10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2007

OR

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

For the transition period from                      to                     

Commission File Number 001-31625

WILLIAM LYON HOMES

(Exact name of registrant as specified in its charter)

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

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

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

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

None

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

None

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

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

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

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

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

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

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

The number of shares of Common Stock outstanding as of March 1, 2008 was 1,000.

DOCUMENTS INCORPORATED BY REFERENCE

None

WILLIAM LYON HOMES

INDEX

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

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NOTE ABOUT FORWARD-LOOKING STATEMENTS

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

Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to a number of factors. The principal factors that could cause the Company’s actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in general economic conditions either nationally or in regions in which the Company operates, changes in the markets for residential housing, terrorism or other hostilities involving the United States, changes in home mortgage interest rates, changes in generally accepted accounting principles or interpretations of those principles, changes in prices of homebuilding materials, labor shortages, adverse weather conditions, the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements, changes in governmental laws and regulations, whether the Company is able to refinance the outstanding balances of its debt obligations at their maturity, the timing of receipt of regulatory approvals and the opening of projects and the availability and cost of land for future growth. These and other risks and uncertainties are more fully described in Item 1A. “Risk Factors”. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, those factors or conditions described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Company’s past performance or past or present economic conditions in the Company’s housing markets are not indicative of future performance or conditions. Investors are urged not to place undue reliance on forward-looking statements. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to projections over time unless required by federal securities law.

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PART I

Item 1.    Business

General

William Lyon Homes, a Delaware corporation, and subsidiaries (the “Company”) are primarily engaged in the design, construction and sale of single family detached and attached homes in California, Arizona and Nevada. Since the founding of the Company’s predecessor in 1956, the Company and its joint ventures have sold over 70,000 homes. The Company conducts its homebuilding operations through four geographic regions (Southern California, Northern California, Arizona and Nevada). For 2007, approximately 69% of the home closings of the Company and its joint ventures were derived from its California operations. For the year ended December 31, 2007, on a consolidated basis the Company had revenues from home sales of $1.002 billion and delivered 2,182 homes, which includes $91.8 million of revenue and 219 homes from consolidated joint ventures (see Note 2 of “Notes to Consolidated Financial Statements”).

The Company designs, constructs and sells a wide range of homes designed to meet the specific needs of each of its markets, although it primarily emphasizes sales to the entry-level and move-up home buyer markets. At December 31, 2007, the Company marketed its homes through 60 sales locations in both its wholly-owned projects and projects being developed in consolidated joint ventures. In 2007, the average sales price for consolidated homes delivered was $459,500. Base sales prices for actively selling projects in 2007, including affordable projects, ranged from $76,000 to $1,725,000.

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

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

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

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

The Company’s operations are dependent to a significant extent on debt financing and, to a lesser extent, on joint venture financing. The Company’s principal credit sources are its 7 ⁵/8% Senior Notes, 10 ³/4% Senior Notes, 7 ¹/2% Senior Notes, secured revolving credit facilities, seller-provided financing, and land banking transactions. At December 31, 2007, the outstanding principal amount of the 7 ⁵/8% Senior Notes was $150.0 million, the outstanding principal amount of the 10 ³/4% Senior Notes was $247.6 million and the outstanding principal amount of the 7 ¹/2% Senior Notes was $150.0 million. The secured revolving credit facilities are revolving lines of credit which previously had a maximum loan commitment of $560.0 million. However, as described below, as a result of certain land sales transactions, the Company has reached agreement with each of the lenders to modify the terms of the respective revolving credit facilities, including reducing the aggregate maximum loan commitment to $395.0 million. The credit facilities have limitations on the amounts that can be borrowed at any time based on assets which are included in the credit facilities and the specified borrowings permitted under borrowing base calculations. The secured revolving credit facilities are secured by substantially all of the Company’s assets. At December 31, 2007, the outstanding principal amount under the secured revolving credit facilities was $139.6 million. The Company’s mortgage subsidiary has two revolving credit facilities to fund its mortgage operations, of which an aggregate $11.5 million was outstanding at December 31, 2007. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition and Liquidity” and Note 6 of “Notes to Consolidated Financial Statements” for more information relating to the revolving credit facilities of the Company and its mortgage subsidiary.

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

During 2007 and 2008, in response to the slow-down in the homebuilding industry, the Company entered into certain land sales transactions to improve its liquidity and to reduce its overall debt. On December 26, 2007 and January 7, 2008, the Company entered into ten separate agreements with various affiliates of one of its joint venture equity partners (the “Equity Partner Agreements”). Pursuant to the Equity Partner Agreements, the Company agreed to sell to the equity partner affiliates 604 residential lots and 5 model homes in 10 communities in Orange County, San Diego, County and Ventura County, California for an aggregate purchase price of $90.6 million in cash. The purchase and sale of 404 of the residential lots and the 5 model homes closed on December 27, 2007 (for an aggregate consideration of approximately $65.9 million) and the remainder of the residential lots closed on January 9, 2008. Prior to the sale, the collective net book value of these lots (as reflected on the Company’s financial statements) was approximately $210.7 million, resulting in a total loss on the sales transactions of $120.1 million. The loss of $40.3 million related to the portion of the land sales which closed in January 2008 has been reflected in the Consolidated Statement of Operations as Impairment Losses on Real

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

On December 27, 2007, the Company sold certain land in San Diego County, California for $12.0 million in cash to a limited liability corporation owned indirectly by Frank T. Suryan, Jr. as Trustee of the Suryan Family Trust. Mr. Suryan is Chairman and Chief Executive Officer of Lyon Capital Ventures, a company wholly owned by Frank T. Suryan, Jr., General William Lyon, Chairman and Chief Executive Officer of the Company, and two trusts whose sole beneficiary is William H. Lyon, Executive Vice President and Chief Administrative Officer of the Company. The Company has received a report from a third-party valuation and financial advisory services firm as to the reasonableness of the sales price in the transaction. Further, the transaction was unanimously approved by all independent members of the Board of Directors. Prior to the sale, the net book value of this land (as reflected on the Company’s financial statements) was approximately $18.7 million, resulting in a loss on the transaction of $6.7 million.

In 2008, the Company expects to temporarily suspend all development, sales and marketing activities at ten of its actively-selling projects which are in the early stages of development. Management of the Company has concluded that this strategy is necessary under the prevailing market conditions and would allow the Company to market the properties at some future time when market conditions may have improved.

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

Under the modified revolving credit facilities, the aggregate loan commitment is reduced to $395.0 million (including one facility of $100.0 million, one of $70.0 million, one of $60.0 million, two of $50.0 million each, one of $35.0 million and one of $30.0 million) and the Company is required to comply with a number of covenants, the most restrictive of which require the Company to maintain:

• A tangible net worth, as defined, of $175.0 million;

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

• Minimum liquidity, as defined, of at least $20.0 million.

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

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

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

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Harwell Lyon 1987 Trust and The William Harwell Lyon Separate Property Trust, represented over 90% of the outstanding shares of the Company.

After receiving deliveries of a sufficient number of tendered shares to reach the 90% threshold, General Lyon and the two trusts contributed all the shares of the Company owned by them to WLH Acquisition Corp., a corporation owned by General Lyon and the two trusts. On July 25, 2006, WLH Acquisition Corp. was then merged with and into the Company under the “short-form” merger provisions of Delaware law, with the Company continuing as the surviving corporation of the merger. At the effective time of the merger, each outstanding share of the Company’s common stock (except for shares owned by WLH Acquisition Corp. and by stockholders who properly exercise their appraisal rights in accordance with Delaware law) was cancelled and converted into the right to receive $109.00 per share in cash, without interest, which is the same consideration that was paid for shares of the Company in the tender offer by General Lyon.

As a consequence of the merger, the Company’s equity now consists solely of 1,000 shares of common stock outstanding held by General William Lyon and two trusts of which William H. Lyon is the sole beneficiary.

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

The Company’s Markets

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

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

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

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

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

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

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

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

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

LAND ACQUISITION AND DEVELOPMENT

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

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

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

• Completing due diligence prior to committing to acquire land;

• Reviewing the status of entitlements and other governmental processing to mitigate zoning and other development risk;

• Focusing on land as a component of a home’s cost structure, rather than on the land’s speculative value;

• Limiting land acquisition size to reduce investment levels in any one project where possible;

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

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

• Employing centralized control of approval over all land transactions;

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

• Diversifying with respect to geography, markets and product types.

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

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

HOMEBUILDING AND MARKET STRATEGY

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

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

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

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

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

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

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Description of Projects and Communities Under Development

The Company’s homebuilding projects usually take two to five years to develop. The following table presents project information relating to each of the Company’s homebuilding regions as of December 31, 2007 and only includes projects with lots owned as of December 31, 2007, lots consolidated in accordance with Interpretation No. 46 as of December 31, 2007 or homes closed for the year ended December 31, 2007.

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

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

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

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

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

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

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

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

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

(6) All or a portion of the lots in this project are not owned as of December 31, 2007. The Company consolidated the purchase price of the lots in accordance with Interpretation No. 46, and considers the lots owned at December 31, 2007.

Sales and Marketing

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

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

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

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

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

Warranty

The Company provides its homebuyers with a one-year limited warranty covering workmanship and materials. The Company also provides its homebuyers with a limited warranty that covers “construction defects,” as defined in the limited warranty agreement provided to each home buyer, for the length of its legal liability for

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

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

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

Sale of Lots and Land

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

Customer Financing — William Lyon Financial Services

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

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

Information Systems and Controls

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

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Regulation

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

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

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

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

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Competition

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

Corporate Organization and Personnel

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

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

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

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

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

Available Information

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

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Item 1A.    Risk Factors

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

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

The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions such as levels of employment, consumer confidence and income, availability of financing for acquisitions, construction and permanent mortgages, interest rate levels, inflation, in-migration trends and demand for housing. For example, California, where many of the Company’s projects are located, underwent a significant recession in the early 1990s that affected demand for housing. Should current economic and business conditions decline, demand for housing could be further affected. An important segment of the Company’s customer base consists of move-up buyers, who often purchase homes subject to contingencies related to the sale of their existing homes. The difficulties facing these buyers in selling their homes during recessionary periods may adversely affect home sales. Moreover, during such periods, the Company may need to reduce sales prices and offer greater incentives to buyers to compete for sales that may result in reduced margins. Increases in the rate of inflation could adversely affect gross margins by increasing costs and expenses. In times of high inflation, demand for housing may decline and the Company may be unable to recover increased costs through higher sales.

In 2007, the homebuilding industry experienced continued decreased demand for housing, which has resulted in a decrease in new home orders, home closings, and average sales prices for the Company compared to the 2006 period. The Company has reduced sales prices and offered greater incentives to buyers to compete for sales that have resulted in reduced margins. If the decreased demand for housing continues, the Company may need to continue the trend of reducing sales prices to meet competitive and market pressures.

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

In general, housing demand is negatively impacted by increases in interest rates and housing costs and the unavailability of mortgage financing as a result of declining customer credit quality, tightening of mortgage loan underwriting standards, or other factors. Most buyers finance their home purchases through third-party lenders providing mortgage financing. Over the last several months, many third-party lenders have significantly increased underwriting standards, mortgage interest rates have increased, and many subprime and other alternate mortgage products are no longer available in the marketplace. If these trends continue and mortgage loans continue to be difficult to obtain, the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes will be adversely affected, which will adversely affect the Company’s results of operations through reduced home sales revenue, gross margin and cash flow, and the impact may be material.

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

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

The Company continuously acquires land for replacement and expansion of land inventory within the markets in which it builds. The risks inherent in purchasing and developing land increase as consumer demand

16

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

In 2007, the Company incurred impairment losses on real estate assets in the amount of $231.1 million. The impairments were primarily attributable to slower than anticipated home sales and lower than anticipated net revenue due to the decline in the homebuilding industry. The Company was required to write-down the book value of certain real estate assets in accordance with Statement No. 144, as defined in Note 1 of “Notes to Consolidated Financial Statements”. The impairment losses have a material adverse effect on the Company’s financial position. A continued slump in the housing market could result in additional writedowns. Any additional material write-downs of assets could have a material adverse effect on the Company’s financial condition and earnings.

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

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

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

There can be no assurance that the Company will remain in compliance with the financial covenants contained in the credit facilities if slowing market conditions continue. If the Company is unable to comply with any one or more of these financial covenants, and is unable to obtain a waiver for the noncompliance, the Company could be precluded from incurring additional borrowings under the credit facilities. In addition, the Company’s obligations to repay indebtedness outstanding under the credit facilities could be accelerated in full. Any of these events could materially impact the Company’s liquidity and ability to conduct its operations.

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

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

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

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

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

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

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

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

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

• the Company will be more vulnerable to economic downturns and adverse developments in the business.

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

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

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

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

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

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

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

The homebuilding industry is highly competitive. Homebuilders compete for, among other things, desirable properties, financing, raw materials and skilled labor. The Company competes both with large homebuilding companies, some of which have greater financial, marketing and sales resources than the Company, and with smaller local builders. The consolidation of some homebuilding companies may create competitors that have greater financial, marketing and sales resources than the Company and thus are able to compete more effectively against the Company. In addition, there may be new entrants in the markets in which the Company currently conducts business. The Company also competes for sales with individual resales of existing homes and with available rental housing.

The Company’s operating results are variable.

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

• the timing of land acquisitions and zoning and other regulatory approvals;

• the timing of home closings, land sales and level of sales;

• product mix;

• the ability to continue to acquire additional land or options thereon at acceptable terms;

• the condition of the real estate market and the general economy;

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

• changes in prevailing interests rates and the availability of mortgage financing; and

• costs of material and labor.

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

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

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

19

Officer, respectively, as well as the services of the regional presidents and division managers. The loss of the services of any of these executives or key personnel, for any reason, could have a material adverse effect upon the Company’s business, operating results and financial condition.

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

California law provides that consumers can seek redress for patent (i.e., observable) defects in new homes within three or four years (depending on the type of claim asserted) from when the defect is discovered or should have been discovered. If the defect is latent (i.e., non-observable), consumers must still seek redress within three or four years from the date when the defect is discovered or should have been discovered, but in no event later than ten years after the date of substantial completion of the work on the construction. Consumers purchasing homes in Arizona and Nevada may also be able to obtain redress under state laws for either patent or latent defects in their new homes. Although the Company has obtained insurance for construction defect and subsidence claims, the Company may still be liable for damages, the cost of repairs, and/or the expense of litigation surrounding possible claims, including claims that arise out of uninsurable events, such as landslides or earthquakes, or other circumstances not covered by insurance and not subject to effective indemnification agreements with subcontractors.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• it issued the guarantee to delay, hinder or defraud present or future creditors; or

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

• it was insolvent or rendered insolvent by reason of issuing the guarantee; or

• it was engaged, or about to engage, in a business or transaction for which its assets constituted unreasonably small capital to carry on its business; or

• it intended to incur, or believed that it would incur, debts beyond its ability to pay as they mature;

then the court could avoid the obligations under the guarantee, subordinate the guarantee of the senior notes to that of the guarantor’s other debt, require holders of the senior notes to return amounts already paid under that guarantee, or take other action detrimental to holders of the senior notes and the guarantees of the senior notes.

The measures of insolvency for purposes of fraudulent transfer laws vary depending upon the law of the jurisdiction that is being applied in any proceeding to determine whether a fraudulent transfer had occurred. Generally, however, a person would be considered insolvent if, at the time it incurred the debt:

• the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

• it could not pay its debts as they become due.

The Company cannot be sure what standard a court would use to determine whether or not a guarantor was solvent at the relevant time, or, regardless of the standard that the court uses, that the issuance of the guarantee would not be avoided or the guarantee would not be subordinated to the guarantors’ other debt. If such a case were to occur, the guarantee could also be subject to the claim that, since the guarantee was incurred for the benefit of the issuer of the senior notes, and only indirectly for the benefit of the guarantor, the obligations of the applicable guarantor were incurred for less than fair consideration.

In addition, if the Company is required to grant an additional subsidiary guarantee for the notes at a time in the future when the guarantor was insolvent, its guarantee may also be avoidable as a preference under U.S. bankruptcy law or comparable provisions of state law.

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

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

• incur additional indebtedness;

• pay dividends or make other distributions;

• make investments;

• sell assets;

• incur liens;

• enter into agreements restricting the Company’s subsidiaries’ ability to pay dividends;

• enter into transactions with affiliates; and

• consolidate, merge or sell all or substantially all of the Company’s assets.

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

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

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

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

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

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

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

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Headquarters

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

Item 3.    Legal Proceedings

Litigation Arising from General Lyon’s Tender Offer

As described above in Item 1—Business, on March 17, 2006, the Company’s principal stockholder commenced a tender offer (the “Tender Offer”) to purchase all outstanding shares of the Company’s common stock not already owned by him. Initially, the price offered in the Tender was $93 per share, but it was subsequently increased to $109 per share.

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

On March 23, 2006, the Company announced that its Board had appointed a special committee of independent directors who were not members of the Company’s management or employed by the Company (the “Special Committee”) to consider the Tender Offer. The members of the Special Committee were Harold H. Greene, Lawrence M. Higby, and Dr. Arthur Laffer. The Company also announced that the Special Committee had retained Morgan Stanley & Co. as its financial advisor and Gibson, Dunn & Crutcher LLP as its legal counsel.

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

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

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

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

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

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

Other Legal Proceedings

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

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

Not applicable.

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PART II

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

The Company’s Common Stock was delisted from the NYSE in conjunction with the Tender Offer and Merger. The Company is now a privately held company. See Note 7 of “Notes to Consolidated Financial Statements.”

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

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Item 6.    Selected Financial Data

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

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

(1) During 2007 and 2008, in response to the slow-down in the homebuilding industry, the Company entered into certain land sales transactions to improve its liquidity and to reduce its overall debt. On December 26, 2007 and January 7, 2008, the Company entered into ten separate agreements with various affiliates of one of its equity partners (the “Equity Partner Agreements”). Pursuant to the Equity Partner Agreements, the Company agreed to sell to the equity partner affiliates 604 residential lots and 5 model homes in 10 communities in Orange County, San Diego, County and Ventura County, California for an aggregate purchase price of $90.6 million in cash. The purchase and sale of 404 of the residential lots and the 5 model homes closed on December 27, 2007 (for an aggregate consideration of approximately $65.9 million) and the remainder of the residential lots closed on January 9, 2008. Prior to the sale, the collective net book value of these lots (as reflected on the Company’s financial statements) was approximately $210.7 million, resulting in a total loss on the

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sales transactions of $120.1. The loss of $40.3 million related to the portion of the land sales which closed in January 2008 has been reflected in the Consolidated Statement of Operations as Impairment Loss on Real Estate Assets for the year ended December 31, 2007.

On December 27, 2007, the Company sold certain land in San Diego County, California for $12.0 million in cash to a limited liability corporation owned indirectly by Frank T. Suryan, Jr. as Trustee of the Suryan Family Trust. Mr. Suryan is Chairman and Chief Executive Officer of Lyon Capital Ventures, a company wholly owned by Frank T. Suryan, Jr., General William Lyon, Chairman and Chief Executive Officer of the Company, and two trusts whose sole beneficiary is William H. Lyon, Executive Vice President and Chief Administrative Officer of the Company. The Company has received a report from a third-party valuation and financial advisory services firm as to the reasonableness of the sales price in the transaction. Further, the transaction was unanimously approved by all disinterested members of the Board of Directors. Prior to the sale, the net book value of this land (as reflected on the Company’s financial statements) was approximately $18.7 million, resulting in a loss on the transaction of $6.7 million.

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

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

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

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

(3) Backlog consists of homes sold under pending sales contracts that have not yet closed, some of which are subject to contingencies, including mortgage loan approval and the sale of existing homes by customers. There can be no assurance that homes sold under pending sales contracts will close. Of the total homes sold subject to pending sales contracts as of December 31, 2007, 252 represent homes completed or under construction and 27 represent homes not yet under construction. Backlog as of all dates is unaudited.

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

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

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

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

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

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

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

The Company is primarily engaged in the design, construction and sale of single family detached and attached homes in California, Arizona and Nevada. Since the founding of its predecessor in 1956, on a combined basis the Company has sold over 70,000 homes. The Company conducts its homebuilding operations through four geographic regions: Southern California, Northern California, Arizona and Nevada. For the year ended December 31, 2007, on a consolidated basis the Company had revenues from home sales of $1.002 billion and delivered 2,182 homes, which includes $91.8 million of revenue and 219 delivered homes from consolidated joint ventures. The Company believes that it is well positioned for long term growth in all of its markets. However, due to slow downs of new orders, increases in cancellation rates and increasing price competition, the Company anticipates a decline in deliveries and revenues in 2008 as compared to 2007. The Company presents information related to its joint ventures as such information represents an important aspect of the Company’s business as well as a substantial portion of its operating income.

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

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Results of Operations

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

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

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

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

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

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

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

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

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

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

Homes in backlog are generally closed within three to six months. The dollar amount of backlog of homes sold but not closed on a combined basis as of December 31, 2007 was $107.9 million, down 63.5% from $295.5 million as of December 31, 2006. The cancellation rate of buyers who contracted to buy a home but did not close escrow at the Company’s projects was approximately 33% during 2007 and 33% during 2006. The inventory of completed and unsold homes was 146 homes as of December 31, 2007.

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

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

Comparisons of Years Ended December 31, 2007 and 2006

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

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

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

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

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

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

Effective January 1, 2007, the Company made an election in accordance with federal and state regulations to be taxed as an “S” corporation rather than a “C” corporation. Under this election, the Company’s taxable income flows through to and is reported on the personal tax returns of its shareholders. The shareholders are responsible for paying the appropriate taxes based on this election. The Company does not pay any federal taxes under this election and is only required to pay certain state taxes based on a rate of approximately 1.5% of taxable income. As a result of this election, the Company’s provision for income taxes for the year ended December 31, 2007 includes a reduction of deferred tax assets of $31,887,000 due to the elimination of any future tax benefit by the Company from such assets. In addition, the provision reflects a valuation allowance of $771,000. Also, due to the “S” corporation election, unused recognized built in losses in the amount of $19,414,000 are no longer available to the Company.

Prior to March 15, 2008, the Company and its shareholders expect to make a revocation of the “S” corporation election effective on January 1, 2008. As a result of this revocation, the Company will be taxed as a “C” corporation. The shareholders will not be able to elect “S” corporation status for at least five years. The revocation of the “S” corporation election will allow taxable losses generated in 2008 to be carried back to the 2006 “C” corporation year. As a result of the contemplated change in tax status, the Company anticipates that it will record a deferred tax asset in the range of $35.0–$41.0 million as of January 1, 2008. The recorded deferred tax asset reflects the tax refund for the anticipated carry back of the estimated 2008 tax loss to 2006 as a result of the reversal of temporary differences in 2008. The Company expects to receive the tax refund in mid-2009.

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

Comparisons of Years Ended December 31, 2006 and 2005

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

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

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

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

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

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

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

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

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

Financial Condition and Liquidity

The Company provides for its ongoing cash requirements principally from internally generated funds from the sales of real estate, outside borrowings and by forming new joint ventures with venture partners that provide a substantial portion of the capital required for certain projects. The Company currently has outstanding 7 ⁵/8% Senior Notes due 2012, 10 ³/4% Senior Notes due 2013 and 7 ¹/2% Senior Notes due 2014 and maintains secured revolving credit facilities (“Revolving Credit Facilities”). The Company has financed, and may in the future finance, certain projects and land acquisitions with construction loans secured by real estate inventories, seller-provided financing and land banking transactions. The Company believes that its current borrowing capacity and increases reasonably available to it, cash on hand and anticipated net cash flows from operations are and will be sufficient to meet its current and reasonably anticipated liquidity needs on both a near-term and long-term basis (and in any event for the next twelve months) for funds to build homes, run its day-to-day operations, acquire land and capital assets and fund its mortgage operations. There is no assurance, however, that future cash flows will be sufficient to meet the Company’s future capital needs. The amount and types of indebtedness that the Company may incur may be limited by the terms of the indentures and credit or other agreements governing the Company’s senior note obligations, revolving credit facilities and other indebtedness.

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

During 2007 and 2008, in response to the slow-down in the homebuilding industry, the Company entered into certain land sales transactions to improve its liquidity and to reduce its overall debt. On December 26, 2007 and January 7, 2008, the Company entered into ten separate agreements with various affiliates of one of its equity partners (the “Equity Partner Agreements”). Pursuant to the Equity Partner Agreements, the Company agreed to sell to the equity partner affiliates 604 residential lots and 5 model homes in 10 communities in Orange County, San Diego County and Ventura County, California for an aggregate purchase price of $90.6 million in cash. The purchase and sale of 404 of the residential lots and the 5 model homes closed on December 27, 2007 (for an aggregate consideration of approximately $65.9 million) and the remainder of the residential lots closed on January 9, 2008. Prior to the sale, the collective net book value of these lots (as reflected on the Company’s financial statements) was approximately $210.7 million, resulting in a total loss on the sales transactions of

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$120.1 million. The loss of $40.3 million related to the portion of the land sales which closed in January 2008 has been reflected in the Consolidated Statement of Operations as Impairment Losses on Real Estate Assets for the year ended December 31, 2007. The Company may consider entering into future agreements with the various affiliates of the equity partner to build and market homes in 5 of the 10 communities on behalf of the affiliates. For such services, the Company would receive fees and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved. Certain of the equity partner affiliates have an option to acquire an additional 23 model homes in 6 of the 10 communities.

On December 27, 2007, the Company sold certain land in San Diego County, California for $12.0 million in cash to a limited liability corporation owned indirectly by Frank T. Suryan, Jr. as Trustee of the Suryan Family Trust. Mr. Suryan is Chairman and Chief Executive Officer of Lyon Capital Ventures, a company wholly owned by Frank T. Suryan, Jr., General William Lyon, Chairman and Chief Executive Officer of the Company, and two trusts whose sole beneficiary is William H. Lyon, Executive Vice President and Chief Administrative Officer of the Company. The Company has received a report from a third-party valuation and financial advisory services firm as to the reasonableness of the sales price in the transaction. Further, the transaction was unanimously approved by all independent members of the Board of Directors. Prior to the sale, the net book value of this land (as reflected on the Company’s financial statements) was approximately $18.7 million, resulting in a loss on the transaction of $6.7 million.

In 2008, the Company expects to temporarily suspend all development, sales and marketing activities at ten of its actively-selling projects which are in the early stages of development. Management of the Company has concluded that this strategy is necessary under the prevailing market conditions and would allow the Company to market the properties at some future time when market conditions may have improved.

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

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

Loan Commitment Amount (in millions)		Balance Outstanding at December 31, 2007 (in millions)		Initial Maturity Date(1)
$	30.0	$	10.6	May 2008
	50.0		9.7	July 2008
	50.0		25.3	September 2008
	100.0		31.4	September 2008
	60.0		25.2	December 2008
	35.0		0.1	April 2009
	70.0		37.3	June 2009
$	395.0	$	139.6

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

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

• A tangible net worth, as defined, of $175.0 million;

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

• Minimum liquidity, as defined, of at least $20.0 million.

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

The ability of the Company to meet its obligations on its indebtedness will depend to a large degree on its future performance which in turn will be subject, in part, to factors beyond its control, such as prevailing economic conditions either nationally or in regions in which the Company operates, the outbreak of war or other hostilities involving the United States, mortgage and other interest rates, changes in prices of homebuilding materials, weather, the occurrence of events such as landslides, soil subsidence and earthquakes that are uninsurable, not economically insurable or not subject to effective indemnification agreements, availability of labor and homebuilding materials, changes in governmental laws and regulations, the timing of receipt of regulatory approvals and the opening of projects, and the availability and cost of land for future development. The Company cannot be certain that its cash flow will be sufficient to allow it to pay principal and interest on its debt, support its operations and meet its other obligations. If the Company is not able to meet those obligations, it may be required to refinance all or part of its existing debt, sell assets or borrow more money. The Company may not be able to do so on terms acceptable to it, if at all. In addition, the terms of existing or future indentures and credit or other agreements governing the Company’s senior note obligations, revolving credit facilities and other indebtedness may restrict the Company from pursuing any of these alternatives.

As discussed above, effective January 1, 2007, the Company made an election in accordance with federal and state regulations to be taxed as an “S” corporation rather than a “C” corporation. Prior to March 15, 2008, the Company and its shareholders expect to make a revocation of the “S” corporation election effective on January 1, 2008. As a result of this revocation, the Company will be taxed as a “C” corporation. The shareholders will not be able to elect “S” corporation status for at least five years. The revocation of the “S” corporation election will allow taxable losses generated in 2008 to be carried back to the 2006 “C” corporation year. As a result of the contemplated change in tax status, the Company anticipates that it will record a deferred tax asset in the range of $35.0 - $41.0 million as of January 1, 2008. The recorded deferred tax asset reflects the tax refund for the anticipated carry back of the estimated 2008 tax loss to 2006 as a result of the reversal of temporary differences in 2008. The Company expects to receive the tax refund in mid-2009.

7 ⁵/8% Senior Notes

On November 22, 2004, the Company’s 100% owned subsidiary, William Lyon Homes, Inc., a California corporation, (“California Lyon”) closed its offering of $150.0 million principal amount of 7 ⁵/8% Senior Notes due 2012 (the “7 ⁵/8% Senior Notes”). The notes were sold pursuant to Rule 144A. The notes were issued at par, resulting in net proceeds to the Company of approximately $148.5 million. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes having substantially identical terms. On January 12, 2005, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an offer to exchange any and all of its outstanding $150.0 million aggregate principal amount of 7 ⁵/8% Senior Notes due 2012, which are not registered under the Securities Act of 1933, for a like amount of its new 7 ⁵/8% Senior Notes due 2012, which are registered under the Securities Act of 1933, upon the terms and subject to the conditions set forth in the prospectus dated January 12, 2005. The exchange offer was completed for $146.5 million principal amount of the 7 ⁵/8% Senior Notes on February 18, 2005. The remaining $3.5 million principal amount of the old notes remains outstanding. The terms of the new notes are identical in all material respects to those of the old

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notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. Interest on the 7 ⁵/8% Senior Notes is payable semi-annually on December 15 and June 15 of each year. Based on the current outstanding principal amount of the 7 ⁵/8% Senior Notes, the Company’s semi-annual interest payments are $5.7 million.

Except as set forth in the Indenture governing the 7 ⁵/8% Senior Notes (“7 ⁵/8% Senior Notes Indenture”), the 7 ⁵/8% Senior Notes are not redeemable prior to December 15, 2008. Thereafter, the 7 ⁵/8% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.

As of December 31, 2007, the outstanding 7 ⁵/8% Senior Notes with a face value of $150.0 million had a fair value of approximately $90.0 million, based on quotes from industry sources.

10 ³/4% Senior Notes

California Lyon filed a Registration Statement on Form S-3 with the Securities and Exchange Commission for the sale of $250.0 million of 10 ³/4% Senior Notes due 2013 (the “10 ³/4% Senior Notes”) which became effective on March 12, 2003. The offering closed on March 17, 2003 and was fully subscribed and issued. The notes were issued at a price of 98.493% to the public, resulting in net proceeds to the Company of approximately $246.2 million. The purchase price reflected a discount to yield 11% under the effective interest method and the notes have been reflected net of the unamortized discount in the consolidated balance sheet. Interest on the 10 ³/4% Senior Notes is payable on April 1 and October 1 of each year. Based on the current outstanding principal amount of the 10 ³/4% Senior Notes, the Company’s semi-annual interest payments are $13.4 million.

Except as set forth in the Indenture governing the 10 ³/4% Senior Notes (“10 ³/4% Senior Notes Indenture”), the 10 ³/4% Senior Notes are not redeemable prior to April 1, 2008. Thereafter, the 10 ³/4% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.

As of December 31, 2007, the outstanding 10 ³/ 4% Senior Notes with a face value of $247.6 million had a fair value of approximately $157.5 million, based on quotes from industry sources.

7 ¹/2% Senior Notes

On February 6, 2004, California Lyon closed its offering of $150.0 million principal amount of 7 ¹/2% Senior Notes due 2014 (the “7 ¹/2% Senior Notes”). The notes were sold pursuant to Rule 144A and outside the United States to non-U.S. persons in reliance on Regulation S. The notes were issued at par, resulting in net proceeds to the Company of approximately $147.6 million. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes having substantially identical terms. On July 16, 2004, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an offer to exchange any and all of its outstanding $150.0 million aggregate principal amount of 7 ¹/2% Senior Notes due 2014, which are not registered under the Securities Act of 1933, for a like amount of its new 7 ¹/2% Senior Notes due 2014, which are registered under the Securities Act of 1933, upon the terms and subject to the conditions set forth in the prospectus dated July 16, 2004. The exchange offer was completed for the full principal amount of the 7 ¹/2% Senior Notes on August 17, 2004. The terms of the new notes are identical in all material respects to those of the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. The new notes have been listed on the New York Stock Exchange. Interest on the 7 ¹/2% Senior Notes is payable on February 15 and August 15 of each year. Based on the current outstanding principal amount of 7 ¹/2% Senior Notes the Company’s semi-annual interest payments are $5.6 million.

Except as set forth in the Indenture governing the 7 ¹/2% Senior Notes (“7 ¹/2% Senior Notes Indenture”), the 7 ¹/2% Senior Notes are not redeemable prior to February 15, 2009. Thereafter, the 7 ¹/2% Senior Notes will be

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

As of December 31, 2007, the outstanding 7 ¹/ 2% Senior Notes with a face value of $150.0 million had a fair value of $87.0 million, based on quotes from industry sources.

* * * * *

The 7 ⁵/8% Senior Notes, the 10 ³/4% Senior Notes and the 7 ¹/2% Senior Notes (collectively, the “Senior Notes”) are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation (“Delaware Lyon”), which is the parent company of California Lyon, and all of Delaware Lyon’s existing and certain of its future restricted subsidiaries. The Senior Notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the Senior Notes and the guarantees, but are effectively subordinated to all of the Company’s and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness.

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

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

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

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

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

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

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

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Revolving Credit Facilities

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

Loan Commitment Amount (in millions)		Balance Outstanding at December 31, 2007 (in millions)		Initial Maturity Date(1)
$	30.0	$	10.6	May 2008
	50.0		9.7	July 2008
	50.0		25.3	September 2008
	100.0		31.4	September 2008
	60.0		25.2	December 2008
	35.0		0.1	April 2009
	70.0		37.3	June 2009
$	395.0	$	139.6

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

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

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

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

Under the modified revolving credit facilities as described above, the Company is required to comply with a number of covenants, the most restrictive of which require Delaware Lyon to maintain:

• A tangible net worth, as defined, of $175.0 million;

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

• Minimum liquidity, as defined, of at least $20.0 million.

