,000 maximum commitment
amount, $25,000,000 is not available for disbursement and the loan amount is limited to $100,000,000 until the lender consents, which consent may be withheld in its sole discretion, to make such funds available. A $150,000,000 revolving line of
credit finally matures in September 2006, although after September 2004, advances under this facility may only be made to complete projects approved on or before such date. A $50,000,000 bank revolving line of credit initially matures in
September 2004, after which the amounts available for borrowing begin to reduce with a final maturity date of September 2006. Availability under each credit facility is subject not only to the maximum amount committed under the respective facility,
but also to both various borrowing base and concentration limitations. The borrowing base limits lender advances to certain agreed percentages of asset value. The allowed percentage generally increases as the asset progresses from land under
development to residence subject to contract of sale. Advances for each type of collateral become due in whole or in part, subject to possible re-borrowing, and/or the collateral becomes excluded from the borrowing base, after a specified period or
earlier upon sale. Concentration limitations further restrict availability under the credit facilities. The effect of these borrowing base and concentration limitations essentially is to mandate minimum levels of the Companys investment in a
project, with higher percentages of investment required at earlier phases of a project, and with greater absolute dollar amounts of investment required as a project progresses. Each revolving credit facility is secured by deeds of trust on the real
property and improvements thereon owned by the Company in the subdivision project(s) approved by the respective lender, as well as pledges of all net sale proceeds, related contracts and other ancillary property. Also, each credit facility includes
financial covenants, which may limit the amount that may be borrowed thereunder. Outstanding advances bear interest at various rates, which approximate the prime rate. As of December 31, 2003, $49,175,000 was outstanding under these credit
facilities, with a weighted-average interest rate of 4.375%, and the undrawn availability was $205,500,000 as limited by the Companys borrowing base calculation. The Company has provided an unsecured environmental indemnity in favor of the
lender under the $125,000,000 bank line of credit (see Note 10.).



Under the revolving credit facilities, the Company is required to comply with a number of covenants, the most restrictive of which require the Company to maintain: (i) a tangible net worth, as defined of $120,000,000 adjusted upwards
quarterly by 50% of the Companys net income after March 31, 2002; (ii) a ratio of total liabilities to tangible net worth, each as defined, of less than 3.25 to 1.0; and (iii) minimum liquidity, as defined of at least $10,000,000. These
facilities include a number of other covenants with respect to such matters as the posting of cash or letters of credit in certain circumstances, the application or deposit of excess net sales proceeds, maintenance of specified ratios, limitations
on investments in joint ventures, maintenance of fixed charge coverages, stock ownership changes, and lot ownership.



As a common practice required by commercial lenders, the Company is obligated to repay loans to a level such that they do not exceed certain required
loan-to-value or loan-to-cost ratios. Each lender has the right to test the ratios by appraising the property securing the loan at any time. Either a decrease in the value of the property securing the loan or an increase in the construction costs
could trigger this pay down obligation. The term of the obligation corresponds with the term of the loan and is limited to the outstanding loan balance. The entire revolving credit facilities balance is subject to these obligations as of December
31, 2003.



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Construction Notes Payable



At December 31, 2003, the Company had a construction note payable amounting to $21,534,000 related to a real estate
project. The note was due on or before April 2, 2004 with interest at a rate of prime plus 0.5% at December 31, 2003. A portion of the net proceeds of the offering of 71/2% Senior Notes (see above) was used to repay this note in full.



Revolving Mortgage Warehouse Credit Facilities



The Company, through its mortgage subsidiary and one of its unconsolidated joint ventures, has entered into two revolving mortgage warehouse credit
facilities with banks to fund its mortgage origination operations. The original credit facility, which matures in May 2004, provides for revolving loans of up to $20,000,000 outstanding, $10,000,000 of which is committed (lender obligated to lend if
stated conditions are satisfied) and $10,000,000 of which is not committed (lender advances are optional even if stated conditions are otherwise satisfied). On August 29, 2003, the Companys mortgage subsidiary and one of its unconsolidated
joint ventures entered into an additional $10,000,000 credit facility which matures in August 2004. Mortgage loans are generally held for a short period of time and are typically sold to investors within 7 to 15 days following funding. The
facilities are secured by substantially all of the assets of each of the borrowers, including the mortgage loans held for sale, all rights of each of the borrowers with respect to contractual obligations of third party investors to purchase such
mortgage loans, and all proceeds of sale of such mortgage loans. The facilities, which have LIBOR based pricing, also contain certain financial covenants requiring the borrowers to maintain minimum tangible net worth, leverage, profitability and
liquidity. These facilities are non-recourse and are not guaranteed by the Company. At December 31, 2003 the outstanding balance under these facilities was $9,622,000.



Prime Interest Rates



The prime interest rates at December 31, 2003, 2002 and 2001 were 4.00%, 4.25% and 4.75%, respectively. The weighted-average prime interest rates
for each of the three years ended December 31, 2003, 2002 and 2001 were 4.12%, 4.67% and 6.91%, respectively.



Note 7  Stockholders Equity



Stock Repurchase



On
September 20, 2001, the Company announced that the Companys Board of Directors had authorized a program to repurchase up to 20% of the Companys outstanding common shares. Under the plan, the stock will be purchased in the open market or
privately negotiated transactions from time to time in compliance with Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements and other factors. The timing and amounts of any purchases will be as
determined by the Companys management from time to time or may be suspended at any time or from time to time without prior notice, depending on market conditions and other factors they deem relevant. The repurchased shares may be held as
treasury stock and used for general corporate purchases or cancelled. As of December 31, 2003, 1,218,400 shares had been purchased and retired under this program for an aggregate purchase price of $26,750,000.