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

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

Construction Notes Payable

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

Seller Financing

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

Revolving Mortgage Warehouse Credit Facilities

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

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Land Banking Arrangements

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

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

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

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

Joint Venture Financing

The Company and certain of its subsidiaries are general partners or members in joint ventures involved in the development and sale of residential projects. As described more fully in Critical Accounting Policies—Variable Interest Entities certain joint ventures have been determined to be variable interest entities in which the Company is considered the primary beneficiary. Accordingly, the assets, liabilities and operations of these joint ventures have been consolidated with the Company’s financial statements as of and for the years ended December 31, 2007 and 2006. Because the Company already recognizes its proportionate share of joint venture earnings and losses under the equity method of accounting, the adoption of Interpretation No. 46 did not affect the Company’s consolidated net income. The financial statements of joint ventures in which the Company is not considered the primary beneficiary are not consolidated with the Company’s financial statements. The Company’s investments in unconsolidated joint ventures are accounted for using the equity method because the Company has a 50% or less voting or economic interest (and thus such joint ventures are not controlled by the

47

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

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

Assessment District Bonds

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

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

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

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

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The increase in net changes in receivables is attributable to a decrease in escrow proceeds receivable of $28.1 million during the 2007 period, from a balance of $47.3 million as of December 31, 2006 to a balance of $19.2 million as of December 31, 2007 compared to a net increase of $37.0 million during the 2006 period, from a balance of $84.3 million as of December 31, 2005 to a balance of $47.3 million as of December 31, 2006. The balance in escrow proceeds receivable as of December 31, 2007 and 2006 is temporary in nature and primarily due to the number of homes closed in the last five days of the year of 122 in 2007 and 192 in 2006 where the homes had closed escrow but the Company had not yet received the funds from the escrow and title companies. The entire balance of escrow proceeds receivable at December 31, 2007 and 2006 was collected within the first few days of the following period. The remaining increase in the change in receivables is primarily attributable to a net decrease in first trust deed mortgage notes receivables of $47.7 million during the 2007 period, from a balance of $59.7 million as of December 31, 2006 to a balance of $12.0 million as of December 31, 2007 compared to a net increase of $11.9 million during the 2006 period to $59.7 million as of December 31, 2006 from $47.8 million as of December 31, 2005. This decrease was also attributable to the decrease in the number of homes closed in the last week of the year in 2007 and 2006 as described above. Substantially all of the balance of first trust deed mortgage notes receivables was collected in the first few days of January 2008 and 2007 when the loans were sold to third party investors.

The successful issuance of the 10 ³/4 % Senior Notes in 2003 and the 7 ¹/2% Senior Notes and 7 ⁵/8% Senior Notes in 2004, offset by the repayment of the 12 ¹/2% Senior Notes, provided the Company with increased financial resources. The risks inherent in purchasing and developing land increase as consumer demand for housing decreases. Thus, the Company may have bought and developed land on which it cannot profitably build and sell homes. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, the Company may have to sell homes at significantly lower margins or at a loss.

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

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

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

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

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

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

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

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

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

Off-Balance Sheet Arrangements

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

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Contractual Obligations

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

			Payments due by period
Contractual obligations (note 1)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Revolving credit facilities	$	148,652	$	110,012	$	38,640	$	—	$	—
Construction notes payable		134,144		45,543		47,765		38,371		2,465
Mortgage Warehouse Credit Facility		11,710		11,710		—		—		—
7 5/8% Senior Notes		206,731		11,438		22,875		172,418		—
10 3/4% Senior Notes		391,094		26,875		53,750		53,750		256,719
7 1/2% Senior Notes		218,906		11,250		22,500		22,500		162,656
Operating leases		12,346		3,499		5,700		2,980		167
Purchase obligations:
Land purchases and option commitments		113,922		17,846		71,636		24,440		—
Project commitments		374,272		287,884		57,592		28,796		—
Total	$	1,611,777	$	526,057	$	320,458	$	343,255	$	422,007

(1) The summary of contractual obligations above includes interest on all interest-bearing obligations. Interest on all fixed rate interest-bearing obligations is based on the stated rate and is calculated to the stated maturity date. Interest on all variable rate interest bearing obligations is based on the rates effective as of December 31, 2007 and is calculated to the stated maturity date.

Inflation

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

Critical Accounting Policies

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

Real Estate Inventories and Cost of Sales

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

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

Impairment of Real Estate Inventories

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

The results of operations for the years ended December 31, 2007 and 2006, include non-cash charges of $231.1 million and $39.9 million, respectively, to record impairment losses on real estate assets held by the Company at certain of its homebuilding projects. The impairments were primarily attributable to slower than anticipated home sales and lower than anticipated net revenue due to softening market conditions. As a result, the future undiscounted cash flows estimated to be generated were determined to be less than the carrying amount of the assets. Accordingly, the related real estate assets were written-down to their estimated fair value. The non-cash charges are reflected in impairment loss on real estate assets in the accompanying consolidated statements of operations.

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

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

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

Sales and Profit Recognition

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

Variable Interest Entities

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

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The Company’s critical accounting policies are more fully described in Note 1 of the “Notes to Consolidated Financial Statements.”

Related Party Transactions

See Item 13 and Note 10 of the “Notes to Consolidated Financial Statements” for a description of the Company’s transactions with related parties.

Tender Offer and Merger

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

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

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

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

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

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

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

See “Part I—Item 3. Legal Proceedings” for information on certain lawsuits which have been filed relating to General Lyon’s proposal.

Recently Issued Accounting Standards

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

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

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

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

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

The Company’s exposure to market risk for changes in interest rates relates to the Company’s floating rate debt with a total outstanding balance at December 31, 2007 of $262.2 million where the interest rate is variable based upon certain bank reference or prime rates. If interest rates were to increase by 10%, the estimated impact on the Company’s consolidated financial statements would be no reduction to income before provision for income taxes based on amounts outstanding and rates in effect at December 31, 2007, but would increase capitalized interest by approximately $2.2 million which would be amortized to cost of sales as home closings occur.

Item 8.    Financial Statements and Supplementary Data

The consolidated financial statements of William Lyon Homes and the reports of the independent registered public accounting firm, listed under Item 15, are submitted as a separate section of this report beginning on page 81 and are incorporated herein by reference.

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

None.

Item 9A.    Controls and Procedures

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

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

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

This annual report does not include an audit report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to audit by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

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PART III

Item 10.    Directors, Executive Officers and Corporate Governance

Information Regarding the Directors of William Lyon Homes

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

The following table lists the Directors of the Company and provides their respective ages and current positions with the Company as of March 1, 2008. Each director holds office until the Company’s next Annual Meeting and until his successor is duly elected and qualified. Except as described below, there are no family relationships between any director or executive officer and any other director or executive officer of William Lyon Homes. Biographical information for each Director is provided below.

Name	Age	Position
General William Lyon	84	Chairman of the Board of Directors and Chief Executive Officer
Douglas F. Bauer	46	Director, President and Chief Operating Officer
William H. Lyon	34	Director, Executive Vice President and Chief Administrative Officer
Douglas K. Ammerman (a, b, c)	56	Director
Harold H. Greene (a, b, c)	68	Director
Gary H. Hunt (a, b, c)	59	Director
Alex Meruelo (a, b, c)	45	Director

(a) Member of the Audit Committee

(b) Member of the Compensation Committee

(c) Member of the Nominating and Corporate Governance Committee

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

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

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

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an assistant project manager, has been employed by the Company since November 1999 and has been a member of the board of directors since January 25, 2000. Since joining the Company, Mr. Lyon has been employed as an assistant project manager and project manager and has participated in a training program designed to expose him to the many facets of real estate development. From February 2003 until February 2005, he served as the Company’s Director of Corporate Affairs. In February 2005, he was appointed Vice President and Chief Administrative Officer of the Company. Effective on March 1, 2007, Mr. Lyon was appointed as Executive Vice President and Chief Administrative Officer. Mr. Lyon received a dual B.S. in Industrial Engineering and Product Design from Stanford University in 1997.

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

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

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

ALEX MERUELO has invested extensively in residential and commercial real estate throughout Southern California since 1987, primarily in Hispanic neighborhoods. Mr. Meruelo currently is the President and Chief Executive Officer of Meruelo Enterprises, Inc., Cantamar Property Management, Inc. and La Pizza Loca, Inc. Mr. Meruelo currently owns and manages over 1,000 residential units and over 20 retail units and has overseen over 15 developments. Mr. Meruelo established La Pizza Loca, a fast food pizza restaurant, in 1986 and which

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now has over 50 franchised and company owned restaurants serving Latino communities throughout Southern California. Since 1999, Mr. Meruelo has focused his endeavors on the construction industry and, through Meruelo Enterprises, owns a number of established Southern California utility construction contractors including Herman Weissker, Inc., Doty Bros. Equipment Company and Tidwell Excavating. He has been a member of the board of directors since May 10, 2004. Mr. Meruelo is also a member of the board of directors and chairman of the audit committee of Commercial Bank of California.

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

Information Regarding Executive Officers of William Lyon Homes

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

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

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

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

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

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

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

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

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

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

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

Section 16(a) Beneficial Ownership Reporting Compliance

During 2007, the Company had no class of equity securities registered under Section 12 of the Securities Exchange Act of 1934. Accordingly, no reports were required to be filed during or with respect to the year ended December 31, 2007 on Form 3, Form 4 and Form 5 by the Company’s directors, officers and 10% stockholders.

Code of Ethics

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

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

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Item 11.    Executive Compensation

Compensation Discussion and Analysis

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

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

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

Elements Of Compensation

Salary

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

Bonuses

Near the beginning of each year, the Compensation Committee sets objective performance criteria for the bonuses of named executive officers for that year. Although the Compensation Committee sets the objective performance criteria at the beginning of each year, in practice the objective performance criteria have been essentially the same for the past several years. The Company believes that the virtual uniformity of the objective performance criteria over the past several years has helped to reward productivity and loyalty by stabilizing the goalposts for bonuses over changing economic times. The objective performance criteria which the Compensation Committee has selected correlate each named executive officer’s bonus directly to the Company’s consolidated pre-tax, pre-bonus income (or, in the case of a region president, to his region’s pre-tax, pre-bonus income), thereby directly rewarding performance.

The Company believes that the bonus plan for its named executive officers is similar to the bonus plans at other major homebuilders. Application of the objective performance criteria can produce large bonuses in the event that the Company has (or the relevant region has) high pre-tax, pre-bonus income. The Company believes that large bonuses for its named executive officers are appropriate if the Company has (or the relevant region has) high pre-tax, pre-bonus income, particularly because in recent years the Company has not awarded any options or other equity compensation.

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

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

Deferred Compensation

Until December 2007, the Company maintained Executive Deferral Plans which gave its named executive officers the opportunity to defer a certain percentage of their base salary and bonus. Deferred salary and bonuses were deemed to be invested in one or more hypothetical investment options, which were individually chosen by each named executive officer from a list of investment alternatives. Each named executive officer’s deferred compensation account was adjusted to reflect the investment performance of the selected investment, including any appreciation or depreciation.

On December 26, 2007, the Board of Directors of the Company terminated the William Lyon Homes Executive Deferred Compensation Plan adopted as of February 11, 2002 (the “2002 Plan”), effective January 2, 2008. Upon termination of the 2002 Plan, all benefits thereunder were distributed in one lump sum on January 18, 2008.

In addition, on December 26, 2007, the Board of Directors of the Company amended the William Lyon Homes 2004 Executive Deferred Compensation Plan (the “2004 Plan”). Under this amendment (i) no further deferral elections were allowed under the 2004 Plan and (ii) each participant was deemed to have elected to receive the balance of his or her deferral account under the 2004 Plan in one lump sum distribution. All benefits thereunder were distributed in one lump sum on January 18, 2008.

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

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Summary Compensation Table

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

Name and Principal Position	Year	Salary ($)(1)		Bonus ($)		Stock Awards ($)		Option Awards ($)		Non-Equity Incentive Plan Compensation ($)(1)(2)		Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)		All Other Compensation ($)(3)		Total ($)
General William Lyon Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	2007 2006	$	1,000,000 1,000,000	$	—   —	$	—   —	$	—   —	$	—   4,529,730	$	—   —	$	—   —	$	1,000,000 5,529,730
Michael D. Grubbs Senior Vice President and Chief Financial Officer (Principal Financial Officer)	2007 2006		225,000 225,000		—   —		—   —		—   —		—   754,955		—   —		6,600 6,600		231,600 986,555
Douglas F. Bauer Director, President and Chief Operating Officer	2007 2006		500,000 275,000		—   —		—   —		—   —		—   1,542,893		—   —		6,600 6,600		506,600 1,824,493
W. Thomas Hickcox Senior Vice President and Arizona Region President	2007 2006		200,000 200,000		—   —		—   —		—   —		610,950 1,613,400		—   —		6,600 6,600		817,550 1,820,000
William H. Lyon Director, Executive Vice President and Chief Administrative Officer	2007 2006		350,000 115,000		—   —		—   —		—   —		—   177,475		—   —		6,600 6,600		356,600 299,045

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

(2) The 2007 Senior Executive Bonus Plan (the “Plan”) provides that (i) the Chief Executive Officer (“CEO”) and the Chief Operating Officer (“COO) are each eligible to receive a bonus of 3% of the Company’s consolidated pre-tax, pre-bonus income; (ii) the Executive Vice President (“EVP”) is eligible to receive a bonus of ¾ of 1% of the Company’s consolidated pre-tax, pre-bonus income; and (iii) the Chief Financial Officer (“CFO”) is eligible to receive a bonus of ½ of 1% of the Company’s consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Region President is eligible to receive a bonus of 3% of the region’s pre-tax, pre-bonus income, determined after allocation to the region of its allocable portion of corporate general and administrative expenses. Awards under the Plan will be paid over two years, with 75% paid following the determination of the bonus awards, and 25% paid one year later. The amounts payable one year later are conditioned upon continued employment to the date of payment, except in the case of retirement, death or disability. All awards under the Plan will be prorated downward if the sum of all calculated awards under the Plan and the Company’s 2007 bonus plans for other officers and employees of the Company and its subsidiaries would exceed 20% of the Company’s consolidated pre-tax, pre-bonus income.

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

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

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Officer (“COO”) are each eligible to receive a bonus of 3% of the Company’s pre-tax, pre-bonus income; (ii) the Executive Vice President (“EVP”) is eligible to receive a bonus of ¾ of 1% of the Company’s consolidated pre-tax, pre-bonus income; and (iii) the Chief Financial Officer (“CFO”) is eligible to receive a bonus of ½ of 1% of the Company’s consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Region President is eligible to receive a bonus of 3% of the division’s pre-tax, pre-bonus income, determined after allocation to the division of its allocable portion of corporate general and administrative expenses. All other participants under the Plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income. In addition, the Company’s board of directors has approved a cash bonus plan applicable in 2007 for all of its full-time, salaried employees who are not included in the Company’s 2007 Senior Executive Bonus Plan. All participants under this cash bonus plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income.

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

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

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

Grants of Plan-Based Awards

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

		Estimated Future Payouts Under Non-Equity Incentive Plan Awards						Estimated Future Payouts Under Equity Incentive Plan Awards						All Other Stock Awards: Number of Shares of Stock or Units (#)		All Other Option Awards: Number of Securities Underlying Options (#)		Exercise or Base Price of Option Awards ($ / Sh)		Grant Date Fair Value of Stock and Option Awards ($)
Name	Grant Date	Threshold ($)(3)		Target ($)(1)(2)		Maximum ($)(3)		Threshold (#)		Target (#)		Maximum (#)
General William Lyon	February 26, 2008	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Michael D. Grubbs	February 26, 2008		—		—		—		—		—		—		—		—		—		—
Douglas F. Bauer	February 26, 2008		—		—		—		—		—		—		—		—		—		—
W. Thomas Hickcox	February 26, 2008		—		610,950		—		—		—		—		—		—		—		—
William H. Lyon	February 26, 2008		—		—		—		—		—		—		—		—		—		—

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

(2) The 2007 Senior Executive Bonus Plan (the “Plan”) provides that (i) the Chief Executive Officer (“CEO”) and the Chief Operating Officer (“COO) are each eligible to receive a bonus of 3% of the Company’s consolidated pre-tax, pre-bonus income; (ii) the Executive Vice President (“EVP”) is eligible to receive a bonus of ¾ of 1% of the Company’s consolidated pre-tax, pre-bonus income; and (iii) the Chief Financial Officer (“CFO”) is eligible to receive a bonus of ½ of 1% of the Company’s consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Region President is eligible to receive a bonus of 3% of the region’s pre-tax, pre-bonus income, determined after allocation to the region of its allocable portion of corporate general and administrative expenses. Awards under the Plan will be paid over two years, with

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

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

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

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

Option Exercises and Stock Vested Table

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

Nonqualified Deferred Compensation Table

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

Name	Executive Contributions in Last Fiscal Year ($)(1)		Registrant Contributions in Last Fiscal Year ($)	Aggregate Earnings in Last Fiscal Year ($)		Aggregate Withdrawals/ Distributions ($)	Aggregate Balance at Last Fiscal Year-End ($)(2)(3)
General William Lyon		—	—		—	—		—
Michael D. Grubbs	$	100,000	—	$	68,766	—	$	661,284
Douglas F. Bauer		50,000	—		18,971	—		179,519
W. Thomas Hickcox		—	—		—	—		—
William H. Lyon		—	—		22,578	—		154,118

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

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

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

Executive Deferral Plan

Until December 2007, the Company maintained Executive Deferral Plans which gave its named executive officers the opportunity to defer a certain percentage of their base salary and bonus. Deferred salary and bonuses were deemed to be invested in one or more hypothetical investment options, which were individually chosen by each named executive officer from a list of investment alternatives. Each named executive officer’s deferred compensation account was adjusted to reflect the investment performance of the selected investment, including any appreciation or depreciation.

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On December 26, 2007, the Board of Directors of the Company terminated the William Lyon Homes Executive Deferred Compensation Plan adopted as of February 11, 2002 (the “2002 Plan”), effective January 2, 2008. Upon termination of the 2002 Plan, all benefits thereunder were distributed in one lump sum on January 18, 2008.

In addition, on December 26, 2007, the Board of Directors of the Company amended the William Lyon Homes 2004 Executive Deferred Compensation Plan (the “2004 Plan”). Under this amendment (i) no further deferral elections were allowed under the 2004 Plan and (ii) each participant was deemed to have elected to receive the balance of his or her deferral account under the 2004 Plan in one lump sum distribution. All benefits thereunder were distributed in one lump sum on January 18, 2008.

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

Employees, including executive officers, enter into annual employment agreements which provide that their employment is at-will. The employment agreements with each of General William Lyon, Michael D. Grubbs, Douglas F. Bauer, W. Thomas Hickcox and William H. Lyon provide for an annual salary effective January 1, 2008 of $1,000,000, $225,000, $500,000, $200,000 and $350,000 respectively. Each employment agreement also provides for a monthly automobile allowance of $400, except for General William Lyon. The employment agreements do not provide for any severance or other payments on termination of employment, or in connection with a change in control of the Company.

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

Compensation Committee Interlocks and Insider Participation

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

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on that review and discussion, has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Compensation Committee

Gary H. Hunt, Chairman

Douglas K. Ammerman

Harold H. Greene

Alex Meruelo

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Director Compensation

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

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

Name	Fees Earned or Paid in Cash ($)		Stock Awards ($)	Option Awards ($)	Non-Equity Incentive Plan Compensation ($)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total ($)
Douglas K. Ammerman	$	76,000	—	—	—	—	—	$	76,000
Richard E. Frankel(1)		73,000	—	—	—	—	—		73,000
Harold H. Greene		87,000	—	—	—	—	—		87,000
Lawrence M. Higby(1)		74,000	—	—	—	—	—		74,000
Gary H. Hunt		83,125	—	—	—	—	—		83,125
Arthur B. Laffer(2)		76,875	—	—	—	—	—		76,875
Alex Meruelo		84,500	—	—	—	—	—		84,500

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

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

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

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

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

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

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

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

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

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

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

As of December 31, 2007, the Company had no securities authorized for issuance under compensation plans.

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

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

On December 27, 2007, the Company sold certain land in San Diego County, California for $12,000,000 in cash to a limited liability corporation owned indirectly by Frank T. Suryan, Jr. as Trustee for the Suryan Family Trust. Mr. Suryan is Chairman and Chief Executive Officer of Lyon Capital Ventures, a company wholly owned by Frank T. Suryan, Jr., General William Lyon, Chairman and Chief Executive Officer of the Company, and two

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trusts whose sole beneficiary is William H. Lyon, Executive Vice President and Chief Administrative Officer of the Company. The Company has received a report from a third-party valuation and financial advisory services firm as to the reasonableness of the sales price in the transaction. Further, the transaction was unanimously approved by all independent members of the Board of Directors. Prior to the sale, the net book value of this land (as reflected on the Company’s financial statements) was approximately $18,737,000 resulting in a loss on the transaction of $6,737,000.

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

On October 26, 2000, the Company’s Board of Directors (with Messrs. William Lyon and William H. Lyon abstaining) approved the purchase of 579 lots for a total purchase price of $12,581,000 from an entity controlled by William Lyon and William H. Lyon. In addition to the purchase price, one-half of the net profits in excess of six percent from the development are to be paid to the seller. As of December 31, 2004, all lots were purchased under this agreement and during the year ended December 31, 2007, $8,305,000 was paid to the seller and a total cumulative amount of $14,015,000 has been paid to the seller as of December 31, 2007. This land acquisition qualified as an affiliate transaction under the Company’s 12 ¹/2% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994 (“Indenture”). Pursuant to the terms of the Indenture, the Company determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company delivered to the Trustee under the Indenture a resolution of the Company’s Board of Directors set forth in an Officers’ Certificate certifying that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition was approved by a majority of the disinterested members of the Company’s Board of Directors of the Company. Further, the Company delivered to the Trustee under the Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.

Purchase of Land from Joint Ventures.

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

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

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

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

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

Charges Incurred Related to the Charter and Use of Aircraft.

Effective September 1, 2004, the Company entered into an aircraft consulting and management agreement with an affiliate (the “Affiliate”) of William Lyon to operate and manage the Company’s aircraft. The terms of the agreement provide that the Affiliate shall consult and render its advice and management services to the

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

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

Mortgage Loans.

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

Finder’s Fee Agreement.

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

Certain Family Relationships.

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

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Terry A. Connelly, who is Senior Vice President and Director of Operations of the Company’s Nevada Region, is married to Mary J. Connelly, President of the Nevada Region. In 2007, Mr. Connelly received a base salary of $160,000 and a monthly car allowance of $400 from the Company. Mr. Connelly earned a bonus of $177,000 in 2007.

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

Director Independence

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

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

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

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

Item 14.    Principal Accountant Fees and Services

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

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

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

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

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

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

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a)(1)  Financial Statements

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

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

(2)  Financial Statement Schedules:

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

(3)  Listing of Exhibits:

Exhibit Number	Description
3.1(2)	Certificate of Incorporation of William Lyon Homes, a Delaware corporation.
3.2(1)	Certificate of Ownership and Merger.
3.3(35)	Certificate of Ownership and Merger.
3.4(35)	Certificate of Amendment of Certificate of Incorporation.
3.5(2)	Bylaws of William Lyon Homes, a Delaware corporation.
4.1(23)	Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.2(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.3(24)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.4(3)	Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.5(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).

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

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Exhibit Number	Description
10.10(7)	Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.11(3)	Agreement for Sixth Modification of Deeds of Trust and Other Loan Agreements, dated as of November 14, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.12(12)	Agreement for Seventh Modification of Deeds of Trust and Other Loan Instruments dated as of October 6, 2004 by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.13(24)	Agreement for Eighth Modification of Deeds of Trust and Other Loan Instruments dated as of October 14, 2005 by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.14(34)	Agreement for Ninth Modification of Deeds of Trust and Other Loan Instruments dated as of October 31, 2006 by and between William Lyon Homes, Inc., a California corporation, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.15(4)	Revolving Line of Credit Loan Agreement (Borrowing Base Loan) by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation, dated as of September 21, 2000.
10.16(17)	Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of September 18, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.17(5)	Second Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of December 13, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.18(3)	Third Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of January 26, 2004, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.19(11)	Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation.
10.20(25)	First Amendment to Amended and Restated Revolving Line of Credit Loan Agreement, dated as of July 19, 2005, by and between William Lyon Homes, Inc. and California Bank & Trust.
10.21(31)	Second Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation.
10.22(39)	Third Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of December 28, 2007, by and between William Lyon Homes, Inc., a California corporation and California Bank & Trust, a California banking corporation.
10.23(39)	Fourth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of January 17, 2008 by and between William Lyon Homes, Inc., a California corporation and California Bank & Trust, a California banking corporation.
10.24(7)	Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as Lender.
10.25(10)	Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2004 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as Lender.

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Exhibit Number	Description
10.26(29)	Mortgage Warehouse Loan and Security Agreement dated June 29, 2006 by and between Duxford Financial, Inc. dba William Lyon Financial Services and/or Bayport Mortgage, L.P. and/or California Pacific Mortgage, L.P., as Borrower and First Tennessee Bank as Lender.
10.27(8)	Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.28(3)	Amendment No. 1 to Credit Agreement dated as of January 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.29(15)	First Amendment to Credit Agreement dated as of August 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.30(13)	Amendment No. 2 to Credit Agreement dated as of November 15, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.31(9)	Revolving Line of Credit Loan Agreement, dated as of March 11, 2003, by and among Moffett Meadows Partners, LLC, a Delaware limited liability company, as borrower, and California Bank & Trust, a California banking corporation, and the other financial institutions named therein, as lenders.
10.32(9)	Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware corporation.
10.33(10)	Borrowing Base Revolving Line of Credit Agreement, dated as of June 28, 2004, by and between William Lyon Homes, Inc., a California corporation, and Bank One, NA, a national banking association.
10.34(15)	Modification Agreement, dated as of December 7, 2004, by and between William Lyon Homes, Inc., a California corporation, and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA, a national banking association).
10.35(25)	Second Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of July 14, 2005, between William Lyon Homes, Inc. and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA).
10.36(33)	Third Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated October 23, 2006 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase Bank, N.A., a National Banking Association.
10.37(36)	Fifth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated November 6, 2007 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase Bank, N.A., a national banking association.
10.38(39)	Sixth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated February 20, 2008 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase Bank, N.A., a national banking association.
10.39(18)	Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.
10.40(18)	Property Management Agreement between Corporate Enterprises, Inc., a California corporation (Owner) and William Lyon Homes, Inc., a California corporation (Manager) dated and effective November 5, 1999.
10.41(18)	Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5, 1999.
10.42(4)	Option Agreement and Escrow Instructions between William Lyon Homes, Inc., a California corporation and Lathrop Investment, L.P., a California limited partnership, dated as of October 24, 2000.
10.43(26)	Adjustment of Salary of Douglas F. Bauer.
10.44(35)	Description of 2006 Cash Bonus Plan.
10.45(35)	2006 Senior Executive Bonus Plan.
10.46(35)	Description of 2007 Cash Bonus Plan.
10.47(35)	2007 Senior Executive Bonus Plan.

76

Exhibit Number	Description
10.48(19)	Standard Industrial/Commercial Single-Tenant Lease – Net between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.
10.49(20)	William Lyon Homes Executive Deferred Compensation Plan effective as of February 11, 2002.
10.50(21)	William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002.
10.51(5)	The Presley Companies Non-Qualified Retirement Plan for Outside Directors.
10.52(16)	William Lyon Homes 2004 Executive Deferred Compensation Plan.
10.53(16)	William Lyon Homes 2004 Outside Directors Deferred Compensation Plan.
10.54(27)	Summary of Director Compensation.
10.55(27)	Borrowing Base Revolving Line of Credit Agreement, dated as of February 14, 2006, by and between William Lyon Homes, Inc., a California corporation, and Wachovia Financial Services, Inc, a North Carolina corporation, by and through its Agent, Wachovia Bank, National Association, a national banking association.
10.56(32)	First Amendment to Borrowing Base Revolving Line of Credit Agreement dated September 29, 2006 by and between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National Association, a national banking association.
10.57(39)	Third Amendment to Borrowing Base Revolving Line of Credit Agreement dated January 23, 2008 between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National Association, a national banking association, formerly referenced as Agent for Wachovia Financial Services, Inc., a North Carolina corporation.
10.58(30)	Borrowing Base Revolving Line of Credit Agreement dated as of July 10, 2006 by and between William Lyon Homes, Inc., a California corporation, and California National Bank.
10.59(37)	Extension and Modification Agreement dated as of August 2, 2007 by and between William Lyon Homes, Inc., a California corporation, and California National Bank
10.60(28)	Revolving Line of Credit Loan Agreement dated as of March 8, 2006 by and between William Lyon Homes, Inc., a California corporation, and Comerica Bank.
10.61(39)	Amendment Agreement entered into as of February 28, 2008, by and between William Lyon Homes, Inc., a California corporation and Comerica Bank
10.62(38)	Loan Agreement dated as of January 30, 2007, by and between East Garrison Partners I, a California limited liability company, and Residential Funding Company, LLC, a Delaware limited liability company.
10.63(38)	Completion Guaranty dated as of January 30, 2007, by and between William Lyon Homes, Inc., a California corporation, and other guarantors in favor of Residential Funding Company, LLC.
10.64(39)	First Amendment to Loan Agreement dated as of February 25, 2008, but effective as of December 31, 2007, by and between East Garrison Partners I, LLC, a California limited liability company, and RFC Construction Funding, LLC, a Delaware limited liability company, as successor in interest to and assignee of Residential Funding Company, LLC., a Delaware limited liability company.
12.1(39)	Statement of computation of ratio of earnings to fixed charges.
21.1(39)	List of Subsidiaries of William Lyon Homes, a Delaware corporation.
31.1(39)	Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2(39)	Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1(39)	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32.2(39)	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

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

77

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

78

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

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

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

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

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

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

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

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

(36) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on November 15, 2007 and incorporated herein by reference.

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

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

(39) Filed herewith.

79

SIGNATURES

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

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

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

Name	Title	Date
/S/    WILLIAM LYON       William Lyon	Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)	March 7, 2008
/S/    DOUGLAS F. BAUER       Douglas F. Bauer	Director, President and Chief Operating Officer	March 7, 2008
/S/    WILLIAM H. LYON       William H. Lyon	Director, Executive Vice President and Chief Administrative Officer	March 7, 2008
/S/    DOUGLAS K. AMMERMAN       Douglas K. Ammerman	Director	March 7, 2008
/S/    HAROLD H. GREENE       Harold H. Greene	Director	March 7, 2008
/S/    GARY H. HUNT       Gary H. Hunt	Director	March 7, 2008
/S/    ALEX MERUELO       Alex Meruelo	Director	March 7, 2008
/S/    MICHAEL D. GRUBBS       Michael D. Grubbs	Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)	March 7, 2008
/S/    W. DOUGLASS HARRIS       W. Douglass Harris	Senior Vice President, Corporate Controller and Corporate Secretary (Principal Accounting Officer)	March 7, 2008

80

INDEX TO FINANCIAL STATEMENTS

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

REQUIRED SCHEDULES

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

81

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

William Lyon Homes

We have audited the accompanying consolidated balance sheets of William Lyon Homes as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of William Lyon Homes at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

/S/    ERNST & YOUNG LLP

Irvine, California

February 26, 2008

82

WILLIAM LYON HOMES

CONSOLIDATED BALANCE SHEETS

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

	December 31,
	2007		2006
ASSETS
Cash and cash equivalents	$	73,197	$	38,732
Receivables — Note 3		45,267		119,491
Real estate inventories — Notes 2 and 4
Owned		1,061,660		1,431,753
Not owned		144,265		200,667
Investments in and advances to unconsolidated joint ventures — Note 5		4,671		3,560
Property and equipment, less accumulated depreciation of $12,093 and $12,465 at December 31, 2007 and 2006, respectively		16,092		16,828
Deferred loan costs		9,645		11,258
Goodwill — Note 1		5,896		5,896
Other assets		14,635		50,410
	$	1,375,328	$	1,878,595
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	40,890	$	48,592
Accrued expenses		67,786		111,871
Liabilities from inventories not owned		113,395		131,564
Notes payable — Note 6		266,932		304,096
7 5/8% Senior Notes due December 15, 2012 — Note 6		150,000		150,000
10 3/4% Senior Notes due April 1, 2013 — Note 6		247,553		247,218
7 1/2% Senior Notes due February 15, 2014 — Note 6		150,000		150,000
		1,036,556		1,143,341
Minority interest in consolidated entities — Note 2		56,009		109,859
Commitments and contingencies — Note 11
Stockholders’ equity — Note 8
Common stock, par value $.01 per share; 3,000 shares authorized; 1,000 shares outstanding at December 31, 2007 and 2006		—		—
Additional paid-in capital		48,867		43,213
Retained earnings		233,896		582,182
		282,763		625,395
	$	1,375,328	$	1,878,595

See accompanying notes.

83

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

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

See accompanying notes.

84

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

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

See accompanying notes.

85

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

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

See accompanying notes.

86

WILLIAM LYON HOMES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)

	Year Ended December 31,
	2007			2006			2005
Supplemental disclosures of non-cash activities:
Issuance of notes payable for land acquisitions	$	—		$	20,625		$	11,686
Issuance of note payable to secure land option agreement	$	—		$	—		$	4,709
Net real estate inventories not owned	$	(56,402	)	$	84,895		$	115,771
Consolidation of other assets and minority interest from variable interest entities	$	—		$	(8,404	)	$	8,404
Net liabilities from inventories not owned	$	18,169		$	(131,564	)	$	—
Net minority interests	$	38,233		$	55,073		$	(124,175	)
Income tax benefit credited to additional paid-in capital in connection with stock option exercises and other	$	—		$	5,459		$	2,997
Net change in assets from previously consolidated joint venture	$	2,196		$	—		$	—
Net change in liabilities from previously consolidated joint venture	$	626		$	—		$	—
Reduction of notes payable and real estate inventories-owned from reconveyance of land to land seller	$	10,021		$	—		$	—
Income tax benefit credited to additional paid-in capital and retained earnings	$	6,776		$	—		$	—
Consolidation of net assets from purchase of partner’s interest in unconsolidated joint venture	$	41,778		$	—		$	—
Consolidation of net liabilities from purchase of partner’s interest in unconsolidated joint venture	$	40,294		$	—		$	—

See accompanying notes.

87

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies

Operations

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

Basis of Presentation

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

Segment Information

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

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

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

Real Estate Inventories and Related Indebtedness

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

88

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Interest incurred under the Revolving Credit Facilities, the 7 ⁵/8% Senior Notes, the 10 ³/4% Senior Notes, the 7 ¹/2% Senior Notes and other notes payable, as more fully discussed in Note 6, is capitalized to qualifying real estate projects under development. Any additional interest charges related to real estate projects not under development are expensed in the period incurred.

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

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

The results of operations for the year ended December 31, 2007 and 2006, include non-cash charges of $231,120,000 and $39,895,000, respectively, to record impairment losses on real estate assets held by the Company at certain of its homebuilding projects. The impairments were primarily attributable to slower than anticipated home sales and lower than anticipated net revenue due to softening market conditions. As a result, the future undiscounted cash flows estimated to be generated were determined to be less than the carrying amount of the assets. Accordingly, the related real estate assets were written-down to their estimated fair value. The non-cash charges are reflected in impairment loss on real estate assets in the accompanying consolidated statements of operations.

89

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Property and Equipment

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

Deferred Loan Costs

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

Goodwill

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

Sales and Profit Recognition

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

Income Taxes

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

90

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Financial Instruments

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

For those instruments, as defined under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, for which it is practical to estimate fair value, management has determined that the carrying amounts of the Company’s financial instruments approximate their fair value at December 31, 2007, except for the 10 ³/4% Senior Notes, 7 ¹/2% Senior Notes and 7 ⁵/8% Senior Notes as described in Note 6.

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

Cash and Cash Equivalents

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

Earnings Per Common Share

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

Use of Estimates

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

Impact of New Accounting Pronouncements

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

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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

Reclassifications

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

Note 2 — Consolidation of Variable Interest Entities

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

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

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

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

93

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)

	December 31, 2007
	Wholly- Owned		Variable Interest Entities Under Interpretation No. 46		Eliminating Entries			Consolidated Total
ASSETS
Cash and cash equivalents	$	64,357	$	8,840	$	—		$	73,197
Receivables		45,262		5		—			45,267
Real estate inventories
Owned		906,254		155,406		—			1,061,660
Not owned		113,395		30,870		—			144,265
Investments in and advances to unconsolidated joint ventures		4,671		—		—			4,671
Investments in consolidated entities		52,211		—		(52,211	)		—
Other assets		46,268		—		—			46,268
Intercompany receivables		1,853		—		(1,853	)		—
	$	1,234,271	$	195,121	$	(54,064	)	$	1,375,328
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	100,039	$	8,637	$	—		$	108,676
Liabilities from inventories not owned		113,395		—		—			113,395
Notes payable		190,521		76,411		—			266,932
7 5/8% Senior Notes due December 15, 2012		150,000		—		—			150,000
10 3/4% Senior Notes due April 1, 2013		247,553		—		—			247,553
7 1/2% Senior Notes due February 15, 2014		150,000		—		—			150,000
Intercompany payables		—		1,853		(1,853	)		—
Total liabilities		951,508		86,901		(1,853	)		1,036,556
Minority interest in consolidated entities		—		—		56,009			56,009
Owners’ capital
William Lyon Homes		—		52,211		(52,211	)		—
Others		—		56,009		(56,009	)		—
Stockholders’ equity		282,763		—		—			282,763
	$	1,234,271	$	195,121	$	(54,064	)	$	1,375,328

94

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET BY FORM OF OWNERSHIP

(in thousands)

	December 31, 2006
	Wholly- Owned		Variable Interest Entities Under Interpretation No. 46		Eliminating Entries			Consolidated Total
ASSETS
Cash and cash equivalents	$	24,123	$	14,609	$	—		$	38,732
Receivables		118,260		1,231		—		$	119,491
Real estate inventories
Owned		1,248,735		183,018		—			1,431,753
Not owned		131,564		69,103		—			200,667
Investments in and advances to unconsolidated joint ventures		3,560		—		—			3,560
Investments in consolidated entities		76,833		—		(76,833	)		—
Other assets		84,392		—		—			84,392
Intercompany receivables		—		3,367		(3,367	)		—
	$	1,687,467	$	271,328	$	(80,200	)	$	1,878,595
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	146,286	$	14,177	$	—		$	160,463
Liabilities from inventories not owned		131,564		—		—			131,564
Notes payable		233,688		70,408		—			304,096
7 5/8% Senior Notes due December 15, 2012		150,000		—		—			150,000
10 3/4% Senior Notes due April 1, 2013		247,218		—		—			247,218
7 1/2% Senior Notes due February 15, 2014		150,000		—		—			150,000
Intercompany payables		3,316		51		(3,367	)		—
Total liabilities		1,062,072		84,636		(3,367	)		1,143,341
Minority interest in consolidated entities		—		—		109,859			109,859
Owners’ capital
William Lyon Homes		—		76,833		(76,833	)		—
Others		—		109,859		(109,859	)		—
Stockholders’ equity		625,395		—		—			625,395
	$	1,687,467	$	271,328	$	(80,200	)	$	1,878,595

95

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)

	Year Ended December 31, 2007
	Wholly- Owned			Variable Interest Entities Under Interpretation No. 46			Elimination Entries			Consolidated Total
Operating revenue
Sales	$	1,010,732		$	111,967		$	(17,342	)	$	1,105,357
Management fees		3,123			—			(3,123	)		—
		1,013,855			111,967			(20,465	)		1,105,357
Operating costs
Cost of sales		(1,010,146	)		(89,150	)		20,465			(1,078,831	)
Impairment loss on real estate assets		(231,120	)		—			—			(231,120	)
Sales and marketing		(60,965	)		(5,738	)		—			(66,703	)
General and administrative		(37,460	)		(12	)		—			(37,472	)
Other		(903	)		—			—			(903	)
		(1,340,594	)		(94,900	)		20,465			(1,415,029	)
Equity in income of unconsolidated joint ventures		304			—			—			304
Equity in income of consolidated entities		6,298			—			(6,298	)		—
Minority equity in income of consolidated entities		—			—			(11,126	)		(11,126	)
Operating (loss) income		(320,137	)		17,067			(17,424	)		(320,494	)
Other income, net		3,387			357			—			3,744
(Loss) income before provision for income taxes		(316,750	)		17,424			(17,424	)		(316,750	)
Provision for income taxes		(32,658	)		—			—			(32,658	)
Net (loss) income	$	(349,408	)	$	17,424		$	(17,424	)	$	(349,408	)

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)

	Year Ended December 31, 2006
	Wholly-Owned			Variable Interest Entities Under Interpretation No. 46			Eliminating Entries			Consolidated Total
Operating revenue
Sales	$	1,289,338		$	202,883		$	—		$	1,492,221
Management fees		5,011			—			(5,011	)		—
		1,294,349			202,883			(5,011	)		1,492,221
Operating costs
Cost of sales		(1,022,443	)		(159,706	)		5,011			(1,177,138	)
Impairment loss on real estate assets		(39,895	)		—			—			(39,895	)
Sales and marketing		(64,073	)		(8,276	)		—			(72,349	)
General and administrative		(61,367	)		(23	)		—			(61,390	)
Other		(6,502	)		—			—			(6,502	)
		(1,194,280	)		(168,005	)		5,011			(1,357,274	)
Equity in income of unconsolidated joint ventures		3,242			—			—			3,242
Equity in income of consolidated entities		18,491			—			(18,491	)		—
Minority equity in income of consolidated entities		—			—			(16,914	)		(16,914	)
Operating income		121,802			34,878			(35,405	)		121,275
Financial advisory expenses		(3,165	)		—			—			(3,165	)
Other income, net		5,072			527			—			5,599
Income before provision for income taxes		123,709			35,405			(35,405	)		123,709
Provision for income taxes		(48,931	)		—			—			(48,931	)
Net income	$	74,778		$	35,405		$	(35,405	)	$	74,778

97

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS BY FORM OF OWNERSHIP

(in thousands)

	Year Ended December 31, 2005
	Wholly-Owned			Variable Interest Entities Under Interpretation No. 46			Eliminating Entries			Consolidated Total
Operating revenue
Sales	$	1,449,524		$	406,859		$	—		$	1,856,383
Management fees		12,658			—			(12,658	)		—
		1,462,182			406,859			(12,658	)		1,856,383
Operating costs
Cost of sales		(1,057,535	)		(306,924	)		12,658			(1,351,801	)
Impairment loss on real estate assets		(4,600	)		—			—			(4,600	)
Sales and marketing		(46,480	)		(12,942	)		—			(59,422	)
General and administrative		(90,045	)		—			—			(90,045	)
Other		(2,450	)		—			—			(2,450	)
		(1,201,110	)		(319,866	)		12,658			(1,508,318	)
Equity in income of unconsolidated joint ventures		4,301			—			—			4,301
Equity in income of consolidated entities		50,009			—			(50,009	)		—
Minority equity in income of consolidated entities		—			—			(37,571	)		(37,571	)
Operating income		315,382			86,993			(87,580	)		314,795
Financial advisory expenses		(2,191	)		—			—			(2,191	)
Other income, net		1,589			587			—			2,176
Income before provision for income taxes		314,780			87,580			(87,580	)		314,780
Provision for income taxes		(124,149	)		—			—			(124,149	)
Net income	$	190,631		$	87,580		$	(87,580	)	$	190,631

98

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3 — Receivables

Receivables consist of the following (in thousands):

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

Note 4 — Real Estate Inventories

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

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

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

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

During 2007 and 2008, in response to the slow-down in the homebuilding industry, the Company entered into certain land sales transactions to improve its liquidity and to reduce its overall debt. On December 26, 2007 and January 7, 2008, the Company entered into ten separate agreements with various affiliates of one of its equity partners (the “Equity Partner Agreements”). Pursuant to the Equity Partner Agreements, the Company agreed to sell to the equity partner affiliates 604 residential lots and 5 model homes in 10 communities in Orange County, San Diego, County and Ventura County, California for an aggregate purchase price of $90,650,000 in cash. The purchase and sale of 404 of the residential lots and the 5 model homes closed on December 27, 2007 (for an aggregate consideration of approximately $65,929,000 and the remainder of the residential lots closed on

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

January 9, 2008. Prior to the sale, the collective net book value of these lots (as reflected on the Company’s financial statements) was approximately $210,739,000, resulting in a total loss on the sales transactions of $120,089,000. The loss of $40,282,000 related to the portion of the land sales which closed in January 2008 has been reflected in the Consolidated Statement of Operations as Impairment Losses on Real Estate Assets for the year ended December 31, 2007. The Company may consider entering into future agreements with the various affiliates of the equity partner to build and market homes in 5 of the 10 communities on behalf of the affiliates. For such services, the Company would receive fees and may, under certain circumstances, receive additional compensation if certain financial thresholds are achieved. Certain of the equity partner affiliates have an option to acquire an additional 23 model homes in 6 of the 10 communities.

On December 27, 2007, the Company sold certain land in San Diego County, California for $12,000,000 in cash to a limited liability corporation owned indirectly by Frank T. Suryan, Jr., as Trustee of the Suryan Family Trust. Mr. Suryan is Chairman and Chief Executive Officer of Lyon Capital Ventures, a company wholly-owned by Frank T. Suryan, Jr., General William Lyon, Chairman and Chief Executive Officer of the Company, and two trusts whose sole beneficiary is William H. Lyon, Executive Vice President and Chief Administrative Officer of the Company. The Company has received a report from a third-party valuation and financial advisory services firm as to the reasonableness of the sales price in the transaction. Further, the transaction was unanimously approved by all independent members of the Board of Directors. Prior to the sale, the net book value of this land (as reflected on the Company’s financial statements) was approximately $18,737,000 resulting in a loss on the transaction of $6,737,000.

100

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

CONDENSED COMBINED BALANCE SHEETS

(In thousands)

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

101

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONDENSED COMBINED STATEMENTS OF INCOME

(In thousands)

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

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

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

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

102

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 6 — Notes Payable and Senior Notes

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

	December 31,
	2007		2006
Notes payable:
Revolving credit facilities	$	139,642	$	145,990
Construction notes payable		115,836		70,408
Seller financing		—		28,339
Collateralized mortgage obligations under revolving mortgage warehouse credit facilities, secured by first trust deed mortgage notes receivable		11,454		59,359
		266,932		304,096
Senior Notes:
7 5/8% Senior Notes due December 15, 2012		150,000		150,000
10 3/4% Senior Notes due April 1, 2013		247,553		247,218
7 1/2% Senior Notes due February 15, 2014		150,000		150,000
		547,553		547,218
	$	814,485	$	851,314

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

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

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

7 ⁵/8% Senior Notes

On November 22, 2004, the Company’s 100% owned subsidiary, William Lyon Homes, Inc., a California corporation, (“California Lyon”) closed its offering of $150,000,000 principal amount of 7 ⁵/8% Senior Notes due 2012 (the “7 ⁵/8% Senior Notes”). The notes were sold pursuant to Rule 144A. The notes were issued at par, resulting in net proceeds to the Company of approximately $148,500,000. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes having substantially identical terms. On January 12, 2005, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an offer to exchange any and all of its outstanding $150,000,000 aggregate principal amount of 7 ⁵/8% Senior Notes due 2012, which are not registered under the Securities Act of 1933, for a like amount of its new 7 ⁵/8% Senior Notes due 2012, which are registered under the Securities Act of 1933, upon the terms and subject to the conditions set

103

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

forth in the prospectus dated January 12, 2005. The exchange offer was completed for $146,500,000 principal amount of the 7 ⁵ /8% Senior Notes on February 18, 2005. The remaining $3,500,000 principal amount of the old notes remains outstanding. The terms of the new notes are identical in all material respects to those of the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. Interest on the 7 ⁵/ 8% Senior Notes is payable semi-annually on December 15 and June 15 of each year. Based on the current outstanding principal amount of the 7 ⁵/8% Senior Notes, the Company’s semi-annual interest payments are $5,700,000.

Except as set forth in the Indenture governing the 7 ⁵/8% Senior Notes (“7 ⁵/8% Senior Notes Indenture”), the 7 ⁵/8% Senior Notes are not redeemable prior to December 15, 2008. Thereafter, the 7 ⁵/8% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.

As of December 31, 2007, the outstanding 7 ⁵/8% Senior Notes with a face value of $150,000,000 had a fair value of approximately $90,000,000 based on quotes from industry sources.

10 ³/4% Senior Notes

California Lyon filed a Registration Statement on Form S-3 with the Securities and Exchange Commission for the sale of $250,000,000 of Senior Notes due 2013 (the “10 ³/4% Senior Notes”) which became effective on March 12, 2003. The offering closed on March 17, 2003 and was fully subscribed and issued. The notes were issued at a price of 98.493% to the public, resulting in net proceeds to the Company of approximately $246,233,000. The purchase price reflected a discount to yield 11% under the effective interest method and the notes have been reflected net of the unamortized discount in the accompanying consolidated balance sheet. Interest on the 10 ³/4% Senior Notes is payable on April 1 and October 1 of each year. Based on the current outstanding principal amount of the 10 ³/4% Senior Notes, the Company’s semi-annual interest payments are $13,400,000.

Except as set forth in the Indenture governing the 10 ³/4% Senior Notes (“10 ³/4% Senior Notes Indenture”), the 10 ³/4% Senior Notes are not redeemable prior to April 1, 2008. Thereafter, the 10 ³/4% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.

As of December 31, 2007, the outstanding 10 ³/4% Senior Notes with a face value of $247,553,000 had a fair value of approximately $157,500,000 based on quotes from industry sources.

7 ¹/2% Senior Notes

On February 6, 2004, California Lyon closed its offering of $150,000,000 principal amount of 7 ¹/2% Senior Notes due 2014 (the “7 ¹/2% Senior Notes”). The notes were sold pursuant to Rule 144A and outside the United States to non-U.S. persons in reliance on Regulation S. The notes were issued at par, resulting in net proceeds to the Company of approximately $147,600,000. California Lyon agreed to file a registration statement with the Securities and Exchange Commission relating to an offer to exchange the notes for publicly tradeable notes having substantially identical terms. On July 16, 2004, the Securities and Exchange Commission declared the registration statement effective and California Lyon commenced an offer to exchange any and all of its outstanding $150,000,000 aggregate principal amount of 7 ¹/2% Senior Notes due 2014, which are not registered under the Securities Act of 1933, for a like amount of its new 7 ¹/2% Senior Notes due 2014, which are registered under the Securities Act of 1933, upon the terms and subject to the conditions set forth in the prospectus dated

104

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

July 16, 2004. The exchange offer was completed for the full principal amount of the 7 ¹/2% Senior Notes on August 17, 2004. The terms of the new notes are identical in all material respects to those of the old notes, except for certain transfer restrictions, registration rights and liquidated damages provisions relating to the old notes. The new notes have been listed on the New York Stock Exchange. Interest on the 7 ¹/2% Senior Notes is payable on February 15 and August 15 of each year. Based on the current outstanding principal amount of 7 ¹/2% Senior Notes the Company’s semi-annual interest payments are $5,600,000.

Except as set forth in the Indenture governing the 7 ¹/2% Senior Notes (“7 ¹/2% Senior Notes Indenture”), the 7 ¹/2% Senior Notes are not redeemable prior to February 15, 2009. Thereafter, the 7 ¹/2% Senior Notes will be redeemable at the option of California Lyon, in whole or in part, at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued and unpaid interest, if any.

As of December 31, 2007, the outstanding 7 ¹/ 2% Senior Notes with a face value of $150,000,000 had a fair value of approximately $87,000,000 based on quotes from industry sources.

* * * * *

The 7 ⁵/8% Senior Notes, the 10 ³/4% Senior Notes and the 7 ¹/2% Senior Notes (collectively, the “Senior Notes”) are senior unsecured obligations of California Lyon and are unconditionally guaranteed on a senior unsecured basis by William Lyon Homes, a Delaware corporation (“Delaware Lyon”), which is the parent company of California Lyon, and all of Delaware Lyon’s existing and certain of its future restricted subsidiaries. The Senior Notes and the guarantees rank senior to all of the Company’s and the guarantors’ debt that is expressly subordinated to the Senior Notes and the guarantees, but are effectively subordinated to all of the Company’s and the guarantors’ senior secured indebtedness to the extent of the value of the assets securing that indebtedness.

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

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

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

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

105

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

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

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

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

106

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2007

(in thousands)

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

107

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2006

(in thousands)

	Unconsolidated
	Delaware Lyon		California Lyon		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated Company
ASSETS
Cash and cash equivalents	$	—	$	12,253	$	11,222	$	15,257	$	—		$	38,732
Receivables		—		56,084		62,174		1,233		—			119,491
Real estate inventories
Owned		—		1,246,889		1,846		183,018		—			1,431,753
Not owned		—		200,667		—		—		—			200,667
Investments in and advances to unconsolidated joint ventures		—		3,560		—		—		—			3,560
Property and equipment, net		—		2,493		14,335		—		—			16,828
Deferred loan costs		—		11,258		—		—		—			11,258
Goodwill		—		5,896		—		—		—			5,896
Other assets		—		47,724		2,686		—		—			50,410
Investments in subsidiaries		625,395		77,281		8,502		—		(711,178	)		—
Intercompany receivables		—		1,138		169,983		3,367		(174,488	)		—
	$	625,395	$	1,665,243	$	270,748	$	202,875	$	885,666		$	1,878,595
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	—	$	33,301	$	1,084	$	14,207	$	—		$	48,592
Accrued expenses		—		104,501		7,198		172		—			111,871
Liabilities from inventories not owned		—		131,564		—		—		—			131,564
Notes payable		—		174,329		59,359		70,408		—			304,096
7 5/8% Senior Notes		—		150,000		—		—		—			150,000
10 3/4% Senior Notes		—		247,218		—		—		—			247,218
7 1/2% Senior Notes		—		150,000		—		—		—			150,000
Intercompany payables		—		173,299		1,138		51		(174,488	)		—
Total liabilities		—		1,164,212		68,779		84,838		(174,488	)		1,143,341
Minority interest in consolidated entities		—		—		—		—		109,859			109,859
Stockholders’ equity		625,395		501,031		201,969		118,037		(821,037	)		625,395
	$	625,395	$	1,665,243	$	270,748	$	202,875	$	885,666		$	1,878,595

108

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2007

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Company
Operating revenue
Sales	$	—		$	885,284		$	115,714		$	121,701		$	(17,342	)	$	1,105,357
Management fees		—			3,123			—			—			(3,123	)		—
		—			888,407			115,714			121,701			(20,465	)		1,105,357
Operating costs
Cost of sales		—			(908,201	)		(92,518	)		(98,577	)		20,465			(1,078,831	)
Impairment loss on real estate assets		—			(231,120	)		—			—			—			(231,120	)
Sales and marketing		—			(53,192	)		(6,481	)		(7,030	)		—			(66,703	)
General and administrative		—			(37,083	)		(375	)		(14	)		—			(37,472	)
Other		—			(795	)		(108	)		—			—			(903	)
		—			(1,230,391	)		(99,482	)		(105,621	)		20,465			(1,415,029	)
Equity in income (loss) of unconsolidated joint ventures		—			676			(372	)		—			—			304
(Loss) income from subsidiaries		(349,408	)		20,034			191			—			329,183			—
Minority equity in income of consolidated entities		—			—			—			—			(11,126	)		(11,126	)
Operating (loss) income		(349,408	)		(321,274	)		16,051			16,080			318,057			(320,494	)
Other income (expense), net		—			(247	)		3,551			440			—			3,744
(Loss) income before provision for income taxes		(349,408	)		(321,521	)		19,602			16,520			318,057			(316,750	)
Provision for income taxes		—			(32,645	)		—			(13	)		—			(32,658	)
Net (loss) income	$	(349,408	)	$	(354,166	)	$	19,602		$	16,507		$	318,057		$	(349,408	)

109

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2006

(in thousands)

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

110

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Year Ended December 31, 2005

(in thousands)

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

111

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2007

(in thousands)

	Unconsolidated
	Delaware Lyon			California Lyon			Guarantor Subsidiaries			Non-Guarantor     Subsidiaries			Eliminating Entries			Consolidated Company
Operating activities:
Net (loss) income	$	(349,408	)	$	(354,166	)	$	19,602		$	16,507		$	318,057		$	(349,408	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		—			1,002			1,458			—			—			2,460
Impairment loss on real estate assets		—			231,120			—			—			—			231,120
Equity in (income) loss of unconsolidated joint ventures		—			(676	)		372			—			—			(304	)
Equity in earnings (loss) of subsidiaries		349,408			(20,034	)		(191	)		—			(329,183	)		—
Minority equity in income of consolidated entities		—			—			—			—			11,126			11,126
Provision for income taxes		—			32,645			—			13			—			32,658
Net changes in operating assets and liabilities:
Receivables		—			30,880			49,273			1,212			—			81,365
Intercompany receivables/payables		—			38,233			(22,731	)		(648	)		(14,854	)		—
Real estate inventories-owned		—			153,234			1,846			19,238			—			174,318
Deferred loan costs		—			1,613			—			—			—			1,613
Other assets		—			2,819			294			—			—			3,113
Accounts payable		—			(2,040	)		(693	)		(6,736	)		—			(9,469	)
Accrued expenses		—			(42,357	)		(3,705	)		1,983			—			(44,079	)
Net cash provided by (used in) operating activities		—			72,273			45,525			31,569			(14,854	)		134,513
Investing activities:
Net change in investments in and advances to unconsolidated joint ventures		—			(5,639	)		(372	)		—			—			(6,011	)
Net cash paid for purchase of partner’s interest in unconsolidated joint venture		—			(1,484	)		—			—			—			(1,484	)
Purchases of property and equipment		—			(143	)		(623	)		—			—			(766	)
Investment in subsidiaries		—			29,885			—			—			(29,885	)		—
Advances from (to) affiliates		—			(27,967	)		—			—			27,967			—
Net cash used in investing activities		—			(5,348	)		(995	)		—			(1,918	)		(8,261	)
Financing activities:
Proceeds from borrowings on notes payable		—			894,199			799,498			6,003			—			1,699,700
Principal payments on notes payable		—			(917,965	)		(847,403	)		—			—			(1,765,368	)
Minority interest (distributions) contributions, net		—			—			—			—			(26,119	)		(26,119	)
Advances from (to) affiliates		—			—			(916	)		(41,975	)		42,891			—
Net cash (used in) provided by financing activities		—			(23,766	)		(48,821	)		(35,972	)		16,772			(91,787	)
Net increase in cash and cash equivalents		—			43,159			(4,291	)		(4,403	)		—			34,465
Cash and cash equivalents at beginning of year		—			12,253			11,222			15,257			—			38,732
Cash and cash equivalents at end of year	$	—		$	55,412		$	6,931		$	10,854		$	—		$	73,197

112

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2006

(in thousands)

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

113

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2005

(in thousands)

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

114

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Revolving Credit Facilities

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

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

Loan Commitment Amount (in thousands)	Balance Outstanding at December 31, 2007 (in thousands)	Initial Maturity Date(1)
$  30,000	$  10,600	May 2008
50,000	9,700	July 2008
50,000	25,300	September 2008
100,000	31,400	September 2008
60,000	25,200	December 2008
35,000	100	April 2009
70,000	37,300	June 2009
$395,000	$139,600

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

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

• A tangible net worth, as defined, of $175,000,000;

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

• Minimum liquidity, as defined, of at least $20,000,000.

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

115

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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

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

116

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Construction Notes Payable

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

Seller Financing

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

Revolving Mortgage Warehouse Credit Facilities

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

Prime Interest Rates

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

Note 7 — Tender Offer and Merger

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

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

117

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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

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

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

118

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

Note 8 — Stockholders’ Equity

Incentive Compensation Plans

The Company’s 2007 Senior Executive Bonus Plan (the “Plan”) provides that (i) the Chief Executive Officer (“CEO”) and the Chief Operating Officer (“COO”) are each eligible to receive a bonus of 3% of the Company’s consolidated pre-tax, pre-bonus income; (ii) the Executive Vice President (“EVP”) is eligible to receive a bonus of ¾ of 1% of the Company’s consolidated pre-tax, pre-bonus income; and (iii) the Chief Financial Officer (“CFO”) is eligible to receive a bonus of ½ of 1% of the Company’s consolidated pre-tax, pre-bonus income. In addition, under the Plan, each Region President is eligible to receive a bonus of 3% of the region’s pre-tax, pre-bonus income, determined after allocation to the region of its allocable portion of corporate general and administrative expenses. In addition, the Company’s Board of Directors has approved a cash bonus plan applicable in 2007 for all of its full-time, salaried employees who are not included in the Plan. All other participants under this cash bonus plan are eligible to receive bonuses based upon specified percentages of a bonus pool determined as a specified percentage of pre-tax, pre-bonus income.

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

Executive Deferred Compensation Plans

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

On December 26, 2007, the Board of Directors of the Company terminated the William Lyon Homes Executive Deferred Compensation Plan adopted as of February 11, 2002 (the “2002 Plan”), effective January 2, 2008. Upon termination of the 2002 Plan, all benefits thereunder were distributed in one lump sum on January 18, 2008.

In addition, on December 26, 2007, the Board of Directors of the Company amended the William Lyon Homes 2004 Executive Deferred Compensation Plan (the “2004 Plan”). Under this amendment (i) no further deferral elections were allowed under the 2004 Plan and (ii) each participant was deemed to have elected to receive the balance of his or her deferral account under the 2004 Plan in one lump sum distribution. All benefits thereunder were distributed in one lump sum on January 18, 2008.

119

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 9 — Income Taxes

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

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

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

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

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

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

120

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Effective January 1, 2007, the Company made an election in accordance with federal and state regulations to be taxed as an “S” corporation rather than a “C” corporation. Under this election, the Company’s taxable income flows through to and is reported on the personal tax returns of its shareholders. The shareholders are responsible for paying the appropriate taxes based on this election. The Company does not pay any federal taxes under this election and is only required to pay certain state taxes based on a rate of approximately 1.5% of taxable income. As a result of this election, the Company’s provision for income taxes for the year ended December 31, 2007 includes a reduction of deferred tax assets of $31,887,000 due to the elimination of any future tax benefit by the Company from such assets. In addition, the provision reflects a valuation allowance of $771,000. Also, due to the “S” corporation election, unused recognized built in losses in the amount of $19,414,000 are no longer available to the Company.

Prior to March 15, 2008, the Company and its shareholders expect to make a revocation of the “S” corporation election effective on January 1, 2008. As a result of this revocation, the Company will be taxed as a “C” corporation. The shareholders will not be able to elect “S” corporation status for at least five years. The revocation of the “S” corporation election will allow taxable losses generated in 2008 to be carried back to the 2006 “C” corporation year. As a result of the contemplated change in tax status, the Company anticipates that it will record a deferred tax asset in the range of $35,000,000–$41,000,000 as of January 1, 2008. The recorded deferred tax asset reflects the tax refund for the anticipated carry back of the estimated 2008 tax loss to 2006 as a result of the reversal of temporary differences in 2008. The Company expects to receive the tax refund in mid-2009.

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be considered “more-likely-than-not” to be sustained upon examination by taxing authorities. The Company has taken positions in certain taxing jurisdictions for which it is more likely than not that previously unrecognized tax benefits will be recognized. In addition, the Company has elected to recognize interest and penalties related to uncertain tax positions in the income tax provision. In accordance with the provisions of FIN 48, effective January 1, 2007, the Company recorded an income tax refund receivable of $5,654,000 and recognized the associated tax benefit as an increase in additional paid-in capital. In connection therewith, the Company recorded interest receivable of $1,122,000 and recognized the associated tax benefit as an increase in retained earnings. At January 1, 2007 and December 31, 2007, the Company has no unrecognized tax benefits.

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

The estimated overall effective tax rate for the years ending December 31, 2007, 2006 and 2005 are (10.3%), 39.5% and 39.4%, respectively.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal income tax examination for calendar tax years ending 2002 through 2007. The Company is subject to various state income tax examinations for calendar tax years ending 2004 through 2007.

121

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company currently is under income tax examination by the Internal Revenue Service for years ended December 31, 2002, 2003 and 2004. During 2007, the Company completed state income tax examinations in the states of California and Arizona for years ended December 31, 2002 through 2003 with no significant adjustments.

Note 10 — Related Party Transactions

On December 27, 2007, the Company sold certain land in San Diego County, California for $12,000,000 in cash to a limited liability corporation owned indirectly by Frank T. Suryan, Jr. as Trustee of the Suryan Family Trust. Mr. Suryan is Chairman and Chief Executive Officer of Lyon Capital Ventures, a company wholly-owned by Frank T. Suryan, Jr., General William Lyon, Chairman and Chief Executive Officer of the Company, and two trusts whose sole beneficiary is William H. Lyon, Executive Vice President and Chief Administrative Officer of the Company. The Company has received a report from a third-party valuation and financial advisory services firm as to the reasonableness of the sales price in the transaction. Further, the transaction was unanimously approved by all independent members of the Board of Directors. Prior to the sale, the net book value of this land (as reflected on the Company’s financial statements) was approximately $18,737,000 resulting in a loss on the transaction of $6,737,000.

On October 26, 2000, the Company’s Board of Directors (with Messrs. William Lyon and William H. Lyon abstaining) approved the purchase of 579 lots for a total purchase price of $12,581,000 from an entity controlled by William Lyon and William H. Lyon. In addition to the purchase price, one-half of the net profits in excess of six percent from the development are to be paid to the seller. As of December 31, 2004, all lots were purchased under this agreement and during the year ended December 31, 2007, $8,305,000 was paid to the seller and a total amount of $14,015,000 has been paid to the seller as of December 31, 2007. This land acquisition qualified as an affiliate transaction under the Company’s 12 ¹/2% Senior Notes due July 1, 2003 Indenture dated as of June 29, 1994, as amended (the “Old Indenture”). Pursuant to the terms of the Old Indenture, the Company determined that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person. The Company delivered to the Trustee under the Old Indenture a resolution of the Board of Directors of the Company set forth in an Officers’ Certificate certifying that the land acquisition is on terms that are no less favorable to the Company than those that would have been obtained in a comparable transaction by the Company with an unrelated person and the land acquisition was approved by a majority of the disinterested members of the Board of Directors of the Company. Further, the Company delivered to the Trustee under the Old Indenture a determination of value by a real estate appraisal firm which is of regional standing in the region in which the subject property is located and is MAI certified.

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

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

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

122

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Effective September 1, 2004, the Company entered into an aircraft consulting and management agreement with an affiliate (the “Affiliate”) of William Lyon to operate and manage the Company’s aircraft. The terms of the agreement provide that the Affiliate shall consult and render its advice and management services to the Company with respect to all functions necessary to the operation, maintenance and administration of the aircraft. The Company’s business plan for the aircraft includes (i) use by Company executives for traveling on Company business to the Company’s divisional offices and other destinations, (ii) charter service to outside third parties and (iii) charter service to William Lyon personally. Charter services for outside third parties are contracted for at market rates. As compensation to the Affiliate for its management and consulting services under the agreement, the Company pays the Affiliate a fee equal to (i) the amount equal to 107% of compensation paid by the Affiliate for the pilots supplied pursuant to the agreement, (ii) $50 per operating hour for the aircraft and (iii) $9,000 per month for hangar rent. In addition, all maintenance work, inspections and repairs performed by the Affiliate on the aircraft are charged to the Company at the Affiliate’s published rates for maintenance, inspection and repairs in effect at the time such work is completed. The total compensation paid to the Affiliate under the agreement amounted to $1,423,000, $1,488,000 and $1,414,000 during the years ended December 31, 2007, 2006 and 2005, respectively.