Stock Option Plans



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



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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



Effective on May 9, 2000, the Company issued options under the William Lyon Homes 2000 Stock Incentive Plan to purchase a total of 627,500 shares of
common stock at $8.6875 per share. During the year ended December 31, 2001, the Company issued additional options under the William Lyon Homes 2000 Stock Incentive Plan to purchase 12,500 shares of common stock at $9.10 per share and 20,000 shares
of common stock at a price of $13.00 per share. During the years ended December 31, 2003, 2002 and 2001, certain officers and directors exercised options to purchase 240,359, 102,504 and 49,176 shares, respectively, of the Companys common
stock at a price of $8.6875 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan. During the years ended December 31, 2003 and 2002, certain officers exercised options to purchase 10,000 and 3,334 shares, respectively, of
the Companys common stock at a price of $13.00 per share in accordance with the William Lyon Homes 2000 Stock Incentive Plan. During the year ended December 31, 2003 an officer exercised options to purchase 8,334 shares of the Companys
common stock at a price of $9.10. As of December 31, 2003, 56,666 options have been forfeited and 189,627 options remain unexercised. The unexercised options are as follows: 178,795 options priced at $8.6875, 4,166 options priced at $9.10,
and 6,666 options priced at $13.00. All unexercised options expire on May 9, 2010.



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



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



Incentive Compensation Plan



The Companys Board of Directors has approved a Cash Bonus Plan for all of the Companys full-time, salaried employees, including the Chief
Executive Officer (CEO), Chief Operating Officer (COO), Chief



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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



Executive Deferred Compensation Plan



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



Note 8  Income Taxes



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



|         |  |                         |         |   |      |   |         |      |  |   |        |  
|-------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|         |  | Year Ended December 31, |        
|         |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|Current  |  |                         |         |   |      |   |         |      |  |   |        |  
|Federal  |  | $                       | (45,123 | ) |      | $ | (23,525 | )    |  | $ | 2,467  |  
|State    |  |                         | (10,286 | ) |      |   | (6,038  | )    |  |   | (3,318 | )
|         |  |                         |         |   |      |   |         |      |  |   |        |  
|         |  |                         | (55,409 | ) |      |   | (29,563 | )    |  |   | (851   | )
|         |  |                         |         |   |      |   |         |      |  |   |        |  
|Deferred |  |                         |         |   |      |   |         |      |  |   |        |  
|Federal  |  |                         | 2,985   |   |      |   | 9,656   |      |  |   | (3,989 | )
|State    |  |                         | 609     |   |      |   | 1,637   |      |  |   | (1,007 | )
|         |  |                         |         |   |      |   |         |      |  |   |        |  
|         |  |                         | 3,594   |   |      |   | 11,293  |      |  |   | (4,996 | )
|         |  |                         |         |   |      |   |         |      |  |   |        |  
|         |  | $                       | (51,815 | ) |      | $ | (18,270 | )    |  | $ | (5,847 | )
|         |  |                         |         |   |      |   |         |      |  |   |        |  



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



|                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                     |  | Year Ended December 31, |        
|                                                                     |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|Provision for Federal income taxes at the statutory rate             |  | $                       | (43,420 | ) |      | $ | (23,723 | )    |  | $ | (18,734 | )
|Provision for state income taxes, net of Federal income tax benefits |  |                         | (6,044  | ) |      |   | (2,860  | )    |  |   | (2,811  | )
|Valuation allowance for deferred tax asset                           |  |                         |        |   |      |   | 8,348   |      |  |   | 15,490  |  
|Other                                                                |  |                         | (2,351  | ) |      |   | (35     | )    |  |   | 208     |  
|                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                     |  | $                       | (51,815 | ) |      | $ | (18,270 | )    |  | $ | (5,847  | )
|                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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



|                                                                                  |  |              |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                                                                  |  | December 31, |       
|                                                                                  |  | 2003         |        |   | 2002 |  
|Deferred tax assets                                                               |  |              |        |   |      |   |        |  
|Reserves deducted for financial reporting purposes not allowable for tax purposes |  | $            | 4,754  |   |      | $ | 3,880  |  
|Compensation deductible for tax purposes when paid                                |  |              | 4,702  |   |      |   | 2,802  |  
|Interest expensed for financial reporting purposes and capped for tax purposes    |  |              | 14     |   |      |   | 104    |  
|Net operating loss and alternative minimum tax credit carryovers                  |  |              | 698    |   |      |   | 1,830  |  
|State income tax provisions deductible when paid for Federal tax purposes         |  |              | 2,550  |   |      |   | 1,780  |  
|Effect of book/tax differences for joint ventures                                 |  |              | 394    |   |      |   | 410    |  
|                                                                                  |  |              |        |   |      |   |        |  
|                                                                                  |  |              | 13,112 |   |      |   | 10,806 |  
|Deferred tax liabilities                                                          |  |              |        |   |      |   |        |  
|Effect of book/tax differences for joint ventures                                 |  |              | (3,221 | ) |      |   | (4,509 | )
|                                                                                  |  |              |        |   |      |   |        |  
|                                                                                  |  | $            | 9,891  |   |      | $ | 6,297  |  
|                                                                                  |  |              |        |   |      |   |        |  



During the year ended
December 31, 2003, income tax benefits of $3,113,000 related to stock option exercises were excluded from the results of operations and credited to additional paid-in capital.