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

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

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

123

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11 — Commitments and Contingencies

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

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

Litigation Arising from General Lyon’s Tender Offer

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

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

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

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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

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

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

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

125

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Land Banking Arrangements

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

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

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

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

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

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

126

WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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

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WILLIAM LYON HOMES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 12 — Unaudited Summarized Quarterly Financial Information

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

	Three Months Ended
	March 31, 2007			June 30, 2007			September 30, 2007			December 31, 2007
Sales	$	206,041		$	271,088		$	182,244		$	445,984
Cost of sales		(169,801	)		(232,843	)		(160,621	)		(515,566	)
Gross profit (loss)		36,240			38,245			21,623			(69,582	)
Other income, costs and expenses, net		(30,436	)		(116,031	)		(82,935	)		(113,874	)
Income (loss) before provision for income taxes		5,804			(77,786	)		(61,312	)		(183,456	)
Benefit (provision) for income taxes		(32,388	)		914			1,300			(2,484	)
Net (loss) income	$	(26,584	)	$	(76,872	)	$	(60,012	)	$	(185,940	)
	Three Months Ended
	March 31, 2006			June 30, 2006			September 30, 2006			December 31, 2006
Sales	$	307,381		$	408,254		$	311,248		$	465,338
Cost of sales		(229,873	)		(315,993	)		(247,099	)		(388,073	)
Gross profit		77,508			92,261			64,149			77,265
Other income, costs and expenses, net		(34,386	)		(42,283	)		(46,382	)		(64,423	)
Income before provision for income taxes		43,122			49,978			17,767			12,842
Provision for income taxes		(16,908	)		(19,597	)		(7,265	)		(5,161	)
Net income	$	26,214		$	30,381		$	10,502		$	7,681
	Three Months Ended
	March 31, 2005			June 30, 2005			September 30, 2005			December 31, 2005
Sales	$	246,682		$	407,489		$	376,331		$	825,881
Cost of sales		(176,795	)		(288,976	)		(279,063	)		(606,967	)
Gross profit		69,887			118,513			97,268			218,914
Other income, costs and expenses, net		(36,014	)		(45,621	)		(34,321	)		(73,846	)
Income before provision for income taxes		33,873			72,892			62,947			145,068
Provision for income taxes		(13,380	)		(28,792	)		(24,864	)		(57,113	)
Net income	$	20,493		$	44,100		$	38,083		$	87,955

128

EXHIBIT INDEX

Exhibit Number	Description
3.1(2)	Certificate of Incorporation of William Lyon Homes, a Delaware corporation.
3.2(1)	Certificate of Ownership and Merger.
3.3(35)	Certificate of Ownership and Merger.
3.4(35)	Certificate of Amendment of Certificate of Incorporation.
3.5(2)	Bylaws of William Lyon Homes, a Delaware corporation.
4.1(23)	Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.2(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.3(24)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of March 17, 2003 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.4(3)	Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.5(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.6(24)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of February 6, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.7(14)	Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee (including form of notes and guarantees).
4.8(15)	Supplemental Indenture dated as of December 13, 2004 between Lyon East Garrison Company I, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
4.9(24)	Supplemental Indenture dated as of January 1, 2005 between The Ranch Golf Club, LLC, a California limited liability company, as Guarantor, and U.S. Bank National Association, as Trustee (supplementing the Indenture dated as of November 22, 2004 among William Lyon Homes, Inc., a California corporation, the Guarantors (as defined therein), and U.S. Bank National Association, as Trustee).
10.1(11)	Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a Delaware corporation.
10.2(34)	First Amendment dated as of August 17, 2006 to Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding Corp., a Delaware corporation.

Exhibit Number	Description
10.3(39)	Second Amendment dated as of January 23, 2008 to Amended and Restated Loan Agreement dated as of September 17, 2004 between William Lyon Homes, Inc., a California corporation, and RFC Construction Funding, LLC, a Delaware limited liability company, formerly known as RFC Construction Funding Corp.
10.4(4)	Master Loan Agreement dated as of August 31, 2000 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and Guaranty Federal Bank, F.S.B., a federal savings bank organized and existing under the laws of the United States (“Lender”).
10.5(39)	Amended and Restated Master Loan Agreement dated as of January 28, 2008 by and between William Lyon Homes, Inc., a California corporation (“Borrower”) and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (“Lender”).
10.6(6)	Agreement for First Modification of Deeds of Trust and Other Loan Instruments, dated as of June 8, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.7(5)	Agreement for Second Modification of Deeds of Trust and Other Loan Instruments, dated as of July 23, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.8(5)	Agreement for Third Modification of Deeds of Trust and Other Loan Instruments, dated as of December 19, 2001, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.9(5)	Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments, dated as of May 29, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.10(7)	Agreement for Fifth Modification of Deeds of Trust and Other Loan Agreements, dated as of June 6, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.11(3)	Agreement for Sixth Modification of Deeds of Trust and Other Loan Agreements, dated as of November 14, 2003, by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States (formerly known as “Guaranty Federal Bank, F.S.B.”), as lender.
10.12(12)	Agreement for Seventh Modification of Deeds of Trust and Other Loan Instruments dated as of October 6, 2004 by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.13(24)	Agreement for Eighth Modification of Deeds of Trust and Other Loan Instruments dated as of October 14, 2005 by and between William Lyon Homes, Inc., a California corporation, as borrower, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.14(34)	Agreement for Ninth Modification of Deeds of Trust and Other Loan Instruments dated as of October 31, 2006 by and between William Lyon Homes, Inc., a California corporation, and Guaranty Bank, a federal savings bank organized and existing under the laws of the United States, as lender.
10.15(4)	Revolving Line of Credit Loan Agreement (Borrowing Base Loan) by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation, dated as of September 21, 2000.
10.16(17)	Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of September 18, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.

Exhibit Number	Description
10.17(5)	Second Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of December 13, 2002, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.18(3)	Third Agreement to Modify Loan Agreement, Promissory Note and Deed of Trust, dated as of January 26, 2004, by and between William Lyon Homes, Inc., a California corporation, as borrower, and California Bank & Trust, a California banking corporation, as lender.
10.19(11)	Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation.
10.20(25)	First Amendment to Amended and Restated Revolving Line of Credit Loan Agreement, dated as of July 19, 2005, by and between William Lyon Homes, Inc. and California Bank & Trust.
10.21(31)	Second Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated September 16, 2004 by and between California Bank & Trust, a California banking corporation, and William Lyon Homes, Inc., a California corporation.
10.22(39)	Third Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of December 28, 2007, by and between William Lyon Homes, Inc., a California corporation and California Bank & Trust, a California banking corporation.
10.23(39)	Fourth Amendment to Amended and Restated Revolving Line of Credit Loan Agreement dated as of January 17, 2008 by and between William Lyon Homes, Inc., a California corporation and California Bank & Trust, a California banking corporation.
10.24(7)	Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2003 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as Lender.
10.25(10)	Mortgage Warehouse Loan and Security Agreement dated as of June 1, 2004 between Duxford Financial, Inc., and Bayport Mortgage, L.P. as Borrower and First Tennessee Bank as Lender.
10.26(29)	Mortgage Warehouse Loan and Security Agreement dated June 29, 2006 by and between Duxford Financial, Inc. dba William Lyon Financial Services and/or Bayport Mortgage, L.P. and/or California Pacific Mortgage, L.P., as Borrower and First Tennessee Bank as Lender.
10.27(8)	Credit Agreement dated August 29, 2003 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.28(3)	Amendment No. 1 to Credit Agreement dated as of January 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.29(15)	First Amendment to Credit Agreement dated as of August 27, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.30(13)	Amendment No. 2 to Credit Agreement dated as of November 15, 2004 between Duxford Financial, Inc. and Bayport Mortgage, L.P. as Borrower and Guaranty Bank as Lender.
10.31(9)	Revolving Line of Credit Loan Agreement, dated as of March 11, 2003, by and among Moffett Meadows Partners, LLC, a Delaware limited liability company, as borrower, and California Bank & Trust, a California banking corporation, and the other financial institutions named therein, as lenders.
10.32(9)	Joinder Agreement to Reimbursement and Indemnity Agreement, entered into as of March 25, 2003, by William Lyon Homes, a Delaware corporation.
10.33(10)	Borrowing Base Revolving Line of Credit Agreement, dated as of June 28, 2004, by and between William Lyon Homes, Inc., a California corporation, and Bank One, NA, a national banking association.
10.34(15)	Modification Agreement, dated as of December 7, 2004, by and between William Lyon Homes, Inc., a California corporation, and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA, a national banking association).
10.35(25)	Second Modification Agreement to Borrowing Base Revolving Line of Credit Agreement, dated as of July 14, 2005, between William Lyon Homes, Inc. and JPMorgan Chase Bank, N.A. (successor by merger to Bank One, NA).
10.36(33)	Third Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated October 23, 2006 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase Bank, N.A., a National Banking Association.

Exhibit Number	Description
10.37(36)	Fifth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated November 6, 2007 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase Bank, N.A., a national banking association.
10.38(39)	Sixth Modification Agreement to Borrowing Base Revolving Line of Credit Agreement dated February 20, 2008 by and between William Lyon Homes, Inc., a California corporation and JPMorgan Chase Bank, N.A., a national banking association.
10.39(18)	Form of Indemnity Agreement, between William Lyon Homes, a Delaware corporation, and the directors and officers of William Lyon Homes.
10.40(18)	Property Management Agreement between Corporate Enterprises, Inc., a California corporation (Owner) and William Lyon Homes, Inc., a California corporation (Manager) dated and effective November 5, 1999.
10.41(18)	Warranty Service Agreement between Corporate Enterprises, Inc., a California corporation and William Lyon Homes, Inc., a California corporation dated and effective November 5, 1999.
10.42(4)	Option Agreement and Escrow Instructions between William Lyon Homes, Inc., a California corporation and Lathrop Investment, L.P., a California limited partnership, dated as of October 24, 2000.
10.43(26)	Adjustment of Salary of Douglas F. Bauer.
10.44(35)	Description of 2006 Cash Bonus Plan.
10.45(35)	2006 Senior Executive Bonus Plan.
10.46(35)	Description of 2007 Cash Bonus Plan.
10.47(35)	2007 Senior Executive Bonus Plan.
10.48(19)	Standard Industrial/Commercial Single-Tenant Lease – Net between William Lyon Homes, Inc. and a trust of which William H. Lyon is the sole beneficiary.
10.49(20)	William Lyon Homes Executive Deferred Compensation Plan effective as of February 11, 2002.
10.50(21)	William Lyon Homes Outside Directors Deferred Compensation Plan effective as of February 11, 2002.
10.51(5)	The Presley Companies Non-Qualified Retirement Plan for Outside Directors.
10.52(16)	William Lyon Homes 2004 Executive Deferred Compensation Plan.
10.53(16)	William Lyon Homes 2004 Outside Directors Deferred Compensation Plan.
10.54(27)	Summary of Director Compensation.
10.55(27)	Borrowing Base Revolving Line of Credit Agreement, dated as of February 14, 2006, by and between William Lyon Homes, Inc., a California corporation, and Wachovia Financial Services, Inc, a North Carolina corporation, by and through its Agent, Wachovia Bank, National Association, a national banking association.
10.56(32)	First Amendment to Borrowing Base Revolving Line of Credit Agreement dated September 29, 2006 by and between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National Association, a national banking association.
10.57(39)	Third Amendment to Borrowing Base Revolving Line of Credit Agreement dated January 23, 2008 between William Lyon Homes, Inc., a California corporation and Wachovia Bank, National Association, a national banking association, formerly referenced as Agent for Wachovia Financial Services, Inc., a North Carolina corporation.
10.58(30)	Borrowing Base Revolving Line of Credit Agreement dated as of July 10, 2006 by and between William Lyon Homes, Inc., a California corporation, and California National Bank.
10.59(37)	Extension and Modification Agreement dated as of August 2, 2007 by and between William Lyon Homes, Inc., a California corporation, and California National Bank
10.60(28)	Revolving Line of Credit Loan Agreement dated as of March 8, 2006 by and between William Lyon Homes, Inc., a California corporation, and Comerica Bank.
10.61(39)	Amendment Agreement entered into as of February 28, 2008, by and between William Lyon Homes, Inc., a California corporation and Comerica Bank
10.62(38)	Loan Agreement dated as of January 30, 2007, by and between East Garrison Partners I, a California limited liability company, and Residential Funding Company, LLC, a Delaware limited liability company.

Exhibit Number	Description
10.63(38)	Completion Guaranty dated as of January 30, 2007, by and between William Lyon Homes, Inc., a California corporation, and other guarantors in favor of Residential Funding Company, LLC.
10.64(39)	First Amendment to Loan Agreement dated as of February 25, 2008, but effective as of December 31, 2007, by and between East Garrison Partners I, LLC, a California limited liability company, and RFC Construction Funding, LLC, a Delaware limited liability company, as successor in interest to and assignee of Residential Funding Company, LLC., a Delaware limited liability company.
12.1(39)	Statement of computation of ratio of earnings to fixed charges.
21.1(39)	List of Subsidiaries of William Lyon Homes, a Delaware corporation.
31.1(39)	Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2(39)	Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1(39)	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32.2(39)	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(36) Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on November 15, 2007 and incorporated herein by reference.

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

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

(39) Filed herewith.

EX-10.3

Exhibit 10.3

SECOND AMENDMENT TO

AMENDED AND RESTATED LOAN AGREEMENT

THIS SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (this “Amendment”) dated as of January 23, 2008, but effective as of January 1, 2008, is entered into by and between WILLIAM LYON HOMES, INC., a California corporation (the “Borrower”) and RFC CONSTRUCTION FUNDING, LLC, a Delaware limited liability company, formerly known as RFC Construction Funding Corp. (the “Lender”).

RECITALS

A. Borrower and the Lender are parties to that certain Amended and Restated Loan Agreement dated as of September 17, 2004, as amended by a First Amendment to Amended and Restated Loan Agreement and Other Loan Documents dated as of August 17, 2006 (as amended, restated or otherwise modified from time to time, the “Loan Agreement”), pursuant to which Lender has made a revolving loan to Borrower (the “Loan”) to finance various acquisition, development and construction projects. Capitalized terms used in this Amendment and not otherwise defined in this Amendment shall have the meanings given those terms in the Loan Agreement.

B. The Loan is evidenced by the Borrower’s Revolving Promissory Note dated as of September 17, 2004, payable to the order of the Lender in the principal amount of One Hundred Fifty Million Dollars ($150,000,000) (as the same may be amended, extended, renewed, replaced or otherwise modified from time to time, the “Note”). As of December 31, 2007, the outstanding principal balance of the Note was $31,419,696.29.

C. The Borrower has requested that the Lender amend the Loan Agreement to (i) reduce the Loan Amount from $150,000,000 to $100,000,000, and (ii) amend the financial covenants set forth in Section 5.4 of the Loan Agreement.

D. As a condition to granting the Borrower’s requests, the Lender has required, among other things, the execution and delivery of this Amendment by the Borrower.

E. Unless otherwise defined herein, capitalized terms used herein shall have the meanings given those terms in Loan Agreement.

AGREEMENT

NOW THEREFORE, in consideration of the foregoing Recitals and the covenants and conditions, representations and warranties contained herein, the parties hereto agree as follows:

Section 1    Amendments to Loan Agreement

(a) The term “Loan Amount” as defined in Section 1.1 of the Loan Agreement is hereby amended in its entirety to read as follows:

“Loan Amount” shall mean, at any date of determination, an amount equal to (a) One Hundred Million Dollars ($100,000,000), minus (b) the outstanding principal amount of the loans under the Independent Project Commitment Amount, subject to reduction pursuant to Section 2.15.

(b) The term “Transfer” as defined in Section 1.1 of the Loan Agreement is hereby amended in its entirety to read as follows:

“Transfer” shall mean the occurrence of any of the following:

(a) any sale, conveyance, assignment, transfer, alienation, mortgage, conveyance, of security title, encumbrance or other disposition of any Project, of any kind, or any other transaction the result of which is, directly or indirectly, to divest Borrower of any portion of its title to or interest in any Project, voluntarily or involuntarily;

(b) any merger, consolidation or dissolution involving Borrower or the sale or transfer of a significant portion of the assets of Borrower;

(c) any merger, consolidation or dissolution involving Guarantor or any sale, conveyance, assignment, transfer, alienation, encumbrance or other disposition by Guarantor of any of its stock in Borrower or any other transaction or event the result of which is directly or indirectly to cause Guarantor to own less than one hundred percent (100%) of the outstanding stock of Borrower;

(d) any conveyance, assignment, transfer or other disposition (at one time or over a period of time) of any of the stock of Guarantor owned at any time by William Lyon (“General Lyon”) or William H. Lyon (“Mr. Lyon”) (collectively, General Lyon and Mr. Lyon are herein called the “Lyons”) or any issuance of additional stock in Guarantor or any other event the result of which is to dilute, decrease or eliminate the Lyons’ ownership interest in Guarantor, unless, after giving effect to any such conveyance, assignment, transfer, other disposition, issuance or other event, the Lyons and/or a Qualified Transferee (defined below) (i) retain control of Guarantor, (ii) continue to own at least forty percent (40%) of the outstanding stock of Guarantor at all times subsequent to such conveyance, assignment, transfer, other disposition, issuance or other event on a continuous and full time basis with the power and responsibility to manage the material day to day operations of Guarantor, Borrower and their Subsidiaries, and (iii) any three (3) of Thomas J. Mitchell, Douglas F. Bauer, Richard S. Robinson, Michael D. Grubbs or Mr. Lyon continue to be employed by Guarantor and Borrower at all times subsequent to the transfer on a continuous and full time basis with power and responsibility to manage the material day to day operations of Guarantor, Borrower and their Subsidiaries. For purposes of this subsection (d), a “Qualified Transferee” is a transferee which must be (1) the executor of the estate of General Lyon, (2) a member of the immediate family of General Lyon, or (3) the trustee of a trust established and continuously maintained for the sole benefit of the immediate family of General Lyon.

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(c) Section 5.4 of the Loan Agreement is hereby amended in its entirety to read as follows:

Section 5.4 Financial Covenants. Borrower shall cause the Guarantor to comply with each of the following financial covenants:

(a) Tangible Net Worth. The Guarantor and its Subsidiaries (including the Borrower) shall maintain at all times a Tangible Net Worth equal to or in excess of $175,000,000.

(b) Ratio of Total Liabilities to Tangible Net Worth. The Guarantor and its Subsidiaries (including the Borrower) will maintain at all times the ratio of its Total Liabilities (exclusive of consolidated liabilities of variable interest entities) to Tangible Net Worth of not more than (i) 5.00 to 1.00 at all times during the period from January 1, 2008 through and including December 31, 2008, and (ii) 3.50 to 1.00 at all times from and after January 1, 2009.

(d) Section 8.1(v) of the Loan Agreement is hereby amended in its entirety to read as follows:

(v) the Borrower’s pre-tax net income is negative in each of two (2) consecutive fiscal quarters or for any four (4) consecutive fiscal quarters on a cumulative basis and the ratio of the Total Liabilities of the Guarantor and its Subsidiaries (excluding the Borrower) is more than (i) 5.00 to 1.00 if such determination is made during the period from January 1, 2008 through December 31, 2008, or (ii) 3.50 to 1.00 if such determination is made from and after January 1, 2009.

(e) Section 8.1(w) of the Loan Agreement is hereby amended in its entirety to read as follows:

(w) any two (2) or more of Thomas J. Mitchell, Douglas F. Bauer, Richard S. Robinson, Michael D. Grubbs or William H. Lyon shall cease to be employed by the Guarantor or the Borrower on a continuous and full time basis with power and responsibility to manage the material day to day operations of the Guarantor, the Borrower and their Subsidiaries; or

Section 2    Loan Continues to be Evidenced by the Note

Although the Loan Amount has been reduced from $150,000,000 to $100,000,000, the Loan continues to be evidenced by the Note. Notwithstanding that the face amount of the Note is $150,000,000, Lender has no obligation to consider making any loan or advance to Borrower which would result in the outstanding principal balance of the Loan exceeding the Loan Amount of $100,000,000.

Section 3    Conditions Precedent to Effectiveness of this Second Amendment

This Amendment shall become effective when the Lender shall have received each of the following items in form and content acceptable to the Lender:

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(a) this Amendment, duly executed on behalf of the Borrower and duly consented to by the Guarantor;

(b) the First Amendment to Guaranty, duly executed on behalf of the Guarantor;

(c) evidence that there are amendments to the Borrower’s credit facilities with other lenders amending the financial covenants contained therein in a manner satisfactory to the Lender;

(d) such other items as the Lender shall require.

Section 4    Representations and Warranties of Borrower

Borrower represents, warrants and agrees that: (i) there exists no Potential Default or Event of Default under the Loan Documents; (ii) the Loan Documents continue to be the legal, valid and binding agreements and obligations of the Borrower, enforceable in accordance with their terms, as modified herein; (iii) the Lender is not in default under any of the Loan Documents; (iv) the Borrower does not have any offset or defense to its performance or obligations under any of the Loan Documents; (v) the representations contained in the Loan Documents remain true and accurate in all respects; and (vi) there has been no Material Adverse Change from the date of any of the Loan Documents to the date of this Amendment.

Section 5    No Defenses

Borrower hereby agrees and stipulates that Borrower has no defenses, affirmative defenses, rights to offset, or counterclaims against the exercise of any of the rights or remedies of Lender under the Loan Documents or under applicable law.

Section 6    Release of Claims Against Lender

Borrower absolutely and unconditionally releases and forever discharges Lender and any and all of its parent corporations, subsidiary corporations, affiliated corporation, insurers, indemnitors, successors and assigns, together with all of its present and former directors, officers, agents and employees from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which Borrower has had, now has or had made claim to have against any such party for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and cause of action are matured or unmatured or known or unknown.

Section 7    Effect on Documents

Except as expressly modified by this Amendment, the Loan Agreement shall otherwise be unchanged and shall remain in full force and effect and the Borrower ratifies and reaffirms all of the obligations of the Borrower thereunder. All references in other Loan Documents to the Loan Agreement shall be deemed reference to the Loan Agreement as amended by this Amendment.

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Section 8    Execution in Counterparts

This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument.

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IN WITNESS WHEREOF, Borrower and the Lender have executed this Amendment as of the date first written above by and through their duly authorized representatives.

BORROWER:
WILLIAM LYON HOMES, INC., a California corporation
By:	/s/ Richard S. Robinson
Printed Name:		Richard S. Robinson
Title:	Senior Vice President

And
By:	/s/ Michael D. Grubbs
Printed Name:		Michael D. Grubbs
Title:	Senior Vice President

LENDER:
RFC CONSTRUCTION FUNDING, LLC., a Delaware limited liability company
By:	/s/ Donald V. Pierce
Printed Name:		Donald V. Pierce
Title:	Vice President

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ACKNOWLEDGMENT

OF GUARANTOR

The undersigned, a guarantor of all of the debts, liabilities and obligations of William Lyon Homes, Inc., a California corporation (the “Borrower”) to RFC Construction Funding, LLC, a Delaware limited liability company, formerly known as RFC Construction Funding Corp. (the “Lender”) pursuant to its Guaranty Agreement dated as of September 17, 2004, as amended (as the same may be amended or restated from time to time, the “Guaranty”), hereby (i) acknowledges receipt of the foregoing Second Amendment to Amended and Restated Loan Agreement, (ii) consents and agrees to the terms of the foregoing Second Amendment to Amended and Restated Loan Agreement, (iii) reaffirms its obligations to the Lender under the Guaranty, and (iv) acknowledges that the Lender and the Borrower may amend, restate, extend, renew, or otherwise modify the Loan Agreement (as defined in the foregoing Second Amendment to Amended and Restated Loan Agreement or any other Loan Document (as defined in the foregoing Second Amendment to Amended and Restated Loan Agreement), without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under its Guaranty.

GUARANTOR:
WILLIAM LYON HOMES, a Delaware corporation
By:	/s/ Richard S. Robinson
Printed Name:		Richard S. Robinson
Title:	Senior Vice President

And
By:	/s/ Michael D. Grubbs
Printed Name:		Michael D. Grubbs
Title:	Senior Vice President

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EX-10.5

Exhibit 10.5

William Lyon Homes, Inc.

Loan No. 906-0100

AMENDED AND RESTATED MASTER LOAN AGREEMENT

This Amended and Restated Master Loan Agreement (this “Loan Agreement”) dated as of January 28, 2008, is made by and between WILLIAM LYON HOMES, INC., a California corporation (“Borrower”), whose address is 4490 Von Karman Avenue, Newport Beach, CA 92660, and GUARANTY BANK, a federal savings bank organized and existing under the laws of the United States (“Lender”), whose address is 8333 Douglas Avenue, Dallas, Texas 75225, in connection with a revolving loan (hereinafter called the “Loan”), from Lender to Borrower, for the acquisition and development of lots (the “Lots Being Actively Developed”), and/or refinancing of residential lots (the “Finished Lots”), and the construction of single-family residences thereon (the “Residences”) (the Lots Being Actively Developed and Finished Lots may be collectively referred to as “Lots,” and with the Residences and all related improvements (“Improvements”) thereto, are sometimes collectively referred to hereinafter as the “Real Property” or the “Properties,” and individually, as a “Property.”) The Lots Being Actively Developed and Finished Lots are more particularly defined in the Specific Loan Terms, Conditions and Definitions (the “Specific Loan Terms”) attached hereto as Exhibit “A”. Except as expressly consented to in writing, in advance by Lender, the Properties shall be located only in residential subdivisions (“Subdivisions”) approved in advance by Lender, and otherwise meeting the criteria set forth in Paragraph 4 of the Specific Loan Terms. The initial list of Subdivisions previously approved under the Prior Loan Agreement (as defined below), and approved for purposes of the Loan (the “Initial Approved Subdivisions”), is set forth in Paragraph 2 of the Specific Loan Terms and may be supplemented with such additional Subdivisions (the “Additional Approved Subdivisions”) such as may hereafter be approved by Lender from time to time pursuant to all the terms and provisions of this Loan Agreement (collectively, the “Approved Subdivisions”). The price range of the Residences in the Initial Approved Subdivisions shall be as stipulated in Paragraph 2 of the Specific Loan Terms, and, for Additional Approved Subdivisions, as approved by Lender in connection therewith. The number of Residences to be constructed at any time shall be as stipulated in Paragraph 4 of the Specific Loan Terms. The Loan shall be in the principal amount of SIXTY MILLION DOLLARS ($60,000,000.00) (the “Loan Amount”), subject to the reductions set forth in Paragraph 19 of the Specific Loan Terms. This Loan Agreement is a master agreement and shall govern all of the disbursements (each, a “Disbursement”) of the proceeds of the Loan (“Loan Proceeds”) made under a revolving promissory note secured by one or more deeds of trust, from time to time executed by Borrower, for the benefit of Lender, covering the Lots and Residences constructed or to be constructed thereon and such other property as may be described in any such deeds of trust, all as more fully provided herein below.

In connection with the Loan, Borrower and Lender hereby agree as follows:

1. THE LOAN. Lender shall make and disburse, and Borrower shall accept and use, the Loan in accordance with all the provisions of this Loan Agreement and the other Loan Instruments (defined below). Lender shall make the Loan to Borrower by means of Disbursements over time in accordance with this Loan Agreement, and there shall be no funding of the Loan other than to the extent of the Disbursements actually made. Lender’s agreement to make the Loan is subject to Borrower’s satisfaction of all the conditions precedent applicable to the initial Disbursement of Loan Proceeds (the “Initial Disbursement”) with respect to the Initial Approved Subdivisions in advance, as such conditions are set forth in Section 2.1 below, not later than the deadline (“Loan Closing Deadline”) for the closing for the Loan (“Loan Closing”), as set forth in Paragraph 1 of the Specific Loan Terms. This Loan Agreement, the Note, each Mortgage (defined below), the Guaranty and any other documents evidencing or securing the Loan, including the Prior Loan Instruments (as defined below), whether or not specified in this Loan Agreement or the Specific Loan Terms, are collectively called hereinafter, the “Loan Instruments.” As used in this Loan Agreement, the term “Applicable Law” means all Restrictions (defined below) and all present and future federal, state and local laws, ordinances, rules, regulations, decisions, and other requirements of Governmental Authorities applicable thereto.

2. DISBURSEMENTS. All Disbursements shall be made in accordance with and subject to the following:

        2.1 Requirements for Initial Disbursement. Prior to the Initial Disbursement of the Loan Proceeds, as a condition to the Loan Closing, Borrower shall execute, acknowledge and deliver to, procure for, deposit with and pay to, Lender, the following, all in form and substance satisfactory to Lender:

(a) A Fifth Amended and Restated Revolving Promissory Note of even date herewith evidencing the Loan (the “Note”) in the principal amount of SIXTY MILLION DOLLARS ($60,000,000.00) executed by Borrower in favor of Lender and otherwise in form and content acceptable to Lender. Notwithstanding such stated principal amount, Borrower shall not be entitled to borrow more than is permitted under the then effective Borrowing Base (as defined in Paragraph 5(a)(i) below).

(b) Such documents and instruments as Lender may require to evidence the status, organization or authority of Borrower and any guarantor (“Guarantor”) of the Loan identified in the Specific Loan Terms.

(c) If indicated in Paragraph 7 of the Specific Loan Terms, continuing guaranties (collectively, the “Guaranty”) of the Loan executed by the Guarantor(s) identified in Paragraph 5 of the Specific Loan Terms.

(d) Construction cost breakdowns for the construction and completion of all Lots, Improvements and Residences comprising the Properties (each, a “Construction Cost Breakdown”) within the Initial Approved Subdivisions then forming a part of the Borrowing Base, each in form and content satisfactory to Lender, and otherwise meeting the criteria set forth in Paragraph 2.2(m) below.

(e) Financial statements of Borrower, Borrower’s general partner (“General Partner”) or managing member (“Managing Member”), if applicable, and any Guarantor (the “Financial Statements”), acceptable in form and content to Lender for such operational periods as are required by Lender.

(f) A written opinion of Borrower’s counsel, satisfactory to Lender, in form and content satisfactory to Lender, addressed to Lender (“Opinion Letter”), opining as to the matters described in Paragraph 10 of the Specific Loan Terms.

(g) Such sums required by Lender in connection with the Loan (“Loan Fees”), including, but not limited to, a loan facility fee (“Loan Facility Fee”), cost analysis and inspection fee in the amounts set forth in Paragraph 19 below, and payment of all accrued and owing Lender Costs (defined in Paragraph 19 below).

(h) Such other documents and instruments as Lender may require to evidence, govern or secure payment of the Loan, including one or more Mortgages encumbering the Approved Subdivisions forming the Borrowing Base and such other documents and instruments as may be specified in Paragraph 7 of the Specific Loan Terms.

(i) If required by Lender, evidence that the Properties within the Initial Approved Subdivisions are not located within any designated flood plain or special flood, earthquake, or other hazard area.

        2.2 Additional Borrowing Base Availability Requirements For Initial Approved Subdivisions And For First Disbursements Based On Inclusion Of Additional Approved Subdivisions In Borrowing Base. For Disbursements based on availability under the Borrowing Base with respect to each Additional Approved Subdivision, and in order for such Approved Subdivision to be available for inclusion in the Borrowing Base, Borrower shall execute and deliver to, procure for and deposit with and pay to Lender the following, all in form and substance satisfactory to Lender, such requirements also being applicable to the availability of Disbursements based on the Initial Approved Subdivisions as part of the Borrowing Base in addition to the requirements of Paragraph 2.1 above (without duplication):

(a) Lender shall have received such documents as Lender has required as part of its approval of the subject Approved Subdivision and to evidence, govern or secure the payment of the Loan, including indemnity agreements executed by Borrower and Guarantor covering liability for hazardous materials on, under or about the subject Lots or Properties, and a Construction Deed of Trust (With Security Agreements, Fixture Filing, and Assignment of Rents and Leases) (individually and collectively, the “Mortgage”), securing the payment of the Note and Loan and evidencing a first

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lien or charge on all Real Property within the applicable Approved Subdivision, all in form and content satisfactory to Lender.

(b) Evidence that the Mortgage encumbering the Real Property to be included in the Borrowing Base has been recorded in the official real property records (“Official Records”) of the county where such Real Property is located (“Recordation”).

(c) At Recordation for the subject Mortgage, Lender shall have received a commitment for, and subsequent delivery thereof within the time therefor required by Lender, an ALTA construction loan policy of title insurance or its equivalent, on the form required by Lender, together with any endorsements that Lender may require (“Title Endorsements Required”), as set forth in Paragraph 8 of the Specific Loan Terms, with a liability limit of not less than the maximum aggregate amounts of the Loan Allocations (as hereinafter defined) for each Property covered by such Mortgage assuming that Residences are to be constructed on each Lot in the Approved Subdivision (the “Aggregate Loan Allocation”), issued by an issuer of title insurance, acceptable to Lender as set forth in Paragraph 8 of the Specific Loan Terms (“Title Insurer”), insuring Lender’s interest under each such Mortgage as a valid first-priority lien on the Lots and Properties with full coverage against mechanics’ and materialmen’s liens, subject only to the permitted exceptions acceptable to Lender (“Permitted Exceptions”) (each, a “Title Policy”). In order for each Approved Subdivision to remain eligible under the Borrowing Base for Disbursement availability after Recordation in the Official Records in the counties in which the subject Real Property is located, Borrower shall, at its own cost and expense, maintain the first priority of the Mortgages as a lien on the subject Lots and Properties and deliver or cause to be delivered to Lender from time to time such endorsements to the Title Policies as Lender deems necessary to insure such priority; provided, however, the maximum title insurance for title insurance underwriters must be acceptable to Lender, and if required by Lender, from time to time, Borrower shall cause to be issued to Lender re-insurance or an additional Title Policy or Title Policies, in such amounts and from such title insurance underwriters, as are acceptable to Lender.

(d) Policies of risk insurance in form and content and from insurers acceptable to Lender, which policies shall include clauses requiring a minimum of thirty (30) days’ written notice to Lender before such insurance may be canceled or reduced, and which shall not include any coinsurance provision, and which shall provide coverage, in amounts satisfactory to Lender (“Insurance Required”), for the risks set forth in, and otherwise meeting the requirements of, Paragraph 9 of the Specific Loan Terms. Notice is hereby given to Borrower pursuant to the provisions on California Civil Code Section 2955.5 that no lender shall require a borrower, as a condition of receiving or maintaining a loan secured by real property, to provide hazard insurance coverage against risks to the improvements on that real property in an amount exceeding the replacement value of the improvements on the property. Borrower hereby acknowledges and agrees that it has received and reviewed the foregoing notice prior to its execution of the Note and any other security documents comprising the Loan Instruments.

(e) To the extent the same exist at the time Borrower requests Disbursements based on availability of Loan Proceeds due to the inclusion of a subject Approved Subdivision in the Borrowing Base, and in all events prior to the first Disbursement for the construction of a Residence in such Approved Subdivision, a complete set of representative construction plans and specifications, including grading, mechanical and electrical (the “Plans”) with respect to each type or model of Residence to be constructed by Borrower on every Lot in such Approved Subdivision prepared by a licensed civil engineer or architect acceptable to Lender.

(f) If and when the same exist, if requested by Lender, assignment of any construction contract(s), engineering contract(s) and architectural contract(s), including the Plans for such Approved Subdivision.

(g) Recorded Subdivision Map or Plat, as applicable based on the location of the Approved Project (“Final Map”), meeting the requirements of Applicable Law, legally describing all Lots covered by the Mortgage encumbering such Approved Subdivision, approved by all applicable governmental authorities having jurisdiction (collectively, “Governmental Authorities”), so that for all purposes and under all Applicable Law, each such Lot or Property may be mortgaged, conveyed and otherwise dealt with as a separate legal lot or parcel. For Lots Being Actively Developed, Lender may

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accept an approved tentative map or plat if such map or plat and all conditions thereto are approved by Lender and if the Final Map for all such Lots will be recorded on a date approved in writing by Lender prior to the making of any Disbursement based on Borrowing Base availability for such Approved Subdivision; provided, however, no Disbursements for construction of Residences, other than Models (as defined in Paragraph 2 of the Specific Loan Terms) in any Approved Subdivision shall be permitted until the Final Map is recorded in the Official Records as contemplated above and only to the extent permitted under Applicable Law.

(h) Appraisal of the Real Property in the subject Approved Subdivision, which shall be ordered directly by Lender, at Borrower’s expense, prepared by an appraiser satisfactory to Lender and otherwise in form and substance satisfactory to Lender.

(i) Any sums for Lender Costs which are then due and payable.

(j) Evidence that each Lot covered by the applicable Mortgage is not located within any designated flood plain or special hazard area.

(k) True, correct and complete copies of all executed contracts of sale and escrow instructions (the “Contracts”) for Borrower’s acquisition of the Real Property within such Approved Subdivision.

(l) If construction or site development work has commenced on the Real Property located within the subject Approved Subdivision, and as requested by Lender, a waiver of mechanics lien and stop notice rights from each original contractor, subcontractor and material supplier, enforceable in accordance with Applicable Law, to be submitted with the initial Application for Disbursement (as defined in Paragraph 5(a) below) based on Borrowing Base availability for such Approved Subdivision, or with a Residential Draw Request (as defined in Paragraph 5(a) below) for such Approved Subdivision, as applicable.

(m) A detailed Construction Cost Breakdown of all costs and expenses required to acquire, develop and complete construction of the Lots and Properties in the relevant Approved Subdivision as to the following:

(i) with respect to acquisition of the Real Property and construction of the Lots and Improvements in such Approved Subdivision to be financed with proceeds of the Loan; and

(ii) with respect to construction of the Residences and any Improvements in such Approved Subdivision to be financed with proceeds of the Loan.

Each Construction Cost Breakdown shall be approved by Lender in its sole discretion and is subject to change only with the prior written consent of Lender which may be withheld in its sole discretion.

(n) If and as requested by Lender and depending on the Stage (as defined in Paragraph 5(a)(i) below) of development of the Approved Subdivision in question, (i) evidence that all applicable zoning ordinances, map approvals and conditions, permit requirements and restrictive covenants (collectively, “Restrictions”) affecting the Real Property covered by such Mortgage permit the construction of and use and density intended for the Residences to be constructed thereon and have been or will be complied with; (ii) evidence of building permits and all other permits and governmental approvals reasonably required with respect to the Real Property covered by such Mortgage, (iii) evidence of the availability of all utilities to and for the Real Property covered by such Mortgage; (iv) evidence that all streets providing access to the Real Property covered by such Mortgage have been or will be dedicated to public use (if such dedication is then required by applicable governmental authorities) and installed and accepted by the applicable governmental authorities (if such installation and/or acceptance is then required by such authorities); (v) a Phase 1 and, if recommended therein, Phase 2 environmental site assessment report with respect to the Real Property covered by such Mortgage (together with any additional studies, tests or reports recommended therein) which is

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prepared by a qualified firm acceptable to Lender and which certifies as follows: (a) that the Lots and Properties are in compliance with the requirements of Paragraph 14 below and meeting Lender’s other standard requirements for such reports; and (b) there is no publicly available information or records, or evidence at the Property covered by such Mortgage or visible in the surrounding community, of environmental matters that could restrict the development or use of such Properties or of any high voltage transmission lines, wetlands, or hazardous material except as to such matters consented to in writing by Lender, in advance of any disbursement with respect to such Properties, and (vi) such other information and evidence as Lender shall require relating to Borrower or such Property.

(o) Evidence, which may take the form of a certification thereof by Borrower provided Lender has no reason to believe such certification is inaccurate or misleading as to any such matter stated therein, that all representations and warranties of Borrower set forth in this Loan Agreement are true and correct and that no Default or Event of Default (as each such term is hereafter defined in Paragraph 11 below) shall exist.

(p) Evidence that performance and labor and material payment bonds required by applicable Governmental Authorities with respect to such Approved Subdivision have been posted in accordance with Applicable Law.

(q) Subordination agreements, in form and content satisfactory to Lender, providing for the subordination to the lien and charge of the relevant Mortgage any liens, rights to payment or performance or clouds on title affecting the Real Property in such Approved Subdivision, including, without limitation, pursuant to any Contracts under which Borrower has acquired such Real Property.

(r) If requested by Lender following the imposition of any lien filed against any of the Lots or Properties with respect to site improvement work in such Approved Subdivision, which lien is susceptible of having preference over the lien of the Mortgage encumbering such Approved Subdivision under California Civil Code Section 3137, as determined by Lender in its sole discretion, Lender shall have received evidence satisfactory to Lender of Borrower’s procurement and recordation of a payment bond meeting the requirements of California Civil Code Section 3139. The requirements of this subparagraph shall apply (with such modifications as are necessary to accommodate Applicable Laws in such jurisdiction) equally to Approved Subdivisions in jurisdictions other than California.

(s) Evidence that Borrower is in compliance with any development agreements, public or private, affecting the Real Property in such Approved Subdivision.

        2.3 Requirements For Certain Borrowing Base Stages. Borrower shall satisfy the following requirements and, if required by Lender, deliver to Lender evidence of such satisfaction, (i) to establish availability under the Borrowing Base for Disbursements based on the below specified Stages of construction in an Approved Subdivision, or (ii) as a condition to Disbursements pursuant to the draw procedure set forth in Paragraph 5(a)(ii) below if the Borrowing Base has been discontinued, as applicable:

(a) As to any Stage, all material conditions to precedent availability of Disbursements for any prior Stage shall have been satisfied, or if Lender has deferred the satisfaction of any such conditions to a later date, the satisfaction of such conditions by the required date.

(b) As to Stage 1, specified in the attached Exhibit “B”, building permit(s) and all other permits required with respect to the Residences covered by such Mortgage shall have been issued and in full force and effect.

(c) As to Stage 2, specified in the attached Exhibit “B”, if requested by Lender, Lender’s Inspector (defined in Paragraph 7(c) below) shall have certified in writing, as to the completion of the foundation and Title Insurer shall have issued its foundation endorsement to the Title Policy, in the form of CLTA endorsement No. 102.5 or 102.7 or as Lender may otherwise require, assuring Lender that such foundation is constructed wholly within the boundaries of the Properties, does not encroach on any easements, and does not violate any applicable set-back requirements.

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(d) Availability under the Borrowing Base for Disbursements based on the final Stage (Stage 9 in “Exhibit B”) for a Property will not be deemed to exist until Lender has received, if Lender so requests, an affidavit or certificate executed by Borrower certifying that, as to such Property (1) all requirements of Governmental Authorities having jurisdiction have been satisfied; (2) no mechanics’ or materialmen’s liens or other encumbrances have been filed against the Property; (3) a final certificate of occupancy or an unconditional temporary certificate of occupancy has been issued by the governing municipal authority; and (4) all invoices, bills, and other payments have been paid in full to the appropriate parties with respect to such Property other than invoices or bills being paid from such final Disbursement; however, Lender shall have the right to require at any time the evidence of such certified matters, including without limitation, evidence that either (i) the Property has been completed; or (ii) a certificate of occupancy has been issued by the appropriate Governmental Authority and final lien releases or waivers by all parties who have supplied labor, materials, or services for the construction of such Property, or who otherwise might be entitled to claim a contractual, statutory, or constitutional lien against such Property.

(e) As to any Stage, the applicable Mortgage shall continue to constitute a valid first-priority lien on the Properties encumbered thereby and a valid first-priority security interest in any related personal property for the full amount then outstanding on account of the Loan, and, if requested by Lender, Title Insurer shall have issued its endorsement to the Title Policy (which may be in the form of a CLTA 122 endorsement) insuring the continuing first priority of such Mortgage for all prior Disbursements and/or its commitment to insure such priority as to any pending Disbursements, subject only to such exceptions thereto as have been approved in writing by Lender.

(f) As to each Stage, if requested by Lender, such certificates, approvals and evidence of completion, in whole or in part, of the applicable construction item described on the applicable Construction Cost Breakdown from the prior Stage of construction of the Properties in such Approved Subdivision, together with copies of contracts and subcontractors’ bills and invoices as Lender may request.

(g) Lender shall have timely received any applicable Lender Costs then required to have been paid pursuant to this Loan Agreement with respect to such Approved Subdivision.

3. DISBURSEMENT PRIOR TO RECORDATION. Notwithstanding any contrary provisions of the Note, this Loan Agreement, or any of the other Loan Instruments, and in consideration of Lender’s Disbursement of all or part of the Loan Proceeds prior to the Recordation of a Mortgage on Lots or Property for which such Loan Proceeds are being disbursed, Borrower and Lender covenant and agree as follows as to such Mortgage and such Loan Proceeds:

(a) Provided Borrower has then satisfied all conditions to Disbursement of the Loan Proceeds under this Loan Agreement, except those requiring the Recordation of the subject Mortgage, Lender agrees to make Disbursements of the Loan Proceeds, or so much thereof as Borrower shall request, directly to the Title Insurer as part of the closing of the transaction whereby an Additional Approved Subdivision is included in the Borrowing Base to provide availability of Loan Proceeds based on such Approved Subdivision, or for availability of Loan Proceeds to acquire or construct such Approved Subdivision (in each case, the “Loan Closing”) prior to Recordation of said Mortgage. Said Disbursement shall be made in accordance with and subject to Lender’s escrow instructions to the Title Insurer which shall provide, among other things, that the funds so disbursed may be used for the benefit of Borrower only when Recordation of the subject Mortgage has occurred and the conditions for the Loan Closing can be complied with.

(b) For purpose of this Loan Agreement, all terms and provisions of the Note, and Borrower’s obligations thereunder, shall be deemed effective and in full force and effect on the date the requested Disbursement is made to the Title Insurer, except as those terms and provisions are amended hereby.

(c) Interest shall commence and accrue at the rate provided in the Note on all Loan Proceeds disbursed by Lender to the Title Insurer from the date of such Disbursement irrespective of

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when or if the subject Mortgage is recorded or when or if such Loan Proceeds are disbursed by the Title Insurer to or for the benefit of Borrower.

(d) Unless and until Recordation has occurred, the Note shall be deemed unsecured as to such Approved Subdivision and, if such Mortgage is not recorded within three (3) Business Days following the date of said Disbursement to the Title Insurer, the principal amount of such Disbursement, and all interest accrued thereon in accordance herewith, shall be due and payable by Borrower to Lender upon Lender’s demand made at any time after said third Business Day. Until the Recordation of the subject Mortgage has occurred, the Note shall be deemed amended to conform to the provisions of this Paragraph 3.

This Section is intended to cover the rights and obligations of the parties relative to the Disbursement of Loan Proceeds applicable to Lots and Property covered by a specific Mortgage prior to Recordation of such Mortgage and, except as to the provisions hereof relating to commencement of interest, the provisions of this Section shall be deemed canceled and of no further effect upon Recordation of the subject Mortgage. Lender’s election to make any Disbursement of Loan Proceeds prior to Recordation of such Mortgage shall be in Lender’s sole and absolute discretion and the provisions of this Section shall in no event be deemed to compel Lender to waive any condition to Disbursements under this Loan Agreement, including without limitation, Recordation of the subject Mortgage prior to any Disbursement of Loan Proceeds as to the Initial Disbursements.

4. PROCEDURE FOR APPROVAL OF NEW SUBDIVISIONS. Disbursements shall only be made, and availability of Loan Proceeds under the Borrowing Base shall only exist, with respect to Approved Subdivisions. Lender shall have approved all aspects of each Subdivision for which Disbursements are sought, in advance of any such Disbursement for acquisition or construction of such Approved Subdivision, or based on its inclusion in the Borrowing Base. Borrower shall request approval of each Subdivision prior to a request for Disbursements with respect thereto, and shall provide Lender with all information required by Lender in connection therewith, including, without limitation, a Construction Cost Breakdown applicable to such Subdivision. Lender’s failure to approve a Subdivision in writing, or any portion thereof, within fifteen (15) business days of its receipt of all information required in connection therewith shall be deemed a disapproval thereof. Upon, and as a condition to, any approval of a new Subdivision by Lender, Borrower shall execute and deliver to Lender a confirmation of any restrictions or requirements imposed by Lender as a condition to its approval of such Subdivision, including any required supplements or modifications to the Loan Instruments, or confirmations thereof, as may be required by Lender in connection therewith. A Subdivision which is approved in writing by Lender for inclusion in the Borrowing Base and/or for Disbursements for acquisition or construction thereof, and otherwise meeting the requirements of this Loan Agreement, shall be an “Approved Subdivision.”

5. PROCEDURE FOR DISBURSEMENTS. Subject to all of the terms and provisions of this Loan Agreement, Disbursements under the Loan shall be in accordance with the following:

(a) Except as set forth in subsection (ii) below, Disbursements of the Loan shall be made in accordance with the Borrowing Base (as defined in subsection (i) below) and in accordance with the following:

(i) Borrower shall be entitled only to Disbursements in the amount approved by Lender, based upon: (A) as to Lots, the percentage of completion of each such Lot, as reasonably determined by Lender based on the Construction Cost Breakdown for the Approved Subdivision in which such Lots are located, as the same may be verified by Lender’s Inspector, and (B) as to Properties, the stage, as specified in Exhibit “B” attached hereto (the “Stage”), of construction of the Properties in the subject Approved Subdivision and for which all other requirements under this Loan Agreement for Disbursement have been met. On a monthly basis, Borrower shall submit to Lender a work in progress report (the “WIP Report”) which identifies each Property by Subdivision, its address, lot and block number, plan type, Loan Allocation (as defined below), whether or not it is Under Contract (as defined in Paragraph 3 of the Specific Loan Terms), sales price, and its Stage of completion either as a Residence, a Finished Lot or a Lot Being Actively Developed, according to the applicable Construction Cost Breakdown therefor (as approved by Lender, the “Borrowing Base Summary”). The Borrowing Base Summary, as approved by Lender, shall establish the

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current Borrowing Base availability (subject to reduction for Lots and Residences released or required to be released from Mortgages after the date of such WIP Report), and shall be certified on behalf of Borrower by Borrower’s Agent (as identified in Paragraph 6 of the Specific Loan Terms) as true and correct. To request a Disbursement based on the Borrowing Base, Borrower’s Agent shall execute and deliver an Application for Disbursement in the form of the attached Exhibit “C” (“Application for Disbursement”) accompanied by such information as Lender may reasonably request regarding satisfaction of any conditions to the requested Disbursement required under the terms of this Loan Agreement. At any given time, the Borrowing Base will be determined by the most recent Borrowing Base Summary based on the most recent WIP Report, as received and accepted by Lender. However, if inspections by Lender reveal that the WIP Report overstates the actual work in progress in the aggregate, the Borrowing Base for that and subsequent WIP Reports will be reduced by the amount of overstatement until another inspection has been performed by Lender. If inspection by Lender reveals that more than one WIP Report by Borrower overstates the actual work in progress, Lender may restrict the Borrowing Base to that amount determined by the last inspection by Lender or discontinue Borrowing Base Disbursements, as contemplated under subparagraph (ii) below. The aggregate amount, determined by Lender in its sole discretion, available from time to time, of the Stage of Lots Being Actively Developed (as such Stage is set forth in Exhibit “B” attached hereto) and the Stage of actual work in process (as such Stage is set forth in Exhibit “B” attached hereto) of the Residences, is referred to herein as the “Borrowing Base.”

(ii) Notwithstanding anything to the contrary in this Loan Agreement or the other Loan Instruments, at any time (and from time to time) Lender may, in its sole discretion, following the occurrence of an Event of Default, elect, pursuant to written notice thereof given to Borrower, to discontinue the Borrowing Base method of Disbursement hereunder and require that any and all future Disbursements of the Loan shall be made in installments to Borrower for the payment of the acquisition and development and refinancing costs of Lots and/or, after actual commencement of construction hereunder, for payment of all costs of labor, materials or services for the construction of the Residences based on work actually done in accordance with the applicable Construction Costs Breakdown for such Properties. From and after the date of such written notice, Paragraph 5(a)(i) above shall be of no force and effect. Thereafter, Disbursements under this Loan Agreement shall be based upon work actually done during the preceding period less retainage (if required by Lender), and all draw requests shall be executed and certified on behalf of Borrower by Borrower’s Agent and shall be in the form of, and contain the information as set forth in a residential draw request, in the form of Exhibit “D” attached hereto (“Residential Draw Request”), accompanied by such other information as may be requested by Lender from time to time, such information and documentation to include invoices, canceled checks, lien waivers and other evidence as may be reasonably required by Lender, such as: (i) unconditional lien releases and waivers, in form and content acceptable to Lender, from the general contractor and all other contractors, subcontractors and suppliers of materials or labor, acknowledging receipt of, and release and waiver of any lien, stop notice or other right with respect to, amounts equal to prior Disbursements made for such materials or labor; (ii) if Lender so requests, unconditional lien releases and waivers to similar effect, with respect to the requested Disbursements; and (iii) evidence reasonably satisfactory to Lender establishing actual payment of Property costs of a type which does not give rise to lien rights and for which lien releases are, as a result, not appropriate (such as permits), for which prior Disbursements were made. In addition, delivery to Lender of information and of evidence of the satisfaction of certain conditions specified under Sections 2.2 and 2.3 above, shall be a condition precedent to any Disbursements upon any discontinuation of the Borrowing Base hereunder and such requirements may be applied on an individual Property-by-Property basis.

(b) Any provision herein to the contrary notwithstanding, for purposes of determining the Borrowing Base and/or as to Disbursements for the construction of a Property, the maximum amount of the Loan allocated to be disbursed for a Property (the “Loan Allocation” or if applicable to more than one Property, the “Loan Allocations”) shall not exceed the lesser of: (1) the percentage set forth in Paragraph 11 of the Specific Loan Terms of the direct costs of such Property, as determined by Lender (the “Loan to Cost Ratio”); or (2) the percentage set forth in Paragraph 11 of the Specific Loan

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Terms of the lesser of the following values which is applicable to such Property (the “Loan to Value Ratio”):

(i) The actual price of the Property as stated in a Sales Contract; or

(ii) The value established in an appraisal prepared at Borrower’s cost and expense by an appraiser satisfactory to Lender and in form and substance satisfactory to Lender; or

(iii) The list price offered by Borrower.

(c) Anything herein or in any of the other Loan Instruments to the contrary notwithstanding, at no time shall Lender be obligated to make any Disbursement hereunder if the outstanding balance of the Loan equals or exceeds the Loan Amount or the then amount of the Borrowing Base, or the loans-to-one-borrower limitation imposed upon Lender by any applicable laws, rules, and regulations of entities having jurisdiction over Lender in connection with indebtedness owing by Borrower and its affiliates to Lender (the “Loans-to-One Borrower Limitation”).

(d) Anything herein or in any of the other Loan Instruments to the contrary notwithstanding, Lender will disburse Loan Proceeds, provided Borrower is not in Default or an Event of Default has not occurred and is continuing, and subject to the limitations in Paragraphs 5(b) and (c), in a single Disbursement to Borrower for the payment of the acquisition or refinancing costs for any Finished Lots. Nothing herein shall be construed as an obligation or commitment on the part of Lender to finance the construction of Residences on any Inventory Lots, except as may be otherwise expressly approved in writing by Lender, other than as part of an Approved Subdivision. Lender shall have the right to approve in advance Borrower’s acquisition of an Inventory Lot that is to be encumbered by a Mortgage in favor of Lender.

6. BORROWER’S DEPOSIT.

(a) With respect to any Approved Subdivision, if in Lender’s reasonable judgment, there are insufficient funds remaining in the Loan, or insufficient availability under the Borrowing Base, as applicable, for the completion of the Properties in such Approved Subdivision in accordance with the then-effective Construction Cost Breakdown for such Approved Subdivision and Borrower fails, within ten (10) business days of Lender’s delivery of notice to Borrower of Lender’s determination of the existence of such insufficiency as to such Approved Subdivision, to submit a revised Construction Cost Breakdown for such Approved Subdivision addressing such apparent or actual insufficiency of funds, which Construction Cost Breakdown shall be acceptable in form and content to Lender’s satisfaction, and which takes into account Borrower’s compliance with all other Construction Cost Breakdowns then in effect as to all other Approved Subdivisions then included in the Borrowing Base, it shall constitute a Default hereunder. If Lender determines, based on its review of the revised Construction Cost Breakdown, together with such other information required in connection therewith by Lender, that the Loan will not be In-Balance (as defined below) after giving effect to such revised Construction Cost Breakdown, then in such case, Borrower shall deposit with Lender, within fifteen (15) days after demand by Lender, such sums, either in the form of cash or letter(s) of credit acceptable to Lender (“Borrower’s Deposit”), as Lender may deem necessary, in addition to the Loan, for the completion of the Properties in such Approved Subdivision, the payment of all costs in connection with the construction of such Properties, and the performance of any obligation of Borrower to Lender owed with respect thereto. Borrower hereby agrees that Lender (i) shall have a security interest in any Borrower’s Deposit in any form to secure all of Borrower’s obligations under the Loan Instruments, and (ii) may apply any proceeds of any Borrower’s Deposit for the purposes contemplated herein without any further consent or action on Borrower’s part. Lender shall not be required to pay interest on the Borrower’s Deposit. Lender will disburse all or a portion of the Borrower’s Deposit prior to any disbursement of any portion of the Loan Proceeds to complete Properties in the affected Approved Subdivision(s). Borrower shall promptly notify Lender in writing if and when the cost of the construction of the Properties in an Approved Subdivision materially exceeds, or appears likely to materially exceed, the amounts budgeted therefor in the then-current Construction Cost-Breakdown for

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such Approved Subdivision. For purposes hereof, “materially” shall mean a variance of ten percent (10%) from the budgeted amounts for such item.

(b) The Loan is in-balance whenever the amount of the undisbursed Loan Proceeds or availability under the Borrowing Base (taking into account Borrower’s compliance with the Construction Cost Breakdowns then in effect as to all Approved Subdivisions then included in the Borrowing Base), as applicable, plus any sums on deposit in the Borrower’s Deposit, are sufficient in the reasonable judgment of Lender to pay, through completion of the Properties, in accordance with the then-applicable Construction Cost Breakdowns for each Approved Subdivision then subject to a Mortgage and maturity of the Loan, all of the following sums (“In-Balance”):

(i) All costs of construction, ownership and maintenance of the Properties;

(ii) All costs of marketing and sale of the Properties (if this Loan Agreement contemplates such marketing and sale during the term of the Loan); and

(iii) All interest and all other sums which may accrue or be payable under the Loan Instruments.

(c) Failure of the Loan to be In-Balance shall mean that the Loan is out-of-balance (“Out-Of-Balance”); provided, however, Borrower shall have the right to submit revised Construction Cost Breakdowns for the Approved Projects in the Borrowing Base, which shall be subject to the approval of Lender, which, in the aggregate, shall bring the Loan In-Balance;

(i) Borrower acknowledges that the Loan may become Out-Of-Balance in numerous ways, not all of which may now be foreseen. Borrower further acknowledges that the Loan may become Out-Of-Balance from a shortage of funds in any single line item or category of the Construction Cost Breakdowns, even if there are undisbursed Loan Proceeds in other line items or categories. Undisbursed Loan Proceeds in one category or line item (e.g., construction costs) may not be applied to another category or line item (e.g., interest reserve) unless either the Construction Cost Breakdowns allow such use (and only to the extent specifically allowed) or Lender consents in writing to such use in each instance.

(ii) Whenever the Loan becomes Out-Of-Balance, Lender may make written demand on Borrower to deposit Borrower’s own funds into Borrower’s Deposit in an amount sufficient, in Lender’s reasonable judgment, to cause the Loan to be In-Balance. Borrower must immediately deposit all funds required by Lender’s demand. Borrower must also submit, for Lender’s approval, revised Construction Cost Breakdowns as to all Approved Subdivisions affected thereby within fifteen (15) days after any such demand. Lender shall disburse all funds held in Borrower’s Deposit in the manner provided in this Loan Agreement for Disbursements of the Loan Proceeds.

7. WARRANTIES, REPRESENTATIONS AND COVENANTS. As a material inducement to Lender to enter into this Loan Agreement, Borrower warrants, represents, covenants and agrees as follows:

(a) Commencement, Continuation and Completion. Borrower will diligently prosecute construction of all Lots Being Actually Developed and Residences, as applicable, after the commencement of construction thereon, and will complete same, including all necessary utility connections, in substantial accordance with the Plans submitted to and approved by Lender, and in accordance with good building practices and Applicable Laws.

(b) No Changes to Plans. Without the prior written consent of Lender, Borrower will make no material change in the Plans submitted to Lender that either reduces the value of the Properties or causes the Loan to be Out-Of-Balance.

(c) Inspections. Lender shall have the right to inspect the Properties either itself or using Lender’s inspector or appraiser (“Lender’s Inspector”), at Borrower’s cost and expense (subject to Paragraph 19 below), to determine Borrower’s compliance with the requirements of this Loan Agreement.

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Borrower will permit Lender and Lender’s agents and representatives, at any and all times, during regular business hours, to inspect construction in the Approved Subdivisions in the Borrowing Base, including the Residences located therein and to examine and copy all of Borrower’s books and records and all contracts and bills pertaining to said construction and the Residences. After a Default hereunder, if Lender shall examine the aforesaid books and records, Borrower shall pay on demand by Lender, subject to Paragraph 19 hereof, reasonable expenses incurred by Lender as a result of such examination.

(d) Use of Disbursements. Borrower will accept Disbursements in accordance with the provisions hereof and, if made to Borrower, will use or cause each such Disbursement to be used solely for the payment (or reimbursement) of materials, labor, services, costs and expenses incurred or expended in connection with the construction of the Lots and/or Properties within Approved Subdivisions or for such additional costs and expenses as may be approved in writing by Lender, and in payment or performance of any obligation of Borrower to Lender, and for no other purpose. If requested by Lender, Lender shall have received within fifteen (15) days of its request therefor all information and documentation, including invoices, canceled checks, lien waivers and other evidence as may be required by Lender with respect to any Approved Subdivision, such as: (i) unconditional lien releases and waivers, in form and content acceptable to Lender, from the general contractor and all other contractors, subcontractors and suppliers of materials or labor, acknowledging receipt of, and release and waiver of any lien, stop notice or other right with respect to, amounts equal to payments made by Borrower for such materials or labor for such Subdivision and depending on the Stage of development of the Lot or Property in question, and (ii) evidence satisfactory to Lender establishing actual payment of Property costs of a type which does not give rise to lien rights and for which lien releases are, as a result, not appropriate (such as permits), for which prior Disbursements for such Subdivision were made.

(e) Borrower Liability for Construction. Borrower is solely liable for construction and completion of the Lots and/or Properties in accordance with this Loan Agreement. Lender has no liability or obligation whatsoever for the Lots or Properties or the construction or completion thereof or work performed thereon, and has no obligation except to disburse the Loan as herein agreed, and is not obligated to inspect the Lots or Properties; nor is Lender liable for the performance or default of any contractor or subcontractor, or for any failure to construct, complete, protect or insure the Lots or Properties, or for the payment of any cost or expense incurred in connection therewith, or for the performance or nonperformance of any obligation of Borrower to Lender; and nothing, including without limitation any Disbursement hereunder or the deposit or acceptance of any document or instrument, shall be construed as a representation or warranty, express or implied, on Lender’s part.

(f) No Conditional Sale Contracts. Without the prior written consent of Lender, no materials, equipment, fixtures or any other part of the Residences shall be purchased or installed under security agreements, conditional sale contracts or lease agreements, or other arrangement wherein a security interest or title to said property is retained or the right is reserved or accrues to anyone to remove or repossess any such items or to consider them as personal property.

(g) Right to Defend. Lender may (but shall not be obligated to) commence, appear in or defend any action or proceeding purporting to affect any Real Property or the rights or duties of Lender or Borrower or the payment of any funds hereunder, and in connection therewith may pay all necessary expenses, including reasonable attorneys’ fees, which Borrower agrees to pay to Lender upon demand.

(h) Borrower’s Approval of Plans. The Plans submitted to Lender by Borrower are satisfactory to Borrower, have been approved by any Guarantor(s), and to the extent required by Applicable Law or any restrictive covenant, by all Governmental Authorities and beneficiary of any such covenant respectively. Any existing improvements on the Properties are within the perimeter of the Properties (except any required off-site Property) in accordance with the Plans and any Restrictions applicable thereto. There are no encroachments, defects or conditions (including unstable soil conditions) in, on or about any of the Properties that would or could render it unfit for Residences. There are no structural defects in the Properties, and no violation of any Applicable Law exists with respect to the Lots or Properties.

(i) Notice of Litigation. Borrower shall promptly inform Lender of (i) any litigation, proceeding or enforcement of judgment (collectively, “litigation”) threatened or commenced against Borrower, General Partner, Managing Member or any Guarantor(s) or affecting the Lots or Properties, which, if

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determined adversely, might have a material adverse effect upon the financial condition of Borrower, General Partner, Managing Member or Guarantor(s) or upon the Lots or Properties, or might cause a Default; (ii) any material claim or controversy which might become the subject of such litigation; and (iii) any material adverse change in the financial condition of Borrower, General Partner, Managing Member or Guarantor(s). For the purposes hereof, material adverse change and/or material adverse effect shall mean a decline of fifteen percent (15%) in the net worth of Borrower, General Partner, Managing Member or Guarantor(s) as shown on the Financial Statements delivered to Lender from time to time in connection with the Loan or an event which places Borrower out of compliance with any Additional Loan Covenants (as defined in Paragraph 15 below).

(j) Financial Statements and Reports. As required by Lender, Borrower shall provide Lender with the Financial Statements and other reports during the term of the Loan in accordance with Paragraph 12 of the Specific Loan Terms. Borrower shall also provide, on or before the thirtieth (30th) day of each calendar month, sales, closings and inventory reports on all for-sale residential construction projects owned by Borrower, General Partner, Managing Member or Guarantor, acceptable to Lender, and for Properties securing the Loan, including a sales report showing all currently pending sales (separated into new sales entered into during the month being reported on and previous sales contracted for in preceding months), all closings which took place during the month being reported on, all sales previously reported that for any reason will not close, the status of all inventory and all other sales information reasonably requested by Lender, all in form and content acceptable to Lender. All Financial Statements and other reports shall be true, correct, and complete as of the dates specified therein and, in the case of the Financial Statements, shall fully and accurately present the financial condition of Borrower and any other party obligated for the Loan, as appropriate, as of the dates specified. Borrower represents to Lender that on the date hereof, no material adverse change has occurred in the financial condition of Borrower or, to Borrower’s knowledge, any other party obligated for the Loan since the dates the initial Financial Statements of Borrower or any other party obligated for the Loan were delivered to Lender. Borrower shall also promptly deliver to Lender such other sales information and documents that Lender from time to time may request, including operating statements, any one or more of the sales agreements (“Sales Agreements”) for particular Residences or Lots, or notice of or information regarding any claimed breach or disavowal of buyer’s or seller’s obligations under any one or more Sales Agreements, and any written marketing report(s) including all brochures and prospective purchaser lists.

(k) Required Releases. Subject to the provisions of Paragraph 20 hereof, Borrower shall cause a Lot or Property to be released from a Mortgage at such times as provided in the Specific Loan Terms attached hereto (the “Required Release Date”). On the Required Release Date, Borrower shall repay in full the amount of the Loan advanced with respect to such Property, as determined by Lender as of such date, such amount to be not less than the full amount of the Loan Allocation disbursed for such Property regardless of whether all conditions to a Partial Release (as defined in Paragraph 20(b)) below) are satisfied with respect to such Property.

(l) Occupancy. Neither Borrower nor any other party shall occupy any Residence which is covered by a Mortgage.

(m) Discharge of Liens. Borrower shall pay and discharge all lawful claims, including taxes, assessments, and governmental charges or levies imposed upon it or its income or profits or upon any properties belonging to it, prior to the date upon which penalties attach thereto and deliver receipts of those payments to Lender as required under the Mortgage; however, Borrower shall not be required to pay any such tax, assessment, charge or levy, the payment of which Borrower is diligently contesting in good faith and by proper proceedings and for which a bond and/or other security to prevent impairment of Lender’s security is posted as Lender may require. Borrower shall pay upon demand any costs incurred by Lender for realty tax service if required by Lender. Each Lot is taxed separately without regard to any other real property.

(n) Formation, Existence. Borrower warrants and represents as to standing and organization as follows: (i) If Borrower is a corporation, it is duly organized and validly existing, in good standing under the laws of the state of its incorporation, and is qualified to do business, and in good standing, in the state in which the Lots and Properties are situated (and all other states if any in which Borrower is required to be qualified); (ii) If Borrower is a partnership, it is duly organized and validly existing, is in good standing under the laws of the state of its formation and is qualified to do business in the state in which the Lots and Properties are situated (and all other states if any in which Borrower is required to be qualified); (iii) If

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Borrower is a trust, it is duly organized, validly existing, the trustees thereof are qualified to act as trustees, and the trust is qualified to do business in the state in which the Lots and Properties are situated (and all other states if any in which Borrower is required to be qualified); (iv) If Borrower is a limited liability company, it is duly organized and validly existing, in good standing under the laws of the State of its organization, and is qualified to do business, and in good standing, in the State in which the Properties are situated (and all other States, if any), in which Borrower is required to be qualified.