The elimination during 2002 of the remaining valuation allowances for deferred tax assets reduced the Companys
estimated overall effective tax rate for the year ended December 31, 2002 from 39.3% to 27.0%. The estimated overall effective tax rate for the year ending December 31, 2003 is 41.8%. At December 31, 2003 the Company has net operating loss
carryforwards for Federal tax purposes of approximately $1,994,000 which expire in 2009. In addition, unused recognized built-in losses in the amount of $23,891,000 are available to offset future income and expire between 2009 and 2011. The
utilization of these losses is limited to offset $3,235,000 of taxable income per year; however, any unused losses in any year may be carried forward for utilization in future years through 2011. The Companys ability to utilize the foregoing
tax benefits will depend upon the amount of its future taxable income and may be further limited under certain circumstances.



Note 9  Related Party Transactions



A portion of the net proceeds of the Companys offering of 103/4% Senior Notes (see Note 6) was used to repay all of the Companys 121/2% Senior Notes, including $30,000,000 in principal amount held by General William Lyon, Chairman and Chief Executive Officer, and the trust of which his son, William H. Lyon, is the sole beneficiary,
$2,323,000 held by Wade H. Cable, President and Chief Operating Officer, and $1,000,000 held by William H. McFarland, a director. See Note 6 for description of the transactions between the Company and certain of the Companys Board of Directors
with respect to the 121/2% Senior Notes.



The Company purchased real estate projects for a total purchase price of
$8,468,000 during the year ended December 31, 2000 from entities controlled by William Lyon and William H. Lyon. In addition, one-half of the net profits in excess of six to eight percent from the development are to be paid to the seller. During the
year ended December 31, 2003 and 2002, $0 and $1,770,000, respectively was paid to the seller in accordance with the agreement.



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



On October 26, 2000, the Companys Board of Directors (with Messrs. William Lyon and William H.
Lyon abstaining) approved the purchase of 579 lots for a total purchase price of $12,581,000 from an entity controlled by William Lyon and William H. Lyon. The terms of the purchase agreement provide for an initial option payment of $1,000,000 and a
rolling option takedown of the lots. Phase takedowns of approximately 20 lots each are anticipated to occur at two to three month intervals for each of several product types through September 2004. In addition, one-half of the net profits in excess
of six percent from the development are to be paid to the seller. During the years ended December 31, 2003, 2002 and 2001, the Company purchased 72, 183 and 143 lots, respectively, under this agreement for a total purchase price of $2,507,000,
$4,150,000 and $2,777,000, respectively. During the year ended December 31, 2003, there were no payments made for one-half of the net profits in excess of six percent from the development and during the year ended December 31, 2002, payments were
made in the amount of $1,614,000. This land acquisition qualified as an affiliate transaction under the Companys 121/2% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994, as amended (Indenture). Pursuant to the terms of the Indenture, the Company determined that the land acquisition is on terms that are no less favorable
to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company delivered to the Trustee under the Indenture a resolution of the Board of Directors of the Company set forth in
an Officers Certificate certifying that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land
acquisition was approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company delivered to the Trustee under the Indenture a determination of value by a real estate appraisal firm which is of
regional standing in the region in which the subject property is located and is MAI certified.



On July 9, 2002, the Companys Board of Directors (with Messrs. William Lyon and William H. Lyon abstaining) approved the purchase of 144 lots,
through a land banking arrangement, for a total purchase price of $16,660,000 from an entity that purchased the lots from William Lyon. The terms of the purchase agreement provide for an initial deposit of $3,300,000 (paid on July 23, 2002) and
monthly option payments of 11.5% on the sellers outstanding investment. Such option payments entitle the Company to phase takedowns of approximately 14 lots each, which are anticipated to occur at one to two month intervals through December
2003. As of December 31, 2003 and 2002, 85 and 16 lots have been purchased under this agreement for a purchase price of $9,834,000 and $1,851,000, respectively. Had the Company purchased the property directly, the acquisition would have qualified as
an affiliate transaction under the Indenture. Even though the Companys agreement is not with William Lyon, the Company chose to treat it as an affiliate transaction. Pursuant to the terms of the Indenture, the Company determined that the land
acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company delivered to the Trustee under the Indenture a resolution of
the Board of Directors of the Company set forth in an Officers Certificate certifying that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the
Company with an unrelated person and the land acquisition was approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company has delivered to the Trustee under the Indenture a determination of
value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.



The Company purchased land for a total purchase price of $8,440,000, $17,079,000 and $5,371,000 during the years ended December 31, 2003, 2002 and 2001,
respectively, from certain of its unconsolidated joint ventures.



For the years ended December 31, 2003, 2002 and 2001, the Company incurred reimbursable on-site labor costs of $277,000, $178,000 and $175,000, respectively, for providing customer service to real estate projects



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



developed by entities controlled by William Lyon and William H. Lyon, of which $25,000 and $72,000 was due to the Company at December 31, 2003 and 2002,
respectively. In addition, the Company earned fees of $109,000, $99,000 and $108,000, respectively, for tax and accounting services performed for entities controlled by William Lyon and William H. Lyon during the years ended December 31, 2003, 2002
and 2001.



For the years ended December 31, 2003, 2002 and
2001, the Company incurred charges of $753,000, $729,000 and $729,000, respectively, related to rent on its corporate office, from a trust of which William H. Lyon is the sole beneficiary.