(o) Proper Authority. Borrower has full right, power and authority to own the Properties, execute and deliver the Loan Instruments to be executed and delivered by it, consummate the transactions contemplated thereby, and perform its obligations thereunder. The Loan Instruments to be executed and delivered by Borrower have been duly authorized, executed and delivered, and constitute valid and legally binding obligations of Borrower, enforceable in accordance with their terms, and the Loan is not usurious. The individual(s) executing the Loan Instruments on behalf of Borrower or any person comprising a part of Borrower are authorized and empowered by his/her or their signatures alone to bind Borrower. If Borrower is more than one person, firm or corporation, all receipts, requests and instructions pertaining to the Loan, or for any Disbursement thereof, may be made by any one of the undersigned Borrowers with the same effect as if signed by all.

(p) No Pending Actions. As of the date of Recordation of any Mortgage, other than as disclosed to Lender in writing, there are no actions, suits or proceedings pending or, to the knowledge of Borrower, threatened against or affecting it, the Properties, or any Guarantor(s) of the nature or type required to be reported to Lender under Section 7(i) hereof or involving the validity or enforceability of any Mortgage or the priority of the lien thereof, at law or in equity, or before or by any Governmental Authority. Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court or any Governmental Authority.

(q) CC&Rs. Borrower may submit to Lender a proposed form of declaration of covenants, conditions and restrictions (“CC&Rs”) affecting all or part of the Properties which may include provisions for the formation of an owner’s association for the Approved Subdivisions, and may request Lender to approve and to subordinate the Mortgage to the CC&Rs. Lender shall have no obligation to grant such a request by Borrower. However, Lender shall consider and honor any such request if that would not impair or adversely affect the security of any obligation evidenced by the Loan Instruments. Lender may require as a condition to its consent to such subordination the issuance of one or more endorsements to the Title Policy at Borrower’s sole cost and expense.

(r) Notice of Completion, Notice of Cessation. Borrower shall fully pay and discharge all claims for labor done and materials and services furnished in connection with the Properties, diligently file or procure the filing of a valid Notice of Completion upon completion of construction, diligently file or procure the filing of a Notice of Cessation upon a cessation of labor on the work of improvement for a continuous period of thirty (30) days or more, and take all other reasonable steps to forestall the assertion of claims of lien against the Properties, and of stop notices against Lender of claims against any funds to be advanced hereunder. Nothing herein contained shall require Borrower to pay any claims for labor, materials, or services which Borrower is diligently contesting in good faith and by proper proceedings, if Borrower posts a surety bond, in the required statutory amounts, sufficient to release any claim of lien or stop notice within ten (10) days after the filing or service thereof. Borrower agrees, upon demand by Lender, to defend, indemnify and hold Lender harmless against any action filed or claim asserted against Lender for any reason in connection with any such lien claim or stop notice. Borrower hereby irrevocably appoints and authorizes Lender, as Borrower’s attorney-in-fact under a power of attorney coupled with interest, to execute, file and record any Notice of Completion or Cessation of Labor or any other notice which Lender deems necessary or advisable to protect its interest hereunder or the security for the Loan.

(s) Correcting Defects. Within thirty (30) days after demand by Lender, Borrower shall correct any defect in the Properties or any change in or deviation from the Plans not approved by Lender, and the making of any Disbursements shall not constitute a waiver of this covenant; provided, however, if such thirty (30) day period is insufficient to make such correction, Borrower shall nonetheless promptly commence such correction and submit a schedule to Lender, satisfactory in form and content to Lender, within said thirty-day period providing for the completion of such correction within a time period

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approved by Lender therefor. Borrower shall thereafter diligently prosecute such correction to completion and, in all events, not later than the expiration of the time period approved by Lender for such correction.

(t) Cancellation of Contracts. Borrower shall promptly inform Lender if any Contracts are canceled and/or materially modified.

(u) Preliminary Notices. At Lender’s request, Borrower shall deliver to Lender, so that Lender receives within three (3) business days after Borrower receives, copies of all preliminary notices and related documents served on Borrower pursuant to California Civil Code Sections 3097 and 3097.1 and any similar or successor statutes including all such notices and documents addressed to Lender or to “Construction Lender” and received by Borrower. This subparagraph shall also apply to Approved Subdivisions in jurisdictions other than California (with such conforming changes as are necessary to comply with the statutory requirements in such jurisdiction).

(v) Use of Models. With respect to any Approved Subdivision that does not include as part of the Real Property encumbered by the lien of the Mortgage applicable to such Approved Subdivision, Models (as defined in the Specific Loan Terms) to be used in connection with the marketing and sale of Residences in such Approved Subdivision, Borrower hereby grants to, and for the benefit of, Lender, such use and access rights to any such Models, to the extent of Borrower’s interest therein, as may be required by Lender in connection with Lender’s exercise of its rights and remedies under this Loan Agreement and the other Loan Instruments as the same apply to any such Approved Subdivision.

8. REQUIRED PRINCIPAL PAYMENTS. Borrower shall pay the principal of the Note as therein provided and as may be provided in the Specific Loan Terms attached hereto. Further, if, at any time, the outstanding balance of the Loan exceeds (a) the Loan Amount, (b) the Loans-to-One-Borrower Limitation, (c) the Borrowing Base approved by Lender, or (d) as to any individual Property, the Loan Allocation for that Property, then Borrower shall immediately pay in cash to Lender, following receipt of a written demand therefor, the amount of such excess. Further, at any time after the recording of a Mortgage in the Official Records, Lender shall have the right, but not at the expense of Borrower, unless such appraisal is required by federal regulations applicable to Lender, to obtain an appraisal of any Property covered by such Mortgage, from an appraiser satisfactory to Lender, and in the event such appraisal determines that the portion of the Loan disbursed by Lender for such Property exceeds the Loan Allocation for such Property, then Borrower shall also immediately pay in cash to Lender, following demand therefor, the amount of such excess. Notwithstanding the foregoing provisions of this Paragraph 8, but subject to all other provisions of this Loan Agreement, the aggregate Loan Allocations for Properties included in the Borrowing Base may exceed the Loan Amount; provided, however, (i) in no event shall such aggregate Loan Allocations exceed the amounts specified in Paragraph 19 of the Specific Loan Terms, and (ii) in no event shall the outstanding principal balance of the Loan exceed the Loan Amount.

9. REVOLVING LOAN. All or any portion of the principal of the Loan may be borrowed, paid, prepaid, repaid and reborrowed from time to time prior to maturity in accordance with the provisions of the Loan Instruments. The excess of borrowing (Disbursements and re-Disbursements) over repayments shall be the principal balance of the Loan from time to time and at any time. The aggregate amount of all Disbursements under the Loan may exceed the Loan Amount, but neither the outstanding principal balance of the Loan nor the outstanding aggregate amount of the Loan Allocations (not including those with respect to Properties released of record by Lender) shall ever exceed the Loan Amount.

10. MATURITY AND EXTENSION. The Loan shall mature as provided in the Note and as described in Paragraph 14 of the Specific Loan Terms.

11. DEFAULT. Each of the following events shall constitute a default (“Default”) under this Loan Agreement prior to the giving of notice or expiration of a cure period, as may be required hereunder, and, following the giving of such notice and/or expiration of such cure period, or if no notice or cure period is provided, shall constitute an “Event of Default” under this Loan Agreement and under the other Loan Instruments:

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(a) Failure to Pay Principal or Interest. Any failure to pay or deposit when due or required any sum of principal or, subject to any cure periods which may be set forth on the Note, interest under the Note.

(b) Breach of Other Monetary Obligations. Any failure to pay or deposit when due or required any sum (other than principal or interest) under this Loan Agreement or other Loan Instruments which is not cured within fifteen (15) days of Lender’s delivery of written notice thereof to Borrower.

(c) Breach of Condition/Covenant. Any breach or failure to satisfy or perform any condition, covenant or other provision of this Loan Agreement which is not cured within thirty (30) days of Lender’s delivery of written notice thereof to Borrower.

(d) Breach of Other Obligation. The occurrence of any breach or default which is not cured within the applicable time periods (if any) designated therein by Borrower, General Partner, Managing Member or any Guarantor(s) under: (i) any other Loan Instruments, evidencing, securing or relating to the Loan, in addition to this Loan Agreement; (ii) any Guaranty (or any revocation thereof); (iii) if the Properties are subject to any leasehold estate, the lease creating such estate; or (iv) any general contract for construction of the Properties; (v) any Contract, with respect to any material continuing obligations of Borrower thereunder; or (vi) any evidences of indebtedness or undertakings with respect to any other loan(s) extended by Lender to Borrower.

(e) Suspension of Business/Bankruptcy. Borrower, General Partner, Managing Member or any Guarantor(s): (i) voluntarily suspends the transaction of business; (ii) becomes insolvent or unable to pay its debts as they mature; (iii) makes an assignment for the benefit of creditors; (iv) becomes the subject of a bankruptcy, reorganization or similar debtor-relief proceeding unless, in the case of an involuntary petition filed against Borrower, General Partner, Managing Member or any Guarantor(s), the petition is dismissed within sixty (60) days; (v) becomes, or any material part of its property becomes, the subject of appointment of a receiver, trustee, or conservator, unless, in the case of such appointment without Borrower’s, General Partner’s, Managing Member’s or a Guarantor’s consent, the appointment is vacated within sixty (60) days; (vi) has any of its property become subject to any attachment, execution, sequestration or other judicial seizure not discharged within sixty (60) days; (vii) fails to pay or discharge any judgment against it, singly or in the aggregate, in excess of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00) as to Borrower, or to appeal such judgment(s) and obtain a stay thereof within ten (10) days of entry; or (viii) is dissolved or terminated.

(f) False Representations. Any representation by Borrower, General Partner, Managing Member or any Guarantor(s) of any material fact herein or in any Financial Statement or other submittal delivered to Lender is false, incorrect or misleading as of the date made.

(g) Project Enjoined. Any court of competent jurisdiction issues an order or decree enjoining the construction on any Lot, or enjoining or prohibiting the performance of this Loan Agreement or any other Loan Instrument, and any such decree or order is not vacated within sixty (60) days after its issuance.

(h) Lapsed Permit/License. Borrower neglects, fails or refuses to keep in full force and effect any permit, license or approval necessary for the construction, sale, use, and/or occupancy of the Properties.

(i) Bonded Notice. Any bonded stop or other notice to withhold in connection with the Loan is served on Lender pursuant to the provisions of Title 15, Division 3, Part 4 of the California Civil Code or any similar or successor statute, and within ten (10) days of the receipt of such notice the claim set forth therein is not discharged or, if the amount claimed is disputed in good faith by Borrower, an appropriate counter bond or equivalent acceptable to Lender is not filed with Lender.

(j) Liens; Priority of Mortgage. Other than the statutory lien for non-delinquent real property taxes and assessments, the imposition of any voluntary or involuntary lien upon any of the Properties, except as permitted by the Mortgage or approved by Lender in writing, unless (i) a bond in an amount not less than that required by statute or other security acceptable to Lender is provided within ten (10)

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days following actual knowledge by Borrower of such lien, or (ii) such lien is released within ten (10) days of the Borrower’s knowledge thereof; provided, however, no Disbursements will be available until such lien is released or bonded over.

(k) Destruction. The demolition, destruction or material damage of any of the Properties, if Lender determines that the Properties cannot be restored or rebuilt within a reasonable time (not later than the applicable Completion Date) at a cost not exceeding the aggregate amount then undisbursed by Lender for Disbursements and allocated to such Properties plus insurance proceeds, plus Borrower’s contributions as more particularly provided in the Mortgage.

(l) Uninsured Casualty. The occurrence of an uninsured casualty with respect to any material portion of the Properties, if Lender determines that the Properties cannot be restored or rebuilt within a reasonable time (not later than the applicable Completion Date), at a cost not exceeding the aggregate amount then held by Lender for Disbursements and allocated to such Properties, plus Borrower’s contributions as more particularly provided in the Mortgage.

(m) No Pledge or Change of Stock or Partnership Interest. If Borrower is a corporation, the shareholders of Borrower shall not sell, pledge or assign any shares of the stock of Borrower without the prior written consent of Lender; provided, however, any transfer of up to ten percent (10%) in the aggregate of Borrower’s shares shall not constitute a Default hereunder. If Borrower is a partnership or joint venture, the partners, members or joint venturers of Borrower shall not sell, pledge or assign any of their partnership, membership or joint venture interest nor shall any general partner, member or joint venturer be removed as the managing general partner, member or joint venturer or withdraws from or is admitted to Borrower without the prior written consent of Lender.

(n) Criminal Activity. The occurrence of any criminal activity, regardless of whether Borrower or any person under Borrower’s control is at fault, which could result in the forfeiture of the Properties to any Governmental Authority.

(o) Adverse Change. A material adverse change in the business or financial condition of Borrower, any General Partner, Managing Member or Guarantor(s) which materially potentially or adversely affects (a) the Approved Subdivisions, (b) the performance by Borrower, General Partner, Managing Member or Guarantor(s) of any of their respective obligations under any of the Loan Instruments or any Guaranty, or (c) the priority of the liens, charges, encumbrances or security interests created by any of the Loan Instruments.

(p) Unapproved Deviation. The occurrence of substantial deviations in the work of construction from the Plans or any Subdivision completion schedule without the prior approval of Lender, or the appearance of defective workmanship or materials, which deviations or defects are not corrected within thirty (30) days after Borrower’s discovery or receipt of written notice thereof.

(q) Valuation. The amount of the Loan with respect to any Approved Subdivision exceeds one hundred percent (100%) of the discounted bulk value thereof at completion.

(r) Non-Monetary Defaults.

(i) Generally. Notwithstanding any other provision of this Paragraph, if Lender determines in its reasonable judgment that the Default complained of, other than a Default for the payment of monies, cannot be cured within the period requiring curing as specified in Lender’s written notice of Default, then the Default shall be deemed to be cured if Borrower within the notice period shall have commenced the curing of the Default and shall thereafter diligently prosecute the same to completion. If in Lender’s reasonable judgment Borrower fails to diligently prosecute the curing of the Default or Lender determines that said Default is incurable, then this Default shall constitute an Event of Default.

(ii) Affecting Approved Subdivisions. The Defaults specified in Paragraph 11(c) (with respect to breaches of covenants, representations or warranties set forth in any of Paragraphs 7(a), 7(b), or 7(s)), 11(d)(i) (with respect to defaults under other

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Loan Instruments that are breaches of covenants or representations relating to individual Approved Subdivisions or are Events of Default relating to acts or omissions concerning individual Approved Subdivisions), 11(d)(iii), 11(d)(iv), 11(d)(v), 11(g), 11(h), 11(i), 11(j), 11(k), 11(l), 11(p) and 11(q) shall be deemed to apply to each Approved Subdivision on an individual basis only and shall be deemed cured as to the subject Approved Subdivision to which the Default applies on the first to occur of: (A) Borrower’s cure of such Default within the cure periods specified, if any, for such Default; or (B) removal of the subject Approved Subdivision from the Borrowing Base and re-margining of the Loan, if required by Lender, such that the outstanding principal amount of the Loan does not exceed the amounts permitted to be borrowed by Borrower under this Loan Agreement based on the Borrowing Base as reduced due to the elimination of the Approved Subdivision required to be removed as provided hereinabove; provided that Borrower shall repay within three (3) business days of demand by Lender any principal amounts outstanding with respect to the Loan as may be required to effect such re-margining. Upon the occurrence of any Default referenced in this subsection (ii), no Disbursements based on availability under the Borrowing Base with respect to the Approved Subdivision which is the subject of such Default shall be available to the Borrower until such Default is cured under subsection (A) hereinabove.

(s) Additional Defaults. Any “Additional Defaults” set forth in Paragraph 15 of the Specific Loan Terms shall have occurred and are continuing.

12. REMEDIES. Upon the occurrence of any Event of Default, Lender may at its option, without prior demand or notice, exercise any one or more of the following remedies, and any one or more of such other remedies as may be provided by any Loan Instrument or by law or equity, all of which remedies shall be cumulative:

(a) Right to Terminate Disbursements. Terminate the obligation of Lender to make Disbursements hereunder.

(b) Right to Call Loan. Declare the Loan and all obligations of Borrower under the Loan Instruments immediately due and payable.

(c) Correction. Where substantial deviations from the Plans and Specifications appear which have not been approved, or defective or unworkmanlike labor or materials are being used in the Properties, or there exist encroachments to which there has been no consent, Lender may order immediate stoppage of construction, after which no further work shall be done without the prior written consent of Lender unless and until such condition has been fully corrected notwithstanding any cure periods set forth hereunder.

(d) No Waiver. Notwithstanding the exercise of any or all of the remedies described in Sections 12(a), (b) or (c) hereof, make any Disbursements without thereby waiving (i) its right to demand payment of the Note, (ii) its right not to make any further Disbursements, or (iii) any of its other rights or remedies.

(e) Possession and Completion.

(i) To disburse and directly apply the proceeds of any Disbursement under the Loan to the satisfaction of any of Borrower’s obligations hereunder. Any Disbursement by Lender for such purpose shall be part of the Loan and shall be secured by the Mortgages, except a Disbursement of a Borrower’s Deposit. Borrower hereby authorizes Lender to hold, use, disburse, and apply the Loan and the Borrower’s Deposit for payment of costs of construction of the Properties, expenses incident to the Loan and each Property, costs of completion of all necessary off-site development of each Property, and the payment or performance of any obligation of Borrower hereunder. Borrower hereby assigns and pledges the proceeds of the Loan and Borrower’s Deposit to Lender for such purposes. Lender may disburse and incur such expenses as Lender deems necessary for the completion of construction of the Properties and to preserve each Property and any other security for the Loan, and such expenses, even though in excess of the amount of the Loan, shall be secured by the Mortgages, and payable to Lender upon demand. Lender may

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disburse any portion of any Disbursement at any time, and from time to time, to persons other than Borrower for the purposes specified herein irrespective of the provisions of Paragraph 5 hereof, including without limitation, to general contractors, subcontractors, laborers, material suppliers, or to hire an escrow firm to make such Disbursements, and the amount of Disbursements to which Borrower shall thereafter be entitled shall be correspondingly reduced.

(ii) Without limiting the provisions of subparagraph (i) above, Lender may also take possession of the Properties and perform all work and labor necessary to complete the work of construction, in which event such expenditures (except to the extent made from funds of Borrower) shall be deemed Disbursements under the Note, and any expenditures in excess of the total amount advanced under the Loan shall be deemed an additional Disbursement to Borrower, payable on demand and bearing interest at the rate specified in the Note. In addition, Borrower shall pay Lender a supervision fee at the current market rate, but not to exceed fifteen percent (15%) of the cost of such completion, for supervision of construction. Such additional Disbursement and the supervision fee is secured by the Mortgages and all other agreements securing the performance of Borrower’s obligations under this Loan Agreement and the other Loan Instruments. Borrower hereby irrevocably constitutes and appoints Lender its attorney-in-fact, coupled with an interest, with full power of substitution, to complete the construction of the Project, or any part thereof in Borrower’s name or Lender’s name (but with no obligation to do so), and in connection therewith to: (a) use any funds of Borrower to complete the construction; (b) make such additions, changes and corrections in the Plans as Lender deems desirable to complete the Residences or any part thereof in an economically sound manner; (c) discharge, replace or employ such contractors, subcontractors, agents, architects and inspectors as may be deemed necessary for such purposes; (d) make Disbursements directly to any general contractor, subcontractors, laborers, material suppliers, or to hire an escrow firm to make such Disbursements; (e) pay, settle, or compromise bills and claims; (f) execute applications and certificates; (g) employ watchmen to protect the Properties (including personal property located thereon) from damage, injury, or (h) prosecute and defend actions or proceedings in connection with any of the Properties, and (i) do any act which Borrower might do in its own behalf. In no event shall Lender be required to expend its own funds to complete any of the Properties.

13. INDEMNITY. Borrower hereby agrees to defend (by counsel satisfactory to Lender), indemnify and hold harmless Lender, its officers, directors, shareholders, agents, employees, affiliates, subsidiaries, successors and assigns, from and against all losses, damages, liabilities, claims, actions, judgments, costs and attorneys’ fees which Lender may incur, in any capacity, as a direct or indirect consequence of (a) the making of the Loan (except for violations of banking law or regulations by Lender), (b) Borrower’s failure to perform any obligations as and when required by any Loan Instrument, (c) the failure at any time of any of Borrower’s representations or warranties to be true and correct, or (d) any act or omission by Borrower, any contractor, subcontractor, engineer, architect or other person with respect to any Property.

14. HAZARDOUS MATERIALS.

(a) Representations and Definitions. Borrower and the Properties are in compliance with all applicable present and future federal, state and local laws, ordinances, rules, regulations, decisions and other requirements of governmental authorities relating to hazardous materials, including, without limitation, any substance now or in the future defined or listed in, or otherwise classified pursuant to, or regulated by, any applicable laws or regulations as a hazardous substance, hazardous material, hazardous waste, infectious waste, toxic substance, toxic pollutant or any other term used to define, list, classify or regulate substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity or reproductive toxicity, including asbestos and polychlorinated biphenyls (“Hazardous Materials”), including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendment and Reauthorization Act of 1980, the Resource Conservation and Recovery Act, the Hazardous Materials Transportation Act, the Clean Water Act, the Clean Air Act, the Toxic Substances Control Act, the Safe Drinking Water Act, and regulations thereunder (“Hazardous Materials Laws”).

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(b) Covenants. Borrower shall: (i) keep and maintain the Properties in compliance with, and shall not cause or permit the Properties to be in violation of, any present or future Hazardous Materials Laws; (ii) not engage in or permit the use, generation, manufacture, production, storage, release, discharge, disposal or transportation on, under or about the Properties of any Hazardous Materials; provided, however, that materials containing Hazardous Materials which are normally, prudently and properly used in connection with the development, construction or operation of a project of the same type as the Properties may be stored and used on the Properties, in reasonably necessary quantities, provided such use and storage is incident to and reasonably necessary for normal, prudent and proper development, construction or operation of the Properties, in all respects in strict compliance with all present or future Hazardous Materials Laws, but in no event shall asbestos or asbestos-containing material be incorporated into or placed upon the Properties, nor shall polychlorinated biphenyls be brought onto the Properties; (iii) in the event that any Hazardous Materials are found on, under or about the Properties (except as provided in (ii) above), take all necessary and appropriate actions, at its own expense, to cause them to be cleaned up and immediately removed, all in compliance with all present or future Hazardous Materials Laws and all other applicable laws.

(c) Notice. Borrower shall immediately advise Lender in writing upon Borrower’s receipt of all notices of (i) enforcement, clean up, removal, mitigation or other governmental or regulatory acts instituted, contemplated or threatened pursuant to any present or future Hazardous Materials Laws affecting the Properties; (ii) claims made or threatened by any third party against Borrower or the Properties relating to damage, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Material or violation of any present or future Hazardous Materials Laws; (iii) acts, events or conditions on any real property adjoining or in the vicinity of the Properties that could cause the Properties or any part thereof to be classified as “border-zone property” under the provisions of California Health & Safety Section 25220 et seq., or any regulation thereunder, or which may support a similar claim or cause of action under any present or future Hazardous Materials Laws; and (iv) occurrences or conditions on the Properties or any real property adjoining or in the vicinity of the Properties which could subject Borrower or the Properties to any restrictions on ownership, occupancy, transferability or use of the Properties under any present or future Hazardous Materials Laws.

(d) Border Zone. There is no occurrence or condition on any other real property that could cause the Properties or any part thereof to be classified as “border-zone property” under California Health and Safety Code Sections 25220 et seq., or any regulation related thereto, or to be otherwise subject to any restriction on ownership, occupancy, transferability or use.

(e) Inquiry. Borrower has conducted an appropriate inquiry into the present and prior condition, uses, and ownership of the Properties and has disclosed in writing to Lender all violations of Hazardous Materials Laws discovered as a result of such inquiry.

(f) Actions. Lender shall have the right but not the duty to join and participate in, as a party if it so elects, any settlements, legal proceedings or actions initiated in connection with any Hazardous Materials or present or future Hazardous Materials Laws and to have its reasonable attorneys’ fees and expenses in connection therewith paid by Borrower.

(g) Testing. If Lender reasonably believes that Borrower may be in violation of this Section, Lender has the right to enter the Properties and conduct testing, at Borrower’s cost and expense to satisfy itself that Borrower is in full compliance with the Loan Instruments.

15. ADDITIONAL LOAN COVENANTS. If there are any additional loan covenants (the “Additional Loan Covenants”) listed in Paragraph 16 of the Specific Loan Terms attached hereto, and in the event Borrower or Guarantor (if applicable to Guarantor) breaches any of the Additional Loan Covenants, such breach shall constitute an Event of Default under the provisions of Paragraph 11 above applicable to such breach and Lender shall be entitled to exercise all rights and remedies under this Loan Agreement with respect to such Event of Default.

16. LIMITATION ON INTEREST. All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason of acceleration of the maturity of the Note or otherwise, shall the interest contracted for, charged or received by Lender exceed the maximum amount permissible under Applicable Law. If, from any circumstance

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whatsoever, interest would otherwise be payable to Lender in excess of the maximum lawful amount, the interest payable to Lender shall be reduced to the maximum amount permitted under Applicable Law, and if from any circumstance Lender shall ever receive anything of value deemed interest by Applicable Law in excess of the maximum lawful amount, an amount equal to any excessive interest shall be applied to the reduction of the principal of the Note and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of the Note such excess shall be refunded to Borrower. All interest paid or agreed to be paid to the holder of the Note shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated, and spread throughout the full period from the date of the Note until payment in full of the principal (including the period of any renewal or extension thereof) so that the interest thereon for such full period shall not exceed the maximum amount permitted by Applicable Law. This Paragraph shall control all agreements between Borrower and Lender.

17. CHOICE OF LAW. EXCEPT WHERE FEDERAL LAW IS APPLICABLE (INCLUDING, WITHOUT LIMITATION, ANY FEDERAL USURY CEILING OR OTHER FEDERAL LAW WHICH, FROM TIME TO TIME, IS APPLICABLE TO THE INDEBTEDNESS HEREIN AND WHICH PREEMPTS STATE USURY LAWS), THIS LOAN AGREEMENT, THE NOTE, THE MORTGAGES AND THE OTHER LOAN INSTRUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.

18. NOTICES. All notices, demands, requests, and other communications required or permitted hereunder shall be in writing and shall be deemed effective (a) upon actual delivery if delivered by personal delivery or certified postage prepaid mail; or (b) on the next business day after timely and proper deposit with an overnight air courier with request for next business day delivery; or (c) within two (2) business days after deposit with the U.S. Postal Services by registered or certified mail; or (d) by confirmed facsimile telecopy transmission, in each such case, addressed to Borrower or Lender, as the case may be, at the respective addresses set forth on the first page of this Loan Agreement, or such other address or facsimile telecopier number as Borrower or Lender may from time to time designate by written notice to the other as herein required.

19. FEES AND EXPENSES. Borrower agrees to pay when due (a) a modification fee of TWENTY-FIVE THOUSAND DOLLARS ($25,000.00), which shall be due and payable upon the Effective Date (as defined below), and shall be a condition to the closing of the Loan under this Loan Agreement, (b) a non-refundable Loan Facility Fee to Lender of thirty-five hundredths of one percent (0.35%) of the committed amount of the Loan each calendar year during the term (or extended term if permitted by Lender) of the Loan, payable at Recordation of the first Mortgage and annually thereafter on the anniversary thereof, (c) fees of Lender’s Inspector, (d) cost review expenses of Lender of up to FIVE THOUSAND DOLLARS ($5,000.00) for each requested update and/or change to the Construction Cost Breakdowns, (e) the reasonable attorneys’ fees and expenses of Lender’s counsel, (f) actual title insurance and examination charges, (g) actual survey costs, (h) actual hazard insurance premiums, (i) actual filing and recording fees, and (j) other reasonable expenses payable to third parties incurred by Lender in connection with the consummation of the transactions contemplated by this Loan Agreement, the exercise of Lender’s rights under this Loan Agreement and the other Loan Instruments, and the verification of the performance and satisfaction of all obligations of Borrower, General Partner, Managing Member (and any constituent entities or individuals thereof) and Guarantor under this Loan Agreement and the other Loan Instruments, including all renewals, extensions and modifications thereof. In the event it becomes necessary for Lender to utilize legal counsel for the enforcement of the Loan Instruments or any of their terms, if successful in such enforcement by legal proceedings or otherwise, Lender shall be reimbursed immediately by Borrower for reasonably incurred attorneys’ fees (including fees for Lender’s in-house attorneys) and other costs and expenses. Borrower shall also immediately reimburse Lender for all attorneys’ fees and costs reasonably incurred in connection with the representation of Lender in any bankruptcy, insolvency, reorganization or other debtor-relief or similar proceeding of or relating to Borrower, any General Partner, Managing Member or Guarantor(s), the Property, or any other property which secures the obligations of any of the Loan Instruments. All amounts due under this Section shall bear interest from the date of expenditure until paid at the rate specified in the Note and are collectively referred to as “Lender Costs”. All facility fees payable to Lender hereunder shall be deemed earned when due and are non-refundable to Borrower. All such fees shall be retained by Lender and shall not be applied to any payments of principal or interest due from Borrower under the Loan Instruments.

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20. PARTIAL RELEASES. Borrower shall have the right to obtain partial releases of the Property subject to the following terms and conditions:

(a) There shall not be a Default or Event of Default hereunder or under any other of the Loan Instruments;

(b) Borrower shall submit to Lender a request for partial release of a Property (the “Partial Release”) in form and substance satisfactory to Lender together with a lot and block description of the Residence to be released. In addition, the Partial Release should be accompanied with information necessary for Lender to process the Partial Release, including the name and address of the title insurance company, if any, to whose attention the Partial Release should be directed, numbers that reference the Partial Release (i.e., order numbers, release numbers, assessor’s parcel numbers, etc.) and the date when the Partial Release is to become effective;

(c) If required by Lender, all accrued and unpaid interest on the principal amount of the Loan being prepaid shall be paid at the time such Partial Release is requested; provided that any payment in immediately available funds, received by Lender after one-thirty o’clock, p.m. (1:30 p.m.), Dallas, Texas time, will be deemed to have been made on the next following business day;

(d) Payment to Lender of an amount in cash equal to the Release Price as provided, and as such term is defined in Paragraph 18 of the Specific Loan Terms attached hereto; and

(e) Payment to Lender of all reasonable costs and expenses arising in connection with any Partial Release.

Notwithstanding any provision herein to the contrary, at such time as Lender provides to the title company (which is closing the sale of a Property) a “payoff” quote for a Property being released from a Mortgage, in accordance with this Paragraph 20, Borrower shall not be entitled to any further Disbursements under the Loan with respect to such Property. Notwithstanding any provision herein to the contrary, Lots Being Actively Developed cannot be released from a particular Subdivision until all work is completed to finish the Lot.

21. GENERAL PROVISIONS.

(a) Waiver. No delay or omission of Lender in exercising any right or power arising from any Default or Event of Default by Borrower shall be construed as a waiver of such Default or as an acquiescence therein, nor shall any single or partial exercise of any such right or power preclude any further exercise thereof. Lender may, at its option, waive or postpone satisfaction of any condition herein, all of which are for its benefit, and any such waiver or postponement shall not be deemed to have occurred unless set forth in writing, signed by Lender and delivered to Borrower, and any such written waiver shall be operative only for the time and to the extent expressly stated therein.

(b) No Assignment. Borrower may not assign or otherwise transfer this Loan Agreement or any right hereunder, and this Loan Agreement shall be binding upon Borrower and the representatives and successors of Borrower. In the event of the termination or dissolution of Borrower prior to the completion of the Residences or prior to the use, release or disbursement of all proceeds of the Loan and any Borrower’s Deposit, this Loan Agreement shall not, at the option of Lender, be terminated or affected by such dissolution or termination. Except as provided in the foregoing sentences, this Loan Agreement is made for the sole benefit of Borrower and Lender, their successors and assigns, and no other person or persons shall have any rights or remedies under or by reason of this Loan Agreement. Lender shall not owe any duty whatsoever to any claimant (i) for labor performed or material furnished in connection with the construction of the improvements, (ii) to advance any portion of the Loan to pay any such claim, or (iii) to exercise any right or power of Lender hereunder or arising from any Default.

(c) Payments. Borrower agrees to make each payment which it owes under the Loan Instruments not later than one-thirty (1:30 p.m.) o’clock, p.m., Dallas, Texas time, or such other time as is specifically provided herein, on the date such payment becomes due and payable (or the date any voluntary prepayment is made), in immediately available funds. Any payment received by Lender after such time will be deemed to have been made on the next following business day.

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(d) Writing Necessary. No approval, acceptance or consent of Lender required by any provision of the Loan Instruments, nor any waiver of any required approval, acceptance, consent or condition, shall be deemed to have occurred until set forth in writing, signed by Lender, and delivered to Borrower.

(e) Time Is of the Essence. Time is of the essence of the Loan Instruments and of every part hereof, and Borrower therefore acknowledges that Lender has no obligation to grant any extension of any provision thereof, and any extension which Lender may elect to grant may be conditioned upon such terms and conditions as Lender may impose in its sole discretion.

(f) Joint and Several Obligation. If more than one person has executed this Loan Agreement as Borrower, the obligations of all such persons shall be joint and several. Any married person who executes this Loan Agreement agrees that recourse may be had against his or her separate property. If Borrower is a partnership, the obligations of Borrower shall be the joint and several obligations of all general partners therein. If Borrower is a limited liability company, the obligations of Borrower hereunder shall bind all members of Borrower to the extent of their interests therein.

(g) Government Regulation. If payment of the Loan is to be insured or guaranteed by any governmental agency, Borrower shall comply with all rules, regulations, requirements and statutes relating thereto or provided in any commitment issued by any such agency to insure or guarantee such payment.

(h) Headings. The Paragraph headings hereof and in the Exhibits hereto are inserted for convenience of reference only and shall not alter, define, or be used in construing the text of such Paragraphs or limit the scope of provisions of this Loan Agreement.

(i) Survival. All provisions of the Loan Instruments shall survive each Recordation of a Mortgage and all Disbursements of the Loan.

(j) Severability. In the event of any invalidity or unenforceability of any Loan Instrument or any provision of any Loan Instruments, the remainder of the Loan Instruments shall remain in full force and effect.

(k) Disclosure. Lender may disclose terms of the Loan and payment information (i) whenever a request for a credit rating is received; (ii) pursuant to a court or regulatory order; (iii) pursuant to regulatory reporting requirements; or (iv) to facilitate a sale by Lender of all or any part of the Loan.

(l) Interpretation: Include, Day, Person. Each of the Loan Instruments shall be construed without regard to whether it was prepared or drafted by one party or other or either of their attorneys. As used herein: (i) the terms “include,” “including” and forms thereof are not exclusive; (ii) the term “day” means calendar day, except when used in the defined term “Business Day” which shall mean any day on which Lender is open for business at its Dallas, Texas main office; and (iii) the term “person” means any individual, corporation, partnership, Governmental Authority, or other entity of any kind.

(m) Exhibits. All Exhibits referred to herein are incorporated herein by this reference and are a part hereof.

(n) Waiver of Judicial Procedural Matters. Borrower hereby expressly and unconditionally waives, in connection with any suit, action or proceeding brought by Lender in connection with any of the Loan Instruments, any and every right it may have to (i) injunctive relief; (ii) a trial by jury, to the extent permitted under applicable law; (iii) interpose any counterclaim therein; and (iv) have the same consolidated with any other or separate suit, action or proceeding, with respect to any matter arising out of the Loan Instruments.

(o) Counterparts. This Loan Agreement may be executed in one or more counterparts, all of which, taken together, shall constitute one and the same agreement.

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(p) Use of Certain Terms. As used in this Loan Agreement, the term “General Partner” shall apply only if Borrower’s form of legal existence is that of a partnership and the term “Managing Member” shall apply only if Borrower’s form of legal existence is that of a limited liability company.

22. FINAL AGREEMENT. THIS LOAN AGREEMENT AND THE OTHER LOAN INSTRUMENTS REPRESENT THE FINAL LOAN AGREEMENT BETWEEN LENDER AND BORROWER CONCERNING THE LOAN, AND THE LOAN INSTRUMENTS MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF LENDER AND BORROWER OR ANY AGENT, BROKER, EMPLOYEE OR REPRESENTATIVE OF EITHER OF THEM. THERE ARE NO ORAL AGREEMENTS BETWEEN LENDER AND BORROWER.

23. Letters of Credit. Borrower may request Lender’s issuance of letters of credit under the Loan in accordance with the following:

        23.1 Issuance of Letters of Credit. Subject to the terms and conditions of this Agreement applicable to Disbursements, any additional agreements, instruments and undertakings required by Lender in connection with its issuance of letters of credit generally (collectively, the “Letter of Credit Agreements”), and the conditions and procedures set forth in this Agreement, Lender agrees to issue, from time to time, letters of credit (the “Letters of Credit”) upon the request by and for the account of Borrower. The maximum face amount of Letters of Credit outstanding at any time shall not exceed Twenty Million Dollars ($20,000,000).

(a) Conditions. The conditions precedent to the issuance of each Letter of Credit are all of the following:

(i) the face amount of the Letter of Credit shall not exceed the then available Borrowing Base;

(ii) Borrower shall have executed and delivered to Lender any required Letter of Credit Agreements;

(iii) No Letter of Credit shall have a term exceeding three hundred sixty-four (364) days or ending on a date after the Maturity Date;

(iv) No Letter of Credit shall have any “evergreen” or similar provisions requiring renewal thereof;

(v) Lender shall have received, in immediately available funds, a Letter of Credit fee of fifteen one-hundredths of one percent (0.15%) of the face principal amount of the Letter of Credit; such fee may be paid from a Disbursement, if all other conditions precedent to a Disbursement are satisfied;

(vi) No Default or Event of Default has occurred and is continuing; and

(vii) All policies, procedures and requirements of Lender in effect from time to time for issuance of Letters of Credit shall have been satisfied.

(b) Procedure. To obtain a Letter of Credit, Borrower shall deliver a written request for a Letter of Credit, specifying all material terms of such Letter of Credit, not later than fourteen (14) days prior to the date requested for issuance of such Letter of Credit. Lender will process the Letter of Credit request as an application in accordance with its policies, procedures and requirements then in effect. If the application meets Lender’s requirements and is within Lender’s policies then in effect, the conditions set forth in Paragraph 23.1(a) above are satisfied and all other conditions to Disbursement set forth in this Agreement are satisfied, then Lender will issue the requested Letter of Credit.

        23.2 Letter of Credit Reimbursement Obligations. Borrower’s obligations under this Agreement and any Letter of Credit Agreement to reimburse Lender for any drawings under any Letter of Credit and to repay Lender in the full amount of any draws under any Letter of Credit (collectively “Reimbursement Obligation”) are absolute and unconditional under any and all circumstances and irrespective of any set-off,

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counterclaim, or defense to payment which Borrower may have or have had against Lender or any beneficiary of the Letter of Credit, including any defense or other matter described in Paragraph 23.3 below.

        23.3 Nature of Letter of Credit Reimbursement Obligations. Borrower shall assume all of the risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. Lender shall not be responsible for (a) the form, validity, sufficiency, accuracy, genuineness or legal effect of any Letter of Credit or any document submitted by any party in connection with the issuance of any Letter of Credit, even if such document should in fact prove to be, in any or all respects, invalid, insufficient, inaccurate, fraudulent or forged; (b) the form, validity, sufficiency, accuracy, genuineness or legal effect of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof in whole or in part, which may prove to be invalid or ineffective for any reason; (c) the failure of any beneficiary of any Letter of Credit to comply fully with the terms or conditions required in order to demand payment under a Letter of Credit; (d) errors, omissions, interruptions or delays in transmission or delivery of any messages by mail, cable, telegraph, telecopy, telex or otherwise; (e) any loss or delay in the transmission or otherwise of any document or draft required by or from a beneficiary to make a disbursement under a Letter of Credit or the proceeds thereof; or (f) any nonapplication or misapplication by the beneficiary of the Letter of Credit of proceeds of such payment; or (g) the legality, validity, form, regularity or enforceability of the Letter of Credit. None of the foregoing shall affect, impair or prevent the vesting of any of the rights or powers granted to Lender hereunder. In furtherance and extension and not in limitation or derogation of any of the foregoing, any act taken or omitted to be taken by Lender in good faith shall be binding upon Borrower and shall not put Lender under any resulting liability to Borrower.

        23.4 Interest on Letter of Credit Amounts. From and after the date of issuance of any Letter of Credit until the expiration or cancellation thereof, interest shall accrue and be payable on all amounts drawn under such Letter of Credit at the Applicable Rate (as defined in the Note), subject to all the terms and provisions of the Note; provided, however, interest on such amounts shall be payable quarterly, in arrears, subject to the Maturity Date.

24. Confidentiality. Notwithstanding anything to the contrary set forth herein or in any other written or oral understanding or agreement to which the parties hereto are parties or by which they are bound, the parties hereto acknowledge and agree that (i) any obligations of confidentiality contained herein and therein do not apply and have not applied from the commencement of discussions between the parties to the tax treatment and tax structure of the transactions contemplated by the Loan Instruments (and any related transactions or arrangements), and (ii) each party (and each of its employees, representatives, or other agents) may disclose to any and all parties as required, without limitation of any kind, the tax treatment and tax structure of the transactions contemplated by the Loan Instruments and all materials of any kind (including opinions or other tax analyses) that are provided to such party relating to such tax treatment and tax structure, all within the meaning of Treasury Regulations Section 1.6011-4; provided, however, that each party recognizes that the privilege each has to maintain, in its sole discretion, with regard to the confidentiality of a communication relating to the transactions contemplated by the Loan Instruments, including a confidential communication with its attorney or a confidential communication with a federally authorized tax practitioner under Section 7525 of the Internal Revenue Code, is not intended to be affected by the foregoing. The foregoing acknowledgements and agreements shall also apply to any state tax or treasury regulations similar or analogous to the federal regulations referenced hereinabove.

25. Amendment and Restatement of Prior Loan Agreement. Notwithstanding any provision to the contrary herein, effective as of December 31, 2007 (the “Effective Date”), subject to all the terms and provisions of this Loan Agreement, and expressly conditioned upon recordation of a memorandum of this Loan Agreement in the Official Records with respect to each of the Initial Approved Subdivisions, this Loan Agreement shall amend and restate, in its entirety, that certain Master Loan Agreement dated August 31, 2000, by and between Borrower, as “Borrower,” and Guaranty Bank, as “Lender,” as amended by (i) that certain Agreement for First Modification of Deeds of Trust and Other Loan Instruments dated June 8, 2001, (ii) that certain Agreement For Second Modification of Deeds of Trust and Other Loan Instruments dated July 23, 2001, (iii) that certain Agreement for Third Modification of Deeds of Trust and Other Loan Instruments dated December 19, 2001, (iv) that certain Agreement for Fourth Modification of Deeds of Trust and Other Loan Instruments dated May 29, 2002, (v) that certain Agreement for Fifth Modification of Deeds of Trust and Other Loan Instruments dated June 6, 2003, (vi) that certain Agreement for Sixth Modification of Deeds of Trust and Other Loan Instruments dated November 14, 2003, (vii) that certain Agreement for Seventh Modification of Deeds of Trust and Other

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Loan Instruments dated October 6, 2004, (viii) that certain Agreement for Eighth Modification of Deeds of Trust and Other Loan Instruments dated October 14, 2005, (ix) that certain Agreement for Ninth Modification of Deeds of Trust and Other Loan Instruments dated October 31, 2006, and (x) that certain Agreement for Tenth Modification of Deeds of Trust and Other Loan Instruments dated April 3, 2007 (as so amended, the “Prior Loan Agreement”). Notwithstanding the foregoing, each of the other Loan Instruments executed in connection with the Prior Loan Agreement (including, without limitation, each Supplement (as defined below) and Mortgage executed in connection with the Prior Loan Agreement) (collectively, the “Prior Loan Instruments”) shall continue in full force and effect, as amended by this Loan Agreement, and all references in the Prior Loan Instruments to the “Loan Agreement” shall be deemed to refer to this Loan Agreement. Further notwithstanding the foregoing, each Supplement to Loan Agreement and Other Loan Instruments (“Supplement”) entered into between Borrower and Lender prior to the Effective Date shall remain in full force and effect with respect to each Initial Approved Subdivision, except to the extent amended to this Agreement; provided, however, all references in such Supplement to the “Loan Agreement” shall be deemed to refer to this Loan Agreement, and each Supplement is hereby amended to incorporate the modifications set forth in this Loan Agreement. Borrower agrees to execute and deliver, such additional instruments, undertakings and agreements as are required by Lender to confirm, acknowledge and effectuate the foregoing. As a condition to the effectiveness of this Agreement, Guarantor and each subordinate lienholder shall have consented to the modification to the Prior Loan Agreement under this Loan Agreement, all in form and content acceptable to Lender.

[Remainder of Page Left Intentionally Blank]

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IN WITNESS WHEREOF, this Loan Agreement has been executed by the undersigned as of the date first set forth above.

BORROWER:		LENDER:
WILLIAM LYON HOMES, INC., a California corporation		GUARANTY BANK, a federal savings bank organized and existing under the laws of the United States
By:	/s/ Michael D. Grubbs	By:	/s/ Kent Newberry
Name:	Michael D. Grubbs	Name:	Kent Newberry
Title:	Senior Vice President	Title:	Senior Vice President
By:	/s/ Richard S. Robinson
Name:	Richard S. Robinson
Title:	Senior Vice President

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CONSENT OF GUARANTOR

The undersigned Guarantor hereby consents to the foregoing Amended and Restated Master Loan Agreement and the transactions contemplated thereby and reaffirms its obligations under any guaranties and/or indemnities given in favor of Lender with respect to the obligations of Borrower to the extent accruing prior to the Effective Date. Defined terms used herein have the meanings ascribed thereto in the above-referenced Agreement.

GUARANTOR:	WILLIAM LYON HOMES, a Delaware corporation
	By:	/s/ Michael D. Grubbs
	Name:	Michael D. Grubbs
	Title:	Senior Vice President
	By:	/s/ Richard S. Robinson
	Name:	Richard S. Robinson
	Title:	Senior Vice President

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CONSENT OF JUNIOR LIENHOLDER

The undersigned is the holder of an obligation secured by a lien against the same property, which secures, in a senior priority position (subject to all of the terms of the following Subordination and Intercreditor Agreement between Lender and the undersigned), Borrower’s obligations to Lender under the Prior Loan Agreement and the other Loan Instruments. The undersigned consents to and accepts the modifications set forth in the foregoing Loan Agreement, and agrees that, notwithstanding such modifications, the undersigned’s lien shall be and remain junior and subordinate to the lien of Lender to secure Borrower’s obligations, as modified herein, to the extent provided in and subject to all of the terms of the following Subordination Agreement, which remains in effect:

A) Whitney Ranch: (1161) dated November 8, 2004 and recorded in the Official Records of Placer County, California on December 30, 2004 as Instrument No 2004-0175176.

JUNIOR LIENHOLDER:	SUNSET RANCHOS INVESTORS, LLC, a Delaware limited liability company, dba Whitney Ranch Associates
	By:	/s/ Peter Bridges
	Name:	Peter Bridges
	Title:	Authorized Representative
	By:	/s/ Renee McDonnell
	Name:	Rene McDonnell
	Title:	Authorized Representative

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CONSENT OF JUNIOR LIENHOLDER

The undersigned is the holder of an obligation secured by a lien against the same property, which secures, in a senior priority position, Borrower’s obligations (subject to all of the terms of the following Subordination and Intercreditor Agreement between Lender and Junior Lienholder) to Lender under the Prior Loan Agreement and the other Loan Instruments. The undersigned consents to and accepts the modifications set forth in the foregoing Loan Agreement, and agrees that, notwithstanding such modifications, the undersigned’s lien shall be and remain junior and subordinate to the lien of Lender to secure Borrower’s obligations, as modified herein, to the extent provided in and subject to all of the terms of the following Subordination and Intercreditor Agreement, which remains in effect:

A) Bayside: (1133 & 1138) dated March 1, 2004 and recorded in the Official Records of Contra Costa County, California on March 19, 2004 as Series No. 92736.

JUNIOR LIENHOLDER:	LEWIS-HERCULES, LLC, a Delaware limited liability company
	By:	LEWIS OPERATING CORP., a California corporation
	Its:	Sole Manager
	By:	/s/ Randall W. Lewis
	Name:	Randall W. Lewis
	Title:	Executive Vice President
	By:
	Name:
	Title:

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CONSENT OF JUNIOR LIENHOLDER

The undersigned is the holder of an obligation secured by a lien against the same property, which secures, in a senior priority position, Borrower’s obligations (subject to all of the terms of the following Subordination and Intercreditor Agreement between Lender and Junior Lienholder) to Lender under the Prior Loan Agreement and the other Loan Instruments. The undersigned consents to and accepts the modifications set forth in the foregoing Loan Agreement, and agrees that, notwithstanding such modifications, the undersigned’s lien shall be and remain junior and subordinate to the lien of Lender to secure Borrower’s obligations, as modified herein, to the extent provided in and subject to all of the terms of the following Subordination and Intercreditor Agreement, which remains in effect:

A) Copper Canyon Ranch: (2216) dated May 17, 2004 and recorded in the Official Records of Maricopa County, Arizona on May 26, 2004 as Instrument No. 2004-0586207.

JUNIOR LIENHOLDER:	WILLIAM LYON SOUTHWEST, INC., an Arizona corporation dba WILLIAM LYON HOMES
	By:	/s/ Michael D. Grubbs
	Name:	Michael D. Grubbs
	Title:	Senior Vice President
	By:	/s/ Richard S. Robinson
	Name:	Richard S. Robinson
	Title:	Senior Vice President

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CONSENT OF JUNIOR LIENHOLDER

The undersigned is the holder of an obligation secured by a lien against the same property, which secures, in a senior priority position, Borrower’s obligations (subject to all of the terms of the following Subordination and Intercreditor Agreement between Lender and Junior Lienholder) to Lender under the Prior Loan Agreement and the other Loan Instruments. The undersigned consents to and accepts the modifications set forth in the foregoing Loan Agreement, and agrees that, notwithstanding such modifications, the undersigned’s lien shall be and remain junior and subordinate to the lien of Lender to secure Borrower’s obligations, as modified herein, to the extent provided in and subject to all of the terms of the following Subordination and Intercreditor Agreement, which remains in effect:

A) Three Sixty° @ South Bay—The Flats: (2360) dated June 20, 2007 and recorded in the Official Records of Los Angeles County, California on July 9, 2007 as Instrument No. 2007-1620874.

JUNIOR LIENHOLDER:	SAMS VENTURE, LLC, a Delaware limited liability company
	By:	/s/ Jeffrey A. Dritley
	Name:	Jeffrey A. Dritley
	Title:	Co-President
	By:
	Name:
	Title:

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CONSENT OF JUNIOR LIENHOLDER

The undersigned is the holder of an obligation secured by a lien against the same property, which secures, in a senior priority position, Borrower’s obligations (subject to all of the terms of the following Subordination and Intercreditor Agreement between Lender and Junior Lienholder) to Lender under the Prior Loan Agreement and the other Loan Instruments. The undersigned consents to and accepts the modifications set forth in the foregoing Loan Agreement, and agrees that, notwithstanding such modifications, the undersigned’s lien shall be and remain junior and subordinate to the lien of Lender to secure Borrower’s obligations, as modified herein, to the extent provided in and subject to all of the terms of the following Subordination and Intercreditor Agreement, which remains in effect:

A) Acacia @ Lyon’s Gate: (1190) dated July 12, 2007 and recorded in the Official Records of Maricopa County, Arizona on July 20, 2007 as Instrument No. 2007-0826702.

JUNIOR LIENHOLDER:	WILLIAM LYON SOUTHWEST, INC., an Arizona corporation dba WILLIAM LYON HOMES
	By:	/s/ Michael D. Grubbs
	Name:	Michael D. Grubbs
	Title:	Senior Vice President
	By:	/s/ Richard S. Robinson
	Name:	Richard S. Robinson
	Title:	Senior Vice President

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EXHIBITS

TO LOAN AGREEMENT

EXHIBIT “A”:	SPECIFIC LOAN TERMS, CONDITIONS AND DEFINITIONS
EXHIBIT “B”:	STAGE DRAW BREAKDOWN
EXHIBIT “C”	APPLICATION FOR DISBURSEMENT
EXHIBIT “D”	RESIDENTIAL DRAW REQUEST
EXHIBIT “E”	CONSTRUCTION COST BREAKDOWN

EX-10.22

Exhibit 10.22

THIRD AMENDMENT TO AMENDED AND

RESTATED REVOLVING LINE OF CREDIT LOAN AGREEMENT

THIS THIRD AMENDMENT TO AMENDED AND RESTATED REVOLVING LINE OF CREDIT LOAN AGREEMENT (“Agreement”), dated as of December 28, 2007, by and between WILLIAM LYON HOMES, INC., a California corporation (“Borrower”), and CALIFORNIA BANK & TRUST, a California banking corporation (“Lender”), with reference to the following facts:

RECITALS

A. Borrower originally agreed to borrow a sum not to exceed Seventy Million Dollars ($70,000,000.00) (as the same has been and may be further amended from time to time, “Loan”) from Lender for the purpose of providing Borrower with funding for the acquisition and development of residential lots, the construction of existing and future residential home projects, and the issuance of letters of credit for the payment of costs incurred or associated with said projects. The terms and conditions of the Loan are more particularly set forth in that certain Amended and Restated Revolving Line of Credit Loan Agreement (Borrowing Base Loan) dated as of September 16, 2004, by and between Borrower and Lender (as the same has been and may be further amended from time to time, “Loan Agreement”). All capitalized terms not specifically defined herein shall have the meanings given to such terms in the Loan Agreement.

B. The Loan is evidenced by that certain Fifth Amended and Restated Construction Loan Promissory Note (Construction Revolving Line of Credit) dated as of September 1, 2006, given by Borrower to Lender (as the same has been and may be further amended from time to time, “Current Note”).

C. The Loan is secured by, among other things, the “Deed of Trust” (as defined in the Loan Agreement).

D. This Agreement, the Current Note and the other documents evidencing or relating to the Loan collectively shall be referred to as the “Loan Documents.”

E. Borrower has requested that Lender modify the Loan by, among other things, decreasing (i) the maximum amount of the Loan, (ii) the maximum “Commitment Amount” (as defined in the Loan Agreement), and (iii) the face amount of the Current Note, from Seventy Million Dollars ($70,000,000.00) to Fifty Million Dollars ($50,000,000.00) (“New Commitment Amount”).

F. Lender is willing to consent to the modifications to the Loan Documents set forth herein, subject to the conditions set forth below. The date on which all conditions in this Agreement have been satisfied shall be referred to as the “Modification Closing Date.”

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TERMS AND CONDITIONS

NOW, THEREFORE, in consideration of the foregoing premises and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Recitals. The preamble, recitals and any exhibits hereto are hereby incorporated into this Agreement.

2. Decrease in the Loan Amount.

2.1 Decrease in the Maximum Commitment Amount. From and after the Modification Closing Date, the maximum amount of the Loan and the maximum Commitment Amount are hereby decreased from the current amount of Seventy Million Dollars ($70,000,000.00) to the New Commitment Amount of Fifty Million Dollars ($50,000,000.00). All references in the Loan Documents to the maximum amount of the Loan and maximum Commitment Amount shall be revised to refer to the New Commitment Amount set forth herein.

2.2 Decrease in the Amount of the Current Note. As a result of the decrease in the amount of the Loan and the maximum Commitment Amount, the face amount of the Current Note shall be decreased from the current amount of Seventy Million Dollars ($70,000,000.00) to the New Commitment Amount of Fifty Million Dollars ($50,000,000.00) (“New Note Amount”). All references in the Loan Documents to the face amount of the Current Note shall be revised to refer to the New Note Amount set forth herein.

2.3 Amendment and Restatement of the Current Note. Borrower shall execute and deliver to Lender a Sixth Amended and Restated Promissory Note of even date herewith (the Current Note, as amended by said document, shall hereafter be referred to as the “Note”) evidencing the decrease in the amount of the Loan and the maximum Commitment Amount as described herein. All references in the Loan Documents to the Current Note shall be revised to refer to the Note, as amended and restated.

3. Maximum Allowed Advances. As used in the Loan Documents, the term “Maximum Allowed Advance” shall have the following definition from and after the date hereof:

“Maximum Allowed Advance” shall have the following meanings:

^¡ Entitled Land: The sum of all Advances and Reserved Allocations committed but not disbursed for said Lots shall not exceed the lesser of (i) fifty percent (50%) of Total Project Costs, (ii) fifty percent (50%) of the Appraised Value for said Land, as determined by Lender from time to time based on its receipt of Appraisals, or (iii) fifty percent (50%) of the sales price (net of concessions) set forth in the Purchase Contract, subject to Lender’s approval.

^¡ Lots Under Development: The sum of all Advances and Reserved Allocations committed but not disbursed for said Lots shall not exceed the lesser of (i) seventy percent (70%) of Total Project Costs, (ii) seventy percent (70%) of the Bulk Finished Lot Value for said Lots, or (iii) seventy percent (70%) of the sales price (net of concessions) set forth in the Purchase Contract, subject to Lender’s approval.

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^¡ Developed Lots: The sum of all Advances and Reserved Allocations committed but not disbursed for said Lots shall not exceed the lesser of (i) seventy percent (70%) of Total Project Costs, (ii) seventy percent (70%) of the Bulk Finished Lot Value for said Lots, or (iii) seventy percent (70%) of the sales price (net of concessions) set forth in the Purchase Contract, subject to Lender’s approval.

^¡ Spec Homes: The sum of all Advances and Reserved Allocations committed but not disbursed for said Homes shall not exceed the lesser of (i) eighty-five percent (85%) of Total Project Costs, (ii) seventy-five percent (75%) of the Base Appraisal for said Homes, or (iii) seventy-five percent (75%) of the sales price (net of concessions) set forth in the Purchase Contract, subject to Lender’s approval.

^¡ Presold Homes: The sum of all Advances and Reserved Allocations committed but not disbursed for said Homes shall not exceed the lesser of (i) ninety percent (90%) of Total Project Costs, (ii) eighty percent (80%) of the Base Appraisal for said Homes, or (iii) eighty percent (80%) of the sales price (net of concessions) set forth in the Purchase Contract, subject to Lender’s approval.

4. Modification of Financial Covenants. The financial covenants set forth in Section 6.15 of the Loan Agreement shall be replaced with the following:

“6.15. Financial Covenants. Financial covenants described in this Section 6.15, together with all other financial covenants and restrictions set forth in this Agreement shall be monitored quarterly by Lender upon receipt of the financial statements to be provided hereunder.

Covenant Party	Covenant Type	Covenant Requirement
Borrower	Total Lot Inventory (excluding lots under option agreements)	Borrower shall not own unsold lots under development and unsold developed lots in excess of an aggregate sum equal to two and one-half (2.5) times the number of lot sales and closings over the immediately preceding four (4) quarters for all residential housing projects owned by Borrower
Borrower	Maximum Total Liabilities-to-Tangible Net Worth Ratio (with the Total Liabilities to be exclusive of consolidated liabilities of variable interest entities)	Not in excess of 5.0:1.0
Borrower	Minimum Tangible Net Worth	Not less than $175,000,000.00
Borrower	Minimum Liquidity	Not less than $20,000,000.00 (At least $10,000,000 cash on hand and the remaining $10,000,000 may consist of either cash and/or availabilities under the lines of credit)

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4.1 Deferred Compliance with Maximum Total Liabilities-to-Tangible Net Worth Ratio. Notwithstanding any other provision of the Loan Documents to the contrary, Borrower shall not be required to comply with the Maximum Total Liabilities-to-Tangible Net Worth Ratio until and after January 1, 2009, continuing during the remaining term of the Loan.

5. Modification of the Spec Home Limitation Requirements.

5.1 From and after the date hereof, the “Spec Home” (as defined in the Loan Agreement) limitation set forth in Section 4.5.4(h) of the Loan Agreement shall be deleted in its entirety and replaced with the following:

“(h) For all Spec Homes (including any Model Homes), Borrower shall not be entitled to include in the Borrowing Base at any one time in violation of the Spec Home Concentration Limitation, which shall mean:

(i) For all Projects financed hereunder, the aggregate Loan Allocations for all Spec Homes for all Projects (whether Advances have been made and/or have been committed but have not yet advanced) shall not exceed the sum of Twelve Million Dollars ($12,000,000.00); and/or

(ii) For each and every Project financed hereunder, for more Spec Homes than the greater of (A) eight (8), (B) four (4) months’ appraised absorption for the Project, or (C) four (4) months’ actual absorption for the subject Project, as determined by Lender from time to time based upon the actual prior six-month Home sales average for said Project.”

5.2 Notwithstanding any provision in the Loan Documents to the contrary, in the event that Borrower has included within the “Borrowing Base” (as defined in the Loan Agreement) more Spec Homes for a Project than permitted under the Loan Agreement (including without limitation Section 4.5.4(h) of the Loan Agreement), Borrower shall be permitted until the date six (6) calendar months from the Modification Closing Date to be in compliance with the applicable Spec Home limitation, or Lender will remove said excess Spec Homes from the Borrowing Base, and Borrower will be required to pay any applicable remargining payment pursuant to the terms and conditions set forth in the Loan Agreement.

6. Intentionally Omitted.

7. Modification of the Meadow Leaf Qualified Project. Notwithstanding any provisions of the Loan Documents to the contrary, the fifty-seven (57) “Developed Lots” (as defined in the Loan Agreement for the Qualified Project known as “Meadow Leaf” or “Falling Leaf” shall not be permitted to remain in the Borrowing Base beyond March 31, 2008.

8. Amendment to Deed of Trust. Each Deed of Trust shall be amended to secure the obligations under the Note and the other Loan Documents, as amended herein.

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9. Conditions Precedent. In no event shall Lender have any obligation to close this transaction unless and until all of the following conditions are satisfied:

9.1 No Defaults. There shall be no: (a) uncured, material default hereunder or under the Loan Documents; (b) continuing representation, covenant or warranty hereunder or under the Loan Documents that is false or misleading in any manner; and (c) event currently existing which, with the passage of time, will result in a material default or the falsity of any continuing representation, covenant or warranty hereunder or under the Loan Documents.

9.2 No Financial Change. There has been no material adverse change in Borrower's, financial condition since the closing of the Loan.

9.3 Payment Of Lender’s Costs. Borrower shall pay all of Lender's costs and expenses incurred in connection with the documentation and closing of the modifications to the Loan Documents described herein, including without limitation all attorneys' fees and other closing fees and costs.

9.4 Additional Documents. Lender shall have received all additional documents executed by Borrower, as required by Lender in connection with this Agreement, including, without limitation, the Note and all Recorded Amendments.

10. Representations and Warranties. Borrower hereby represents and warrants to Lender as follows:

10.1 No Default. No default or event of default under any of the Loan Documents has occurred that remains uncured, and no event has occurred which, with the giving of notice or the passage of time, or both, would constitute a default or an event of default under any of the Loan Documents.

10.2 Representations and Warranties. As of the date hereof, all of the warranties and representations contained in all of the Loan Documents remain true, correct, complete and accurate.

10.3 No Claims or Defenses. As of the date hereof, neither Borrower nor its managing member has any claims against Lender nor defenses to the enforcement of any of the Loan Documents in accordance with their respective terms, as amended by this Agreement.

10.4 Financial Covenants. Borrower acknowledges and agrees that, with the exception of the Maximum Total Liabilities-to-Tangible Net Worth Ratio covenants for which Lender has granted Borrower an extension until and after January 1, 2009, continuing during the remaining term of the Loan, by which to comply, the financial covenants contained in the Loan Documents are in full force and effect and shall be monitored by Lender based on the financial reports to be provided under the Loan Agreement.

10.5 Satisfaction of Conditions. All of the conditions precedent set forth above have been fully satisfied.

11. Further Assurances. Borrower agrees to perform such other and further acts, and to execute such additional documents, agreements, notices or financing statements, as Lender deems necessary or desirable from time to time to create, preserve, continue, perfect, validate or carry out any of Lender's rights under this Agreement and the other Loan Documents.

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12. Integration. All rights, remedies, powers and interest provided for Lender herein are in addition to the rights, remedies, powers and interests provided for Lender in the Loan Documents, the terms and provisions of which are incorporated herein by this reference and made a part hereof. If and to the extent any term or provision hereof is inconsistent with any term or provision of the Loan Documents, the term or provision of this Agreement shall prevail.

13. Entire Agreement; Amendments. This Agreement and the other Loan Documents contain the entire agreement between Borrower and Lender with respect to the Loan Documents, and all prior negotiations, commitments, understandings and agreements are superseded by this Agreement and the Loan Documents. No amendment, modification, supplement, extension, termination or waiver of any provision of this Agreement, any Loan Document, or any other agreement executed in connection with any of the foregoing shall be effective unless in writing and signed by Lender and Borrower, and then only in the specific instance and for the specific purpose given.

14. Governing Law. The Loan Documents shall be governed by, and construed and enforced in accordance with, the internal laws of the State of California, without regard to its conflict of laws principles.

15. Section Headings. The section headings of this Agreement are included for convenience only, and shall not affect the construction or interpretation of any provision of this Agreement.

16. Attorneys’ Fees. If any action or other proceeding is brought to interpret or enforce any provision of this Agreement, the prevailing party shall be entitled to recover attorneys' fees and expenses.

17. Binding Effect. This Agreement and the other Loan Documents shall be binding upon, and shall inure to the benefit of, Borrower and Lender and their respective successors and assigns, or heirs and personal representatives, as applicable, subject to any provision of the Loan Documents restricting transfers of the Property.

18. Severability of Provisions. No provision of this Agreement or any other Loan Document that is held to be inoperative, unenforceable and invalid shall affect the remaining provisions, and this and all provisions of this Agreement and the Loan Documents are hereby declared to be severable.

19. Miscellaneous. No reference to this Agreement is necessary in any instrument or document at any time referring to the Loan Documents. A reference to the Loan Documents shall be deemed a reference to such document as modified hereby.

20. No Commitment. The furnishing of this Agreement and other modification documents shall in no way be construed as a commitment by Lender to modify, amend, extend or otherwise alter the Loan Documents. Lender shall be under no obligation to close the transaction evidenced by this Agreement unless this Agreement and all related documents are returned to Lender fully executed by Borrower, and unless this Agreement is actually executed by Lender and delivered to Borrower.

21. No Other Amendments. Except as expressly amended herein, the Loan Agreement, and all of the other Loan Documents remain unmodified and in full force and effect.

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22. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which, when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, this Agreement has been executed by Borrower and Lender as of the date first above written.

BORROWER:
WILLIAM LYON HOMES, INC., a California corporation
By:	/s/ Douglas F. Bauer
Name: Douglas F. Bauer Title: President
By:	/s/ Michael D. Grubbs
Name: Michael D. Grubbs Title: Senior Vice President
LENDER:
CALIFORNIA BANK & TRUST, a California banking corporation
By:	/s/ Erin Johnsen
Name: Erin Johnsen Its: Vice President

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EX-10.23

Exhibit 10.23

FOURTH AMENDMENT TO AMENDED AND

RESTATED REVOLVING LINE OF CREDIT LOAN AGREEMENT

THIS FOURTH AMENDMENT TO AMENDED AND RESTATED REVOLVING LINE OF CREDIT LOAN AGREEMENT (“Agreement”), dated as of January 17, 2008, by and between WILLIAM LYON HOMES, INC., a California corporation (“Borrower”), and CALIFORNIA BANK & TRUST, a California banking corporation (“Lender”), with reference to the following facts:

RECITALS

A. Borrower originally agreed to borrow a sum not to exceed Fifty Million Dollars ($50,000,000.00) (as the same has been and may be further amended from time to time, “Loan”) from Lender for the purpose of providing Borrower with funding for the acquisition and development of residential lots, the construction of existing and future residential home projects, and the issuance of letters of credit for the payment of costs incurred or associated with said projects. The terms and conditions of the Loan are more particularly set forth in that certain Amended and Restated Revolving Line of Credit Loan Agreement (Borrowing Base Loan) dated as of September 16, 2004, by and between Borrower and Lender (as the same has been and may be further amended from time to time, “Loan Agreement”). All capitalized terms not specifically defined herein shall have the meanings given to such terms in the Loan Agreement.

B. The Loan is evidenced by that certain Sixth Amended and Restated Construction Loan Promissory Note (Construction Revolving Line of Credit) dated as of December 28, 2007, given by Borrower to Lender (as the same has been and may be further amended from time to time, “Note”).