During the years ended December 31, 2003, 2002 and 2001, the Company incurred
charges of $250,000, $177,000 and $201,000, respectively, related to the charter and use of aircraft owned by an affiliate of William Lyon, of which $19,000 was due to the Company at December 31, 2003.



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



Note 10  Commitments and Contingencies



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



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



The Company enters into purchase agreements with various land sellers. In
some instances, and as a method of acquiring land in staged takedowns, thereby minimizing the use of funds from the Companys revolving credit facilities and other corporate financing sources and limiting the Companys risk, the Company
transfers its right in such purchase agreements to entities owned by third parties (land banking arrangements). These entities use equity contributions and/or incur debt to finance the acquisition and development of the lots. The entities grant the
Company an option to acquire lots in staged takedowns. In consideration for this option, the Company makes a non-refundable deposit equal to 20% or less of the total purchase price. Additionally, the Company may be subject to other penalties if lots
are not acquired. The Company is under no obligation to purchase the balance of the lots, but would forfeit remaining deposits and be subject to penalties if the lots are not purchased. The Company does not have legal title to these entities or
their assets and has not guaranteed their liabilities. As described in Note 2, a recently adopted accounting interpretation required the consolidation of the assets, liabilities and operations of one of the Companys land banking arrangements
created after January 31, 2003. As of March 31, 2004, the interpretation will likely require the consolidation of the assets, liabilities and operations on a prospective basis of the six remaining unconsolidated land banking arrangements created
prior to February 1, 2003 (see Notes 2 and 3). The deposits and penalties related to the six land banking projects created prior to February 1, 2003 have been recorded in the accompanying consolidated balance sheet. The financial statements of these
six entities are not consolidated with the Companys consolidated financial statements. These land banking arrangements help the Company manage the financial and market risk associated with land holdings. The use of these land banking
arrangements is dependent on, among other things, the availability of capital to the



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



option provider, general housing market conditions and geographic preferences. Summary information with respect to the Companys unconsolidated land
banking arrangements is as follows as of December 31, 2003 (dollars in thousands):



|                                                           |  |   |        
|---------------------------------------------------------- |  | - | -------
|Total number of land banking projects                      |  |   | 6      
|                                                           |  |   |        
|Total number of lots                                       |  |   | 1,149  
|                                                           |  |   |        
|Total purchase price                                       |  | $ | 108,958
|                                                           |  |   |        
|Balance of lots still under option and not purchased:      |  |   |        
|Number of lots                                             |  |   | 588    
|                                                           |  |   |        
|Purchase price                                             |  | $ | 41,997 
|                                                           |  |   |        
|Forfeited deposits and penalties if lots are not purchased |  | $ | 18,107 
|                                                           |  |   |        



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



As of December 31, 2003, the Company had $38,400,000 of outstanding irrevocable standby letters of credit to guarantee the Companys financial obligations under certain land banking arrangements and other contractual
arrangements in the normal course of business. Letters of credit totaling $9,289,000 related to land banking arrangements are recorded on the accompanying balance sheet. The beneficiary may draw upon these letters of credit in the event of a
contractual default by the Company relating to each respective obligation. These letters of credit have a stated term of 12 months and have varying maturities throughout 2004, 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 related principally to its obligations for site improvements at various projects at December 31, 2003. The Company does not believe that draws upon these bonds, if any, will have a material effect on the
Companys financial position, results of operations or cash flows.



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



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



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WILLIAM LYON HOMES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 11  Unaudited Summarized Quarterly Financial Information



Summarized unaudited quarterly financial information for the years ended
December 31, 2003, 2002 and 2001 is as follows (in thousands except per common share amounts):



|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|---------------------------------------- |  | ------------------ | ------- | - | ------------ | - | -------- | ----------------- |  | - | ---------------- | - |  | - | -------- | -
|                                         |  | Three Months Ended |        
|                                         |  | March 31,2003      |         |   | June 30,2003 |   |          | September 30,2003 |  |   | December 31,2003 |  
|Sales                                    |  | $                  | 70,423  |   |              | $ | 156,681  |                   |  | $ | 212,598          |   |  | $ | 448,611  |  
|Other income, costs and expenses, net    |  |                    | (62,162 | ) |              |   | (133,345 | )                 |  |   | (188,197         | ) |  |   | (380,657 | )
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Income before provision for income taxes |  |                    | 8,261   |   |              |   | 23,336   |                   |  |   | 24,401           |   |  |   | 67,954   |  
|Provision for income taxes               |  |                    | (3,379  | ) |              |   | (9,544   | )                 |  |   | (9,534           | ) |  |   | (29,358  | )
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net income                               |  | $                  | 4,882   |   |              | $ | 13,792   |                   |  | $ | 14,867           |   |  | $ | 38,596   |  
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Basic earnings per common share          |  | $                  | 0.50    |   |              | $ | 1.40     |                   |  | $ | 1.52             |   |  | $ | 3.95     |  
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Diluted earnings per common share        |  | $                  | 0.49    |   |              | $ | 1.38     |                   |  | $ | 1.49             |   |  | $ | 3.89     |  
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|                                         | 
|                                         |  | Three Months Ended |        
|                                         |  | March 31,2002      |         |   | June 30,2002 |   |          | September 30,2002 |  |   | December 31,2002 |  
|Sales                                    |  | $                  | 90,149  |   |              | $ | 127,417  |                   |  | $ | 182,998          |   |  | $ | 201,846  |  
|Other income, costs and expenses, net    |  |                    | (86,359 | ) |              |   | (117,559 | )                 |  |   | (164,036         | ) |  |   | (166,675 | )
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Income before provision for income taxes |  |                    | 3,790   |   |              |   | 9,858    |                   |  |   | 18,962           |   |  |   | 35,171   |  
|Provision for income taxes               |  |                    | (677    | ) |              |   | (2,826   | )                 |  |   | (5,212           | ) |  |   | (9,555   | )
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net income                               |  | $                  | 3,113   |   |              | $ | 7,032    |                   |  | $ | 13,750           |   |  | $ | 25,616   |  
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Basic earnings per common share          |  | $                  | 0.30    |   |              | $ | 0.68     |                   |  | $ | 1.34             |   |  | $ | 2.63     |  
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Diluted earnings per common share        |  | $                  | 0.29    |   |              | $ | 0.66     |                   |  | $ | 1.30             |   |  | $ | 2.56     |  
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|                                         | 
|                                         |  | Three Months Ended |        
|                                         |  | March 31,2001      |         |   | June 30,2001 |   |          | September 30,2001 |  |   | December 31,2001 |  
|Sales                                    |  | $                  | 72,455  |   |              | $ | 105,222  |                   |  | $ | 107,629          |   |  | $ | 173,750  |  
|Other income, costs and expenses, net    |  |                    | (65,662 | ) |              |   | (94,467  | )                 |  |   | (94,483          | ) |  |   | (150,919 | )
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Income before provision for income taxes |  |                    | 6,793   |   |              |   | 10,755   |                   |  |   | 13,146           |   |  |   | 22,831   |  
|Provision for income taxes               |  |                    | (712    | ) |              |   | (1,137   | )                 |  |   | (1,468           | ) |  |   | (2,530   | )
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Net income                               |  | $                  | 6,081   |   |              | $ | 9,618    |                   |  | $ | 11,678           |   |  | $ | 20,301   |  
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Basic earnings per common share          |  | $                  | 0.58    |   |              | $ | 0.91     |                   |  | $ | 1.10             |   |  | $ | 1.91     |  
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  
|Diluted earnings per common share        |  | $                  | 0.57    |   |              | $ | 0.90     |                   |  | $ | 1.08             |   |  | $ | 1.89     |  
|                                         |  |                    |         |   |              |   |          |                   |  |   |                  |   |  |   |          |  



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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 combined balance sheet of the Significant Subsidiaries of William Lyon Homes, as defined in
Note 1, as of December 31, 2001, and the related combined statements of income, members capital and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audit.



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



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



/s/    ERNST & YOUNG LLP



Irvine, California

February 15, 2002



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SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES



COMBINED BALANCE SHEET

(in thousands)



|                                         |  |                   |        
|---------------------------------------- |  | ----------------- | -------
|                                         |  | December 31, 2001
|                                         |  |                  
|ASSETS                                   |  |                  
|                                         | 
|Cash                                     |  | $                 | 3,797  
|Receivables                              |  |                   | 4,555  
|Real estate inventories  Note 2         |  |                   | 153,182
|                                         |  |                   |        
|                                         |  | $                 | 161,534
|                                         |  |                   |        
|                                         | 
|LIABILITIES AND MEMBERS CAPITAL         |  |                   |        
|                                         | 
|Accounts payable and accrued liabilities |  | $                 | 12,150 
|Amount due to member  Note 3            |  |                   | 2,407  
|                                         |  |                   |        
|                                         |  |                   | 14,557 
|Commitments and contingencies  Note 4   |  |                   |        
|                                         | 
|Members capital                         |  |                   | 146,977
|                                         |  |                   |        
|                                         |  | $                 | 161,534
|                                         |  |                   |        









See accompanying notes.



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SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES



COMBINED STATEMENT OF INCOME

(in thousands)



|                                             |  |                             |          |  
|-------------------------------------------- |  | --------------------------- | -------- | -
|                                             |  | Year EndedDecember 31, 2001 |         
|                                             |  |                             |         
|REVENUES                                     |  |                             |          |  
|Sales of homes                               |  | $                           | 189,349  |  
|Interest and other income                    |  |                             | 91       |  
|                                             |  |                             |          |  
|                                             |  |                             | 189,440  |  
|                                             |  |                             |          |  
|COSTS AND EXPENSES                           |  |                             |          |  
|Cost of homes sold                           |  |                             | (151,838 | )
|Sales, marketing and administrative expenses |  |                             | (6,138   | )
|                                             |  |                             |          |  
|                                             |  |                             | (157,976 | )
|                                             |  |                             |          |  
|NET INCOME                                   |  | $                           | 31,464   |  
|                                             |  |                             |          |  









See accompanying notes.



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SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES



COMBINED STATEMENT OF MEMBERS CAPITAL



For the Year Ended December 31, 2001

(in thousands)



|                            |  |             |         |   |                           |   |          |                      |  |   |          |  
|--------------------------- |  | ----------- | ------- | - | ------------------------- | - | -------- | -------------------- |  | - | -------- | -
|                            |  | LyonMembers |         |   | CommonUnaffiliatedMembers |   |          | TotalMembersCapital | 
|BALANCE  December 31, 2000 |  | $           | 31,767  |   |                           | $ | 91,240   |                      |  | $ | 123,007  |  
|Contributions               |  |             | 15,555  |   |                           |   | 141,543  |                      |  |   | 157,098  |  
|Distributions               |  |             | (21,510 | ) |                           |   | (143,082 | )                    |  |   | (164,592 | )
|Net income                  |  |             | 15,009  |   |                           |   | 16,455   |                      |  |   | 31,464   |  
|                            |  |             |         |   |                           |   |          |                      |  |   |          |  
|BALANCE  December 31, 2001 |  | $           | 40,821  |   |                           | $ | 106,156  |                      |  | $ | 146,977  |  
|                            |  |             |         |   |                           |   |          |                      |  |   |          |  







See accompanying notes.



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SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES



COMBINED STATEMENT OF CASH FLOWS



(in thousands)



|                                                                                  |  |                            |          |  
|--------------------------------------------------------------------------------- |  | -------------------------- | -------- | -
|                                                                                  |  | Year EndedDecember 31,2001 |         
|                                                                                  |  |                            |         
|Operating activities                                                              |  |                            |          |  
|Net income                                                                        |  | $                          | 31,464   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                            |          |  
|Net changes in operating assets and liabilities:                                  |  |                            |          |  
|Receivables                                                                       |  |                            | (3,600   | )
|Real estate inventories                                                           |  |                            | (10,993  | )
|Other assets                                                                      |  |                            | 250      |  
|Accounts payable and accrued liabilities                                          |  |                            | (2,035   | )
|Amount due member                                                                 |  |                            | (32      | )
|                                                                                  |  |                            |          |  
|Net cash provided by operating activities                                         |  |                            | 15,054   |  
|                                                                                  |  |                            |          |  
|Financing activities                                                              |  |                            |          |  
|Contributions from members                                                        |  |                            | 157,098  |  
|Distributions to members                                                          |  |                            | (164,592 | )
|Proceeds from notes payable                                                       |  |                            | 2,401    |  
|Repayment of notes payable                                                        |  |                            | (12,261  | )
|                                                                                  |  |                            |          |  
|Net cash used in financing activities                                             |  |                            | (17,354  | )
|                                                                                  |  |                            |          |  
|Net decrease in cash                                                              |  |                            | (2,300   | )
|Cash  beginning of year                                                          |  |                            | 6,097    |  
|                                                                                  |  |                            |          |  
|Cash  end of year                                                                |  | $                          | 3,797    |  
|                                                                                  |  |                            |          |  
|                                                                                  | 
|Supplemental disclosures of cash flow activities                                  |  |                            |          |  
|Cash paid for interest                                                            |  | $                          | 156      |  
|                                                                                  |  |                            |          |  





See accompanying notes.



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##### Table of Contents

SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES



NOTES TO COMBINED FINANCIAL STATEMENTS



December 31, 2001



1.    Organization and Summary of Significant Accounting Policies



Basis of Presentation



The combined financial statements are presented in accordance with Rule 3-09 of SEC Regulation S-X (Rule 3-09) and represent the combined
financial position, results of operations and cash flows of the subsidiaries which are accounted for using the equity method by William Lyon Homes (Lyon) which have a common unaffiliated member with cross-collateralized and
cross-defaulted membership interests and are deemed significant when aggregated for purposes of Rule 3-09 (collectively, the Significant Subsidiaries of William Lyon Homes) as of December 31, 2001 and for the year then
ended. The membership interests were not cross-collateralized or cross-defaulted as of December 31, 2003 or 2002 and not aggregated for purposes of Rule 3-09. None of the subsidiaries was deemed significant individually and as such,
information for such periods are not presented herein.



Organization



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



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



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



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



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



|                                                       |  |                                                          |        |   |                                        |   |         |                               |  |   |        |  
|------------------------------------------------------ |  | -------------------------------------------------------- | ------ | - | -------------------------------------- | - | ------- | ----------------------------- |  | - | ------ | -
|                                                       |  | Unaffiliated MembersConstruction LoanEquivalent Returns |        |   | Unaffiliated MembersPreferred Returns |   |         | Lyon MembersPreferredReturns | 
|Cumulative returns on unrecovered capital              |  | $                                                        | 19,179 |   |                                        | $ | 17,723  |                               |  | $ | 8,130  |  
|Cumulative return distributions                        |  |                                                          | (9,418 | ) |                                        |   | (17,013 | )                             |  |   | (3,484 | )
|                                                       |  |                                                          |        |   |                                        |   |         |                               |  |   |        |  
|Remaining undistributed returns as ofDecember 31, 2001 |  | $                                                        | 9,761  |   |                                        | $ | 710     |                               |  | $ | 4,646  |  
|                                                       |  |                                                          |        |   |                                        |   |         |                               |  |   |        |  



Cash flow, as defined
in the Agreements, is generally distributed first, to the Unaffiliated Member to the extent of its unpaid construction loan equivalent and preferred returns and to the extent required to reduce the



93



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##### Table of Contents

SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES



NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)



balance of the Unaffiliated Members unrecovered capital account to zero; second to Lyon Member to the extent of its unpaid preferred returns and to the
extent required to reduce the balance of the Lyon Members unrecovered capital account to zero; thereafter, between 25% to 80% to the Lyon Member and between 20% to 75% to the Unaffiliated Member.



Use of Estimates



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



Real Estate Inventories



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



The Significant Subsidiaries of William Lyon Homes account for their real estate inventories in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement No. 121). Statement No. 121 requires
impairment losses to be recorded on assets to be held and used by the Significant Subsidiaries of William Lyon Homes when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of the assets. Under Statement No. 121, when an asset to be held and used by the Significant Subsidiaries of William Lyon Homes is determined to be impaired, the related carrying amount of the asset is adjusted to its estimated
fair value.



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



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



In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement No. 144), effective for fiscal years beginning after December 15, 2001. Statement No. 144 supersedes Statement No.
121. The Significant Subsidiaries of William Lyon Homes do not believe Statement 144 will have a significant impact on the earnings or financial position of the Significant Subsidiaries of William Lyon Homes upon adoption.



94



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SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES



NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)



Revenue and Profit Recognition



A sale is recorded and profit recognized when a sale is consummated, the buyers initial and continuing investments are
adequate, any receivables are not subject to future subordination, and the usual risks and rewards of ownership have been transferred to the buyer in accordance with the provisions of Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 66, Accounting for Sales of Real Estate.    When it is determined that the earnings process is not complete, profit is deferred for recognition in future periods. As of December 31, 2001,
there are no deferred profits.



Warranty Costs



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



Income Taxes



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



2.    Real Estate Inventories



Real estate inventories consist of the following as of December 31, 2001 (in
thousands):



|                                            |  |   |        
|------------------------------------------- |  | - | -------
|                                            |  |  
|Land under development                      |  | $ | 122,796
|Construction in process and completed homes |  |   | 30,386 
|                                            |  |   |        
|                                            |  | $ | 153,182
|                                            |  |   |        



3.    Related
Party Transactions



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



The following amounts were incurred during the years ended December 31, 2001 (in thousands):



|                                |  |   |       
|------------------------------- |  | - | ------
|                                |  |  
|Lyon Member fees                |  | $ | 5,432 
|Lyon Member cost reimbursements |  |   | 4,071 
|Unaffiliated Member fees        |  |   | 1,745 
|                                |  |   |       
|                                |  | $ | 11,248
|                                |  |   |       



As of December 31,
2001, $2,407,000 is due Lyon Member for fees and cost reimbursements.



95



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SIGNIFICANT SUBSIDIARIES OF WILLIAM LYON HOMES



NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)



4.    Commitments and Contingencies



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



96



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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|2.1(1)        |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|3.1(2)        |  | Certificate of Incorporation of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|              | 
|3.3(2)        |  | Bylaws of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              | 
|4.1(2)        |  | Specimen certificate of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              | 
|4.2(3)        |  | Indenture dated as of March 17, 2003 governing the 103/4% Senior Notes due 2013 among William Lyon Homes, Inc. as Issuer, William Lyon Homes, California Equity Funding, Inc., Carmel Mountain Ranch, Duxford Financial, Inc., HSP Inc., Mountain Gate Ventures, Inc., OX I Oxnard, L.P., PH-LP
Ventures, PH-Rielly Ventures, PH VenturesSan Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc. and William Lyon Southwest, Inc. as Guarantors and U.S. Bank National Association, as
Trustee.
|              | 
|4.3(3)        |  | Form of 103/4% Senior Notes (included in Exhibit
4.2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              | 
|4.4(3)        |  | Form of Notation of Guarantee (included in Exhibit 4.2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|              | 
|4.5(15)       |  | Indenture dated as of February 6, 2004 governing the 71/2% Senior Notes due 2014 among William Lyon Homes, Inc. as Issuer, William Lyon Homes, California Equity Funding, Inc., Duxford Financial, Inc., HSP Inc., Lyon Montecito, LLC, OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH
VenturesSan Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc., The Ranch Golf Club Co. and William Lyon Southwest, Inc. as Guarantors and U.S. Bank National Association, as
Trustee.      
|              | 
|4.6(15)       |  | Form of 71/2% Senior Note (included in Exhibit
4.5).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|4.7(15)       |  | Form of Notation of Guarantee (included in Exhibit 4.5).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|              | 
|10.1(4)       |  | Form of Indemnity Agreement, between the Company and the Directors and Officers of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|              | 
|10.2(2)       |  | Purchase Agreement and Escrow Instructions dated October 7, 1999 among The Presley Companies, Presley Homes, William Lyon Homes, Inc., William Lyon and William H. Lyon.                                                                                                                                                                                                                                                                                                                                                                   
|              | 
|10.3(4)       |  | Property Management Agreement between Corporate Enterprises, Inc., a California corporation (Owner) and William Lyon Homes, Inc., a California corporation (Manager) dated and effective
November 5, 1999.                                                                                                                                                                                                                                                                                                                                 
|              | 
|10.4(4)       |  | Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5,
1999.                                                                                                                                                                                                                                                                                                                                                      
|              | 
|10.5(5)       |  | Loan Agreement dated as of September 25, 2000 between William Lyon Homes, Inc., a California corporation, the Borrower, and Residential Funding Corporation, a Delaware
corporation, Lender.                                                                                                                                                                                                                                                                                                                                           
|              | 
|10.6(6)       |  | First Amendment to Loan Agreement, dated as of July 13, 2001, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware
corporation, as lender.                                                                                                                                                                                                                                                                                                                              
|              | 
|10.7(6)       |  | Second Amendment to Loan Agreement and to Other Loan Documents, dated as of March 28, 2002, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction
Funding Corp., a Delaware corporation, as lender.                                                                                                                                                                                                                                                                                                
|10.8(6)       |  | Third Amendment to Loan Agreement and to Other Loan Documents, dated as of January 10, 2003, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction
Funding Corp., a Delaware corporation, as lender.                                                                                                                                                                                                                                                                                               
|              | 
|10.9(6)       |  | Fourth Amendment to Loan Agreement, dated as of January 23, 2003, between William Lyon Homes, Inc., a California corporation, as borrower, and RFC Construction Funding Corp., a Delaware
corporation, as lender.                                                                                                                                                                                                                                                                                                                          



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                       
|              | 
|10.10(5)      |  | Master Loan Agreement dated as of August 31, 2000 by and between William Lyon Homes, Inc., a California corporation (Borrower) and Guaranty Federal Bank, F.S.B., a federal savings
bank organized and existing under the laws of the United States (Lender).                                                                                                 
|              | 
|10.11(7)      |  | Agreement for First Modification of Deeds of Trust and Other Loan Instruments, dated as of June 8, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.     
|              | 
|10.12(6)      |  | Agreement for Second Modification of Deeds of Trust and Other Loan Instruments, dated as of July 23, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.   
|              | 
|10.13(6)      |  | Agreement for Third Modification of Deeds of Trust and Other Loan Instruments, dated as of December 19, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.
|              | 
|10.14(6)      |  | Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments, dated as of May 29, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.    
|              | 
|10.15(8)      |  | Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender.      
|              | 
|10.16(15)     |  | Agreement for Sixth Modification of Deeds of Trust and Other Loan Agreements, dated as of November 14, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as Guaranty Federal Bank, F.S.B.), as lender. 
|              | 
|10.17(5)      |  | Revolving Line of Credit Loan Agreement (Borrowing Base Loan) by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California
corporation, dated as of September 21, 2000.                                                                                                                                   
|              | 
|10.18(9)      |  | Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of September 18, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
California Bank & Trust, a California banking corporation, as lender.                                                                                                  
|              | 
|10.19(6)      |  | Second Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of December 13, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower,
and California Bank & Trust, a California banking corporation, as lender.                                                                                            
|              | 
|10.20(15)     |  | Third Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of January 26, 2004, by and between William Lyon Homes, Inc., a California corporation, as borrower, and
California Bank & Trust, a California banking corporation, as lender.                                                                                              
|              | 
|10.21(5)      |  | 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.                                                                                                                                                                  
|              | 
|10.22(10)     |  | William Lyon Homes 2000 Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                     
|              | 
|10.23(11)     |  | Form of Stock Option Agreements.                                                                                                                                                                                                                                                                                                                                  
|10.24(11)     |  | William Lyon Homes, Inc. 2000 Cash Bonus Plan.                                                                                                                                                                                                                                                                                                                    
|              | 
|10.25(11)     |  | Standard Industrial/Commercial Single-Tenant Lease  Net Between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.                                                                                                                                                                                                           
|              | 
|10.26(12)     |  | William Lyon Homes Executive Deferred Compensation Plan effective as of February 11, 2002.                                                                                                                                                                                                                                                                        
|              | 
|10.27(13)     |  | William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002.                                                                                                                                                                                                                                                                



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|10.28(6)      |  | The Presley Companies Non-Qualified Retirement Plan for Outside Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              | 
|10.29(15)     |  | Underwriting Agreement dated as of March 12, 2003 among William Lyon Homes, Inc. as Company, William Lyon Homes, California Equity Funding, Inc., Carmel Mountain Ranch, Duxford Financial,
Inc., HSP Inc., Mountain Gate Ventures, Inc., OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH VenturesSan Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc. and William Lyon Southwest, Inc.
as Guarantors and UBS Warburg, LLC and Salomon Smith Barney Inc. as Underwriters.
|              | 
|10.30(8)      |  | Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and first Tennessee Bank as
Lender.                                                                                                                                                                                                                                                                                                                                               
|              | 
|10.31(14)     |  | Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                                                                                                                                                                                                                                                                                        
|              | 
|10.32(15)     |  | Amendment No. 1 to Credit Agreement dated as of January 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.                                                                                                                                                                                                                                                                                                                                                              
|              | 
|10.33(15)     |  | Purchase Agreement dated as of January 28, 2004 among William Lyon Homes, Inc. as Company, William Lyon Homes, California Equity Funding, Inc., Duxford Financial, Inc., HSP Inc., Lyon
Montecito, LLC, OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH VenturesSan Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc., The Ranch Golf Club Co. and William Lyon Southwest, Inc. as
Guarantors and UBS Securities LLC, as Initial Purchaser.                               
|              | 
|10.34(15)     |  | Registration Rights Agreement dated as of February 6, 2004 among William Lyon Homes, Inc. as Company, William Lyon Homes, California Equity Funding, Inc., Duxford Financial, Inc., HSP Inc.,
Lyon Montecito, LLC, OX I Oxnard, L.P., PH-LP Ventures, PH-Rielly Ventures, PH VenturesSan Jose, Presley CMR, Inc., Presley Homes, St. Helena Westminster Estates, LLC, Sycamore CC, Inc., The Ranch Golf Club Co. and William Lyon Southwest, Inc.
as Guarantors and UBS Securities, LLC, as Initial Purchaser.                   
|              | 
|12.1  (15)    |  | Statement of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              | 
|21.1  (15)    |  | List of Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              | 
|31.1          |  | Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                               
|              | 
|31.2          |  | Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                               
|              | 
|32.1          |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                
|              | 
|32.2          |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                

---

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



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



|(3) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 and incorporated herein by this reference.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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##### Table of Contents

|(7) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 and incorporated herein by this reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|(9) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 and incorporated herein by this reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(10) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-8 (SEC Registration No. 333-50232) filed on November 17, 2000 and incorporated herein by
this reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|(12) |  | Previously filed as an exhibit to the Companys Registration Statement on Form S-8 (SEC Registration No. 333-82448) filed on February 8, 2002 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, 2001 and incorporated herein by this reference.
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|(14) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003 and incorporated herein by this reference.
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|(15) |  | 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 this reference.
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