C. The Loan is secured by, among other things, the “Deed of Trust” (as defined in the Loan Agreement).

D. This Agreement, the Note and the other documents evidencing or relating to the Loan collectively shall be referred to as the “Loan Documents.”

E. Borrower has requested that Lender modify the Loan by, among other things, modifying the definition of “Maximum Aggregate Loan Allocation(s)” within the Loan Agreement.

F. Lender is willing to consent to the modifications to the Loan Documents set forth herein, subject to the conditions set forth below. The date on which all conditions in this Agreement have been satisfied shall be referred to as the “Modification Closing Date.”

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TERMS AND CONDITIONS

NOW, THEREFORE, in consideration of the foregoing premises and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Recitals. The preamble, recitals and any exhibits hereto are hereby incorporated into this Agreement.

2. Maximum Aggregate Loan Allocation(s). New Definitions. The definition of Maximum Aggregate Loan Allocation(s) in the Loan Agreement shall be replaced with the following:

“Maximum Aggregate Loan Allocation(s)” shall mean each and every one of the following:

(a) With respect to all Qualified Projects included in the Borrowing Base (collectively or individually “Geographic Concentration Limitation”):

        (1) The aggregate Loan Allocations for all Lots and/or Homes for Qualified Projects (whether Advances have been made and/or have been committed but have not yet advanced) located in the State of Arizona shall not exceed the sum of Fifteen Million Dollars ($15,000,000.00); and/or

        (2) The aggregate Loan Allocations for all Lots and/or Homes for Qualified Projects (whether Advances have been made and/or have been committed but have not yet advanced) located in the State of Nevada shall not exceed the sum of Fifteen Million Dollars ($15,000,000.00).

(b) With respect to all Lots to be included in the Borrowing Base, the aggregate Loan Allocations for all Entitled Land, Lots Under Development and Developed Lots for all Qualified Projects (whether Advances have been made and/or have been committed but have not yet advanced) shall not exceed the sum of Twenty Million Dollars ($20,000,000.00) (“Lot Concentration Limitation”).

(c) With respect to all Spec Homes to be included in the Borrowing Base (“Spec Home Concentration Limitation”):

        (1) For all Projects financed hereunder, the aggregate Loan Allocations for all Spec Homes for all Projects (whether Advances have been made and/or have been committed but have not yet advanced) shall not exceed the sum of Twelve Million Dollars ($12,000,000.00); and/or

        (2) For each and every Project financed hereunder, the total number of Spec Homes shall not exceed the greater of (A) eight (8), (B) four (4) months’ appraised absorption for the Project, or (C) four (4) months’ actual absorption for the subject Project, as determined by Lender from time to time based upon the actual prior six-month Home sales average for said Project.

3. Amendment to Deed of Trust. Each Deed of Trust shall be amended to secure the obligations under the Note and the other Loan Documents, as amended herein.

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4. Conditions Precedent. In no event shall Lender have any obligation to close this transaction unless and until all of the following conditions are satisfied:

4.1 No Defaults. There shall be no: (a) uncured, material default hereunder or under the Loan Documents; (b) continuing representation, covenant or warranty hereunder or under the Loan Documents that is false or misleading in any manner; and (c) event currently existing which, with the passage of time, will result in a material default or the falsity of any continuing representation, covenant or warranty hereunder or under the Loan Documents.

4.2 No Financial Change. There has been no material adverse change in Borrower’s financial condition since the closing of the Loan.

4.3 Payment Of Lender’s Costs. Borrower shall pay all of Lender’s costs and expenses incurred in connection with the documentation and closing of the modifications to the Loan Documents described herein, including without limitation all attorneys’ fees and other closing fees and costs.

4.4 Additional Documents. Lender shall have received all additional documents executed by Borrower, as required by Lender in connection with this Agreement, including, without limitation, the Note.

5. Representations and Warranties. Borrower hereby represents and warrants to Lender as follows:

5.1 No Default. No default or event of default under any of the Loan Documents has occurred that remains uncured, and no event has occurred which, with the giving of notice or the passage of time, or both, would constitute a default or an event of default under any of the Loan Documents.

5.2 Representations and Warranties. As of the date hereof, all of the warranties and representations contained in all of the Loan Documents remain true, correct, complete and accurate.

5.3 No Claims or Defenses. As of the date hereof, neither Borrower nor its managing member has any claims against Lender nor defenses to the enforcement of any of the Loan Documents in accordance with their respective terms, as amended by this Agreement.

5.4 Financial Covenants. Borrower acknowledges and agrees that the financial covenants contained in the Loan Documents are in full force and effect and shall be monitored by Lender based on the financial reports to be provided under the Loan Agreement.

5.5 Satisfaction of Conditions. All of the conditions precedent set forth above have been fully satisfied.

6. Further Assurances. Borrower agrees to perform such other and further acts, and to execute such additional documents, agreements, notices or financing statements, as Lender deems necessary or desirable from time to time to create, preserve, continue, perfect, validate or carry out any of Lender’s rights under this Agreement and the other Loan Documents.

7. Integration. All rights, remedies, powers and interest provided for Lender herein are in addition to the rights, remedies, powers and interests provided for Lender in the Loan Documents, the terms and provisions of which are incorporated herein by this reference and made a

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part hereof. If and to the extent any term or provision hereof is inconsistent with any term or provision of the Loan Documents, the term or provision of this Agreement shall prevail.

8. Entire Agreement; Amendments. This Agreement and the other Loan Documents contain the entire agreement between Borrower and Lender with respect to the Loan Documents, and all prior negotiations, commitments, understandings and agreements are superseded by this Agreement and the Loan Documents. No amendment, modification, supplement, extension, termination or waiver of any provision of this Agreement, any Loan Document, or any other agreement executed in connection with any of the foregoing shall be effective unless in writing and signed by Lender and Borrower, and then only in the specific instance and for the specific purpose given.

9. Governing Law. The Loan Documents shall be governed by, and construed and enforced in accordance with, the internal laws of the State of California, without regard to its conflict of laws principles.

10. Section Headings. The section headings of this Agreement are included for convenience only, and shall not affect the construction or interpretation of any provision of this Agreement.

11. Attorneys’ Fees. If any action or other proceeding is brought to interpret or enforce any provision of this Agreement, the prevailing party shall be entitled to recover attorneys’ fees and expenses.

12. Binding Effect. This Agreement and the other Loan Documents shall be binding upon, and shall inure to the benefit of, Borrower and Lender and their respective successors and assigns, or heirs and personal representatives, as applicable, subject to any provision of the Loan Documents restricting transfers of the Property.

13. Severability of Provisions. No provision of this Agreement or any other Loan Document that is held to be inoperative, unenforceable and invalid shall affect the remaining provisions, and this and all provisions of this Agreement and the Loan Documents are hereby declared to be severable.

14. Miscellaneous. No reference to this Agreement is necessary in any instrument or document at any time referring to the Loan Documents. A reference to the Loan Documents shall be deemed a reference to such document as modified hereby.

15. No Commitment. The furnishing of this Agreement and other modification documents shall in no way be construed as a commitment by Lender to modify, amend, extend or otherwise alter the Loan Documents. Lender shall be under no obligation to close the transaction evidenced by this Agreement unless this Agreement and all related documents are returned to Lender fully executed by Borrower, and unless this Agreement is actually executed by Lender and delivered to Borrower.

16. No Other Amendments. Except as expressly amended herein, the Loan Agreement, and all of the other Loan Documents remain unmodified and in full force and effect.

17. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which, when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument.

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[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, this Agreement has been executed by Borrower and Lender as of the date first above written.

BORROWER:

WILLIAM LYON HOMES, INC., a California corporation

By: /s/ Douglas F. Bauer                            

Name: Douglas F. Bauer

Title: President

By: /s/ Michael D. Grubbs                        

Name: Michael D. Grubbs

Title: Senior Vice President

LENDER:

CALIFORNIA BANK & TRUST, a California banking corporation

By: /s/ Erin Johnsen                                    

Name: Erin Johnsen                                    

Its: Vice President                                       

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EX-10.38

Exhibit 10.38

SIXTH MODIFICATION AGREEMENT TO BORROWING BASE REVOLVING

LINE OF CREDIT AGREEMENT

DATE:	As of February 20, 2008
PARTIES:
	Borrower:	WILLIAM LYON HOMES, INC., a California corporation
	Guarantor:	WILLIAM LYON HOMES, a Delaware corporation
	Bank:	JPMORGAN CHASE BANK, N.A. (successor by merger to Bank One, NA (Main Office Chicago, Illinois)), a national banking association

JPMORGAN CHASE BANK, N.A. (successor by merger to Bank One, NA (Main Office Chicago, Illinois)), a national banking association (“Bank”), and WILLIAM LYON HOMES, INC., a California corporation (“Borrower”), hereby enter into this Sixth Modification Agreement (the “Modification”) to the Borrowing Base Revolving Line of Credit Agreement dated as of June 28, 2004, as modified by a Modification Agreement, dated as of December 7, 2004, by a Second Modification to Borrowing Base Revolving Line of Credit Agreement, dated as of July 14, 2005, by a Third Modification to Borrowing Base Revolving Line of Credit Agreement, dated as of October 23, 2006, by a Fourth Modification to Borrowing Base Revolving Line of Credit Agreement, dated as of April 26, 2007, and by a Fifth Modification to Borrowing Base Revolving Line of Credit Agreement, dated as of November 6, 2007 (the “Loan Agreement”), with the consent of guarantor WILLIAM LYON HOMES, a Delaware corporation (“Guarantor”).

RECITALS

A. Bank has extended to Borrower credit (“Loan”) up to the maximum principal amount of One Hundred Million Dollars ($100,000,000) pursuant to the Loan Agreement, as presently evidenced by that certain Amended and Restated Promissory Note dated as of July 14, 2005 (the “Note”) executed by Borrower and payable to the order of Bank.

B. The Loan is secured by, among other things, certain Construction Deeds of Trust and Fixture Filing (With Assignment of Rents and Security Agreement) executed by Borrower as Trustor for the benefit of Bank (such Deeds of Trust, as amended to dated, shall be hereinafter referred to, individually, as a “Deed of Trust” and, collectively, as the “Deeds of Trust”). The Loan is further secured by the personal property described in certain UCC-1 Financing Statements relating to the property encumbered by the Deeds of Trust naming Borrower as Debtor and Bank as Secured

1

Party (as amended to date, the “UCC Financing Statements”). The Deeds of Trust, the UCC Financing Statements, and such other agreements, documents and instruments securing the Loan are referred to individually and collectively as the “Security Documents”).

C. Repayment of the Loan and the completion of the improvements have been, and continue to be, guaranteed by the Repayment Guaranty dated as of June 28, 2004 and executed by Guarantor in favor of Bank (the “Guaranty”). The Guaranty and any other agreements, documents and instruments guarantying the Loan are referred to individually and collectively as the “Guaranty Documents”.

D. The Loan Agreement, the Note, the Security Documents, the Guaranty Documents, any environmental certification and indemnity agreement, and all other agreements, documents, and instruments evidencing, securing, or otherwise relating to the Loan, as may be amended, modified, extended or restated from time to time, are sometimes referred to individually and collectively as the “Loan Documents”. Hereinafter, the Loan Documents shall mean such documents as modified in this Modification.

E. The Borrower has requested that the Bank agree to modify the Loan as provided herein. Based on the representations of Borrower, Bank is willing to so modify the Loan, subject to the terms and conditions herein.

F. All capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Loan Agreement.

AGREEMENT

For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Bank agree as follows:

1. ACCURACY OF RECITALS.

Borrower acknowledges the accuracy of the Recitals.

2. MODIFICATION OF LOAN DOCUMENTS.

2.1 The Commitment Amount is hereby reduced from $100,000,000 to $70,000,000. In no event shall the Bank be obligated to make any disbursement of the Loan which would cause the outstanding principal balance of the Loan to exceed the Commitment Amount, as reduced hereby.

2.2 Paragraph (b) of the definition of “Maximum Allowed Advance” set forth in Section 1.1 of the Loan Agreement is deleted in its entirety and replaced with the following:

“(b) With respect to each SFR A&D Lot, the lesser of (i) 65% of the “bulk wholesale as-if complete” value of the Approved Subdivision divided by the total

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number of Lots in the Approved Subdivision (regardless of whether such total number of Lots are Eligible Collateral), or (ii) 70% of the Total Lot Cost for the Approved Subdivision divided by the total number of Lots in the Approved Subdivision (regardless of whether such total number of Lots are Eligible Collateral);”

2.3 Paragraph (c) of the definition of “Maximum Allowed Advance” set forth in Section 1.1 of the Loan Agreement is deleted in its entirety and replaced with the following:

“(c) With respect to each MFR A&D Lot, the lesser of (i) 60% of the “bulk wholesale as-if complete” value of the Approved Subdivision divided by the total number of Lots in the Approved Subdivision (regardless of whether such total number of Lots are Eligible Collateral), or (ii) 60% of the Total Lot Cost for the Approved Subdivision divided by the total number of Lots in the Approved Subdivision (regardless of whether such total number of Lots are Eligible Collateral);”

2.4 Paragraph (d) of the definition of “Maximum Allowed Advance” set forth in Section 1.1 of the Loan Agreement is deleted in its entirety and replaced with the following:

“(d) With respect to each High Density A&D Lot, the lesser of (i) 60% of the “bulk wholesale as-if complete” value of the Approved Subdivision divided by the total number of Lots in the Approved Subdivision (regardless of whether such total number of Lots are Eligible Collateral), or (ii) 60% of the Total Lot Cost for the Approved Subdivision divided by the total number of Lots in the Approved Subdivision (regardless of whether such total number of Lots are Eligible Collateral);”

2.5 Paragraph (e)(i) of the definition of “Maximum Allowed Advance” set forth in Section 1.1 of the Loan Agreement is deleted in its entirety and replaced with the following:

“(i) For each SFR Presold Unit, the lowest of (A) 80% of the Appraised Value for that Unit; (B) 80% of the sales price of such Unit pursuant to the applicable Purchase Contract; and (C) 95% of the Unit Cost for that Unit;”

2.6 Paragraph (e)(ii) of the definition of “Maximum Allowed Advance” set forth in Section 1.1 of the Loan Agreement is deleted in its entirety and replaced with the following:

“(ii) For each Presold Unit which constitutes an MFR Unit, the lowest of (A) 75% of the Appraised Value for that Unit; (B) 75% of the sales price of such Unit pursuant to the applicable Purchase Contract; and (C) 85% of the Unit Cost for that Unit;”

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2.7 Paragraph (e)(iii) of the definition of “Maximum Allowed Advance” set forth in Section 1.1 of the Loan Agreement is deleted in its entirety and replaced with the following:

“(iii) For each Presold Unit which constitutes a High Density Unit, the lowest of (A) 70% of the Appraised Value for that Unit; (B) 70% of the sales price of such Unit pursuant to the applicable Purchase Contract; and (C) 70% of the Unit Cost for that Unit;”

2.8 Section 3.3(a)(i) of the Loan Agreement is deleted in its entirety and replaced with the following:

“(i) Limitation on Lot Availability in Approved Subdivisions. The aggregate Maximum Allowed Advance for all Lots (other than Lots that have been reclassified as Units) in all Approved Subdivisions included as Eligible Collateral in the Borrowing Base may not exceed forty-five percent (45%) of the Commitment Amount (the “Lot Sub-Limit”).”

2.9 Section 7.1 of the Loan Agreement is deleted in its entirety and replaced with the following:

“7.1 Minimum Tangible Net Worth Covenant. Guarantor shall maintain a Tangible Net Worth of at least $175,000,000.00 plus fifty percent (50%) of Guarantor’s net profit after tax on a cumulative basis, commencing as of December 31, 2007.”

2.10 Section 7.2 of the Loan Agreement is deleted in its entirety and replaced with the following:

“7.2 Maximum Total Debt to Tangible Net Worth Covenant. Guarantor will maintain at all times a ratio of Indebtedness (exclusive of (i) Consolidated Indebtedness of Variable Interest Entities, and (ii) Indebtedness of Guarantor arising under its mortgage warehouse lines of credit) to Tangible Net Worth that is equal to or less than (a) for any period prior to January 1, 2009, 5.00 to 1.00 for the period of calculation, and (c) for any period commencing on or after January 1, 2009 and thereafter, 3.25 to 1.00 for the period of calculation.”

2.11 The Deeds of Trust are modified to secure payment and performance of the Loan as amended to date, in addition to all other “Obligations” of Borrower as therein defined. The foregoing notwithstanding, certain obligations continue to be excluded from the Obligations, as provided in the Deeds of Trust.

2.12 Each of the Loan Documents is modified to provide that it shall be a default or an event of default thereunder if Borrower shall fail to comply with any of the covenants of Borrower herein or if any representation or warranty by Borrower herein or by any guarantor in any related Consent and Agreement of Guarantor is materially incomplete, incorrect, or misleading as of the date hereof.

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2.13 Each reference in the Loan Documents to any of the Loan Documents shall be a reference to such document as modified herein.

3. RATIFICATION OF LOAN DOCUMENTS AND COLLATERAL.

The Loan Documents are ratified and affirmed by Borrower and shall remain in full force and effect as modified herein. Any property or rights to or interests in property granted as security in the Loan Documents shall remain as security for the Loan and the obligations of Borrower in the Loan Documents.

4. CONDITIONS PRECEDENT.

Before this Agreement becomes effective and any party becomes obligated under it, all of the following conditions shall have been satisfied at Borrower’s sole cost and expense in a manner acceptable to Bank in the exercise of Bank’s sole judgment:

4.1 Bank shall have received fully executed and, where appropriate, acknowledged originals of this Modification, the attached consents signed by Guarantor, and any other documents which Bank may require or request in accordance with this Agreement or the other Loan Documents.

4.2 Bank shall have received payment of a modification fee of $25,000 in immediately available funds.

4.3 Bank shall have received reimbursement, in immediately available funds, of all costs and expenses incurred by Bank in connection with this Agreement, including charges for title insurance (including endorsements), recording, filing and escrow charges, fees for appraisal, architectural and engineering review, construction services and environmental services, mortgage taxes, and legal fees and expenses of Bank’s counsel. Such costs and expenses may include the allocated costs for services of Bank’s in-house staffs, such as legal, appraisal, construction services and environmental services. Borrower acknowledges that any extension and modification fees payable in connection with this transaction do not include the amounts payable by Borrower under this subsection.

5. ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER.

The Loan Documents as modified herein contain the entire understanding and agreement of Borrower and Bank in respect of the Loan and supersede all prior representations, warranties, agreements, arrangements, and understandings. No provision of the Loan Documents as modified herein may be changed, discharged, supplemented, terminated, or waived except in a writing signed by Bank and Borrower.

6. BINDING EFFECT.

The Loan Documents as modified herein shall be binding upon, and inure to the benefit of, Borrower and Bank and their respective successors and assigns.

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7. CHOICE OF LAW.

This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflicts of law principles.

8. COUNTERPART EXECUTION.

This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. Signature pages may be detached from the counterparts and attached to a single copy of this Agreement to physically form one document.

[Signatures on following page]

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DATED as of the date first above stated.

BORROWER:	WILLIAM LYON HOMES, INC., a California corporation
	By:	/s/ Michael D. Grubbs
	Name:	Michael D. Grubbs
	Title:	Senior Vice President
	By:	/s/ Richard S. Robinson
	Name:	Richard S. Robinson
	Title:	Senior Vice President
BANK:	JPMORGAN CHASE BANK, N.A. (successor by merger to Bank One, NA (Main Office Chicago, Illinois)), a national banking association
	By:	/s/ Kimberlee Edwards
	Name:	Kimberlee Edwards
	Title:	Senior Vice President

S-1

CONSENT AND AGREEMENT OF GUARANTOR

With respect to that certain Sixth Modification Agreement to the Borrowing Base Revolving Line of Credit Agreement (hereinafter, the “Modification”) between WILLIAM LYON HOMES, INC., a California corporation (“Borrower”), and JPMORGAN CHASE BANK, N.A. (successor by merger to Bank One, NA (Main Office Chicago, Illinois)), a national banking association (“Bank”), to which this Consent is attached, the undersigned (“Guarantor”), hereby (i) ratifies and reaffirms all of its obligations to Bank under the Guaranty, (ii) consents to the execution and delivery by Borrower of the attached Modification, and (iii) confirms that the Guaranty remains in full force and effect notwithstanding Borrower’s execution of the attached Modification. The undersigned agrees that the execution of this Consent and Reaffirmation of Guarantor (the “Consent”) is not necessary for the continued validity and enforceability of the Guaranty, but it is executed to induce Bank to enter into the Modification Agreement.

Guarantor further agrees that the Guaranty is hereby modified and amended as follows:

1. Section 4.4.1 of the Guaranty is deleted in its entirety and replaced with the following:

“4.4.1 Minimum Tangible Net Worth Covenant. Guarantor shall maintain a Tangible Net Worth of at least $175,000,000.00 plus fifty percent (50%) of Guarantor’s net profit after tax on a cumulative basis, commencing as of December 31, 2007.”

2. Section 4.4.2 of the Guaranty is deleted in its entirety and replaced with the following:

“4.4.2 Maximum Total Debt to Tangible Net Worth Covenant. Guarantor will maintain at all times a ratio of Indebtedness (exclusive of (i) Consolidated Indebtedness of Variable Interest Entities, and (ii) Indebtedness of Guarantor arising under its mortgage warehouse lines of credit) to Tangible Net Worth that is equal to or less than (a) for any period prior to January 1, 2009, 5.00 to 1.00 for the period of calculation, and (c) for any period commencing on or after January 1, 2009 and thereafter, 3.25 to 1.00 for the period of calculation.”

This Consent may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. Signature pages may be detached from the counterparts and attached to a single copy of this Consent to physically form one document. Facsimile transmission of the signed original of this Consent or the retransmission of any signed facsimile transmission will be deemed the same as delivery of an original.

CONSENT

IN WITNESS WHEREOF, Guarantor has executed this Agreement as of the date set forth on the attached Sixth Modification Agreement.

“Guarantor”	WILLIAM LYON HOMES, a Delaware corporation
	By:	/s/ Michael D. Grubbs
	Name:	Michael D. Grubbs
	Title:	Senior Vice President
	By:	/s/ Richard S. Robinson
	Name:	Richard S. Robinson
	Title:	Senior Vice President

CONSENT

EX-10.57

Exhibit 10.57

THIRD AMENDMENT TO BORROWING BASE

REVOLVING LINE OF CREDIT AGREEMENT

This Third Amendment to Borrowing Base Revolving Line of Credit Agreement (“Amendment”) is entered into to as of January 23, 2008 between WILLIAM LYON HOMES, INC., a California corporation (“Borrower”) and WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association (“Lender”), formerly referenced as Agent for Wachovia Financial Services, Inc., a North Carolina corporation, which Amendment is consented to by Guarantor WILLIAM LYON HOMES, a Delaware corporation (“Guarantor”).

RECITALS:

A. Borrower has received a revolving line of credit from Lender in the maximum commitment amount of $50,000,000.00 (the “Loan”) for the acquisition and development of Approved Subdivisions pursuant to the terms of that certain Borrowing Base Revolving Line of Credit Agreement dated as of February 14, 2006, between Borrower and Lender, and as amended by that certain First Amendment to Borrowing Base Revolving Line of Credit Agreement dated as of September 29, 2006, and as further amended by that certain Second Amendment to Borrowing Base Revolving Line of Credit Agreement dated as of March 30, 2007, (as the same may be further amended, modified, extended, renewed, restated or supplemented from time to time, the “Loan Agreement”) and as further evidenced by that certain Amended and Restated Borrowing Base Secured Promissory Note executed by Borrower and payable to the order of Lender (as amended, restated and otherwise modified from time to time, the “Note”). All capitalized terms used herein and not otherwise defined shall have the meanings given to such terms in the Loan Agreement.

B. The Loan is secured by, among other things, duly recorded Construction Deeds of Trust and Fixture Filing (With Assignment of Rents and Security Agreement), duly filed UCC-1 Financing Statements naming Borrower as Debtor and Lender as Secured Party, and such certain other assignments (collectively, as amended, restated and otherwise modified from time to time, the “Security Documents”).

C. Guarantor has executed certain documents in favor of Lender in connection with the Loan, including that certain Payment and Completion Guaranty Agreement (together with any other documents executed by any Guarantor in favor of Lender in connection with the Loan, each as may be amended, restated and otherwise modified from time to time, the “Guarantor Documents”).

D. The Note, the Security Documents, the Guaranty Documents, and all other agreements, documents, and instruments evidencing, securing, or otherwise relating to the Loan, as may be amended, modified, extended or restated from time to time, are sometimes referred to individually and collectively as the “Loan Documents”. Hereinafter, the Loan Documents shall mean such documents as modified in this Amendment.

E. The parties desire to modify the Loan Agreement and the Loan Documents as set forth below.

AGREEMENT:

For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. ACCURACY OF RECITALS.

Borrower and Lender acknowledge the accuracy of the recitals.

2. MODIFICATION OF THE LOAN AGREEMENT AND LOAN DOCUMENTS.

2.1 The definition of “Commitment Amount” in Section 1.1 of the Loan Agreement is hereby amended and restated in its entirety to provide as follows:

“Commitment Amount” means THIRTY MILLION AND NO/100THS DOLLARS ($30,000,000.00) subject to such decreases thereof pursuant to Section 2.1(e); provided, however, upon the occurrence of a Term Out Date pursuant to Section 2.1(h), the Commitment Amount shall be deemed to be that amount which is equal to the aggregate amount of Outstanding Loan Borrowings as of such Term Out Date.

2.2 Section 1.1 of the Agreement is hereby amended by deleting the definition of “Facility Increase”.

2.3 The definition of “Interest Rate” in Section 1.1 of the Loan Agreement is hereby amended and restated in its entirety to provide as follows:

“Interest Rate” means, at the election of Borrower in connection with any Advance Request pursuant to Section 2.2(a) (and otherwise subject to the provisions of Section 2.3 and Section 3 of the Note), either:

(a) The LIBOR Rate plus (i) 2.30% if the Leverage Ratio is less than or equal to 3.25 or (ii) 2.50% if the Leverage Ratio is greater than 3.25, which combined figure shall be rounded upwards to the nearest one-eighth percent (.125%), with such interest rate being adjusted from time to time as of each Interest Rate Adjustment Date (“LIBOR Based Rate”) or

(b) The Prime Rate plus (i) 0.30% if the Leverage Ratio is less than or equal to 3.25 or (ii) 0.50% if the Leverage Ratio is greater than 3.25, which combined figure shall be rounded upwards to the nearest one-eighth percent (.125%), with such interest rate being adjusted from time to time as and when the Prime Rate is adjusted (“Prime Based Rate”).

Borrower may not elect to convert or otherwise change the Interest Rate except in connection with an Advance Request. Interest shall accrue on the entire outstanding balance of the Loan at the Interest Rate selected by Borrower until such time as Borrower elects to convert such Interest Rate to the other available Interest Rate (i.e., LIBOR Based Rate or Prime

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Based Rate); provided that the applicable Interest Rate shall be the Default Rate at any time an Event of Default has occurred and is continuing. In the event no such Interest Rate election is made by Borrower, the Interest Rate shall be deemed to be the LIBOR Based Rate.

2.4 The definition of “Maturity Date” in Section 1.1 of the Loan Agreement is hereby amended by deleting the reference therein to “February 14, 2008” and inserting in place thereof “May 14, 2008”.

2.5 Section 2.1(d) is hereby amended and restated in its entirety to provide as follows: [Intentionally Omitted].

2.6 Section 2.5 of the Loan Agreement is hereby amended by inserting the following new subsection (d):

(d) Unused Commitment Fee. In addition, commencing as of January 1, 2008 and continuing thereafter until the Commitment has been terminated and the Loan paid in full, Borrower agrees to pay Lender a quarterly Unused Commitment Fee for each quarterly period that the Average Quarterly Outstandings is less than fifty percent (50%) of the Commitment Amount then in effect. As used herein, the term “Unused Commitment Fee” means that amount which is equal to the result of multiplying: (i) the difference between the Commitment Amount in effect during the applicable period and the Average Quarterly Outstandings for that same period by (ii) 0.15%. As used herein the term “Average Quarterly Outstanding” means, for each quarter (or portion thereof), the aggregate amount of the daily amount of outstanding Advances during the applicable period divided by the actual number of days in that period. Each Unused Commitment Fee shall be calculated by Lender with each such calculation being deemed conclusive absent manifest error. Each Unused Commitment Fee shall be due and payable in arrears within ten (10) days after the end of each quarterly period; provided that any such Unused Commitment Fee, whether for the full quarterly period or any portion thereof, shall become immediately due and payable on the earlier of the Maturity Date or the occurrence of an Event of Default; provided, however, Unused Commitment Fees shall continue to accrue and be due and payable during the existence of any such Event of Default.

2.7 Sections 7.1 and 7.2 of the Loan Agreement are hereby amended and restated in their entirety to provide as follows:

7.1 Minimum Tangible Net Worth Covenant. WLH will maintain at all times, on a consolidating basis, a minimum Tangible Net Worth equal to or greater than $175,000,000.00.

7.2 Leverage Ratio. WLH will maintain at all times, on a consolidating basis, a ratio of (a) Total Liabilities to (b) Tangible Net

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Worth that is equal to or less than 5.00 to 1. As used herein, the term “Total Liabilities” shall mean the book value of WLH’s assets less (i) Tangible Net Worth, (ii) “off-balance sheet” liabilities complying with the Financial Accounting Standards For Financial Interpretation No. 46 and (iii) minority interests in WLH consolidated entities, all as determined in accordance with GAAP.

2.8 Effective Date of Modifications. The modifications to the financial covenants set forth in Section 2.7 above shall be deemed to be effective as of December 31, 2007 and applicable to the 2007 fourth quarter and year end reporting and financial covenant requirements of WLH. All other modifications set forth in this Section 2 shall be deemed to be effective as of January 23, 2008, the date of this Amendment.

3. RATIFICATION OF LOAN DOCUMENTS AND COLLATERAL.

The Loan Documents are ratified and affirmed by Borrower and will remain in full force and effect as modified herein, and as those Loan Documents may have been amended, restated or otherwise modified. Any property or rights to or interest in property granted as security in the Loan Documents will remain as security for the Loan and the obligations of Borrower in the Loan Documents. Each reference in any Loan Document to any other Loan Document will be a reference to such Loan Document as modified by this Amendment or as otherwise restated, amended or modified.

4. REPRESENTATIONS AND WARRANTIES.

Borrower represents and warrants to Lender:

4.1 To the best of its knowledge, no Event of Default under the Loan Agreement, as modified herein, or any other Loan Document, as those Loan Documents may have been amended, restated or otherwise modified, has occurred and is continuing.

4.2 There has been no Material Adverse Change as of the date hereof.

4.3 Each and all representations and warranties of Borrower in the Loan Documents, as such Loan Documents may have been amended, restated or otherwise modified, are accurate on the date hereof in all material respects.

4.4 Borrower has no claims, counterclaims, defenses, or set-offs with respect to the Loan Documents as modified by this Amendment or otherwise amended, restated or modified.

4.5 The Loan Documents, as modified by this Amendment or as otherwise amended, restated or modified, are the legal, valid, and binding obligation of Borrower, enforceable against Borrower in accordance with their terms.

4.6 Borrower is validly existing under the laws of the state of its formation and has the requisite power and authority to execute and deliver this Amendment and to perform the Loan Documents, as modified herein or as otherwise amended, restated or modified. Each of

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the certificates and resolutions previously delivered to Lender in connection with the Loan continue to be true and accurate in all material respects, have not been rescinded, revoked, terminated, limited, restricted or otherwise modified and continue in full force and effect. The execution and delivery of this Amendment and the performance of the Loan Documents, as modified herein or as otherwise amended, restated or modified, have been duly authorized by all requisite action by or on behalf of Borrower and all other requisite persons. This Amendment has been duly executed and delivered on behalf of Borrower.

5. COVENANTS.

Borrower covenants with Lender that Borrower shall execute, deliver, and provide to Lender such additional agreements, documents, and instruments as reasonably required by Lender to effectuate the intent of this Amendment.

6. RELEASE.

Borrower represents and warrants that Borrower has no claims, counterclaims, defenses, or offsets with respect to the enforcement by Lender against Borrower of the Loan or the Loan Documents. Borrower further fully, finally and forever releases and discharges Lender and its respective successors, assigns, directors, officers, employees, agents, and representatives from any and all actions, causes of action, claims, debts, demands, liabilities, obligations, and suits, of whatever kind or nature in law or equity that it has or in the future may have, whether known or unknown, with respect to the Loan and the Loan Documents or the actions or omissions of Lender in respect thereof to the extent such claims, counterclaims, defenses or offsets arose from events occurring prior to the date of this Agreement. It is the intention of Borrower that the above release shall be effective as a full and final release of each and every matter specifically and generally referred to in this paragraph. Borrower acknowledges and represents that it has been advised by independent legal counsel with respect to the agreements contained herein and with respect to the provisions of California Civil Code Section 1542, which provides as follows: “A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.” Borrower, being aware of said code section, expressly waives any and all rights it may have thereunder, as well as under any other statute or common law principle of similar effect, with respect to any of the matters released herein. The Agreement shall act as a release of all included claims, rights and causes of action, whether such claims are currently known, unknown, foreseen or unforeseen and regardless of any present lack of knowledge as to such claims. Borrower understands and acknowledges the significance and consequence of this waiver of California Civil Code Section 1542, and hereby assumes full responsibility for any injuries, damages, losses or liabilities released herein.

7. CONDITIONS PRECEDENT TO THIS AMENDMENT.

This Amendment shall become effective and binding on Lender only upon satisfaction, as determined by Lender in its sole and absolute discretion, of the following conditions precedent:

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7.1 No Event of Default. No Event of Default, Unmatured Event of Default or Material Adverse Change shall have occurred and be continuing as of the date of this Amendment.

7.2 No Mechanics’ Lien and/or Labor Claims against the Land. Borrower shall provide evidence to Lender, in a form and manner satisfactory to Lender in its sole and absolute discretion, that, there are no mechanic lien claims, labor claims or other claims for service or goods that could result in a lien or encumbrance against the Land (as that term is defined in the Loan Agreement).

7.3 Execution and Delivery of Amendment. Borrower shall have delivered to Lender a fully executed original of this Amendment and the attached Consent and Agreement. Lender has executed and delivered a fully executed copy of this Amendment to Borrower.

7.4 Payment of Extension Fee. Borrower shall pay to Lender an earned in full upon receipt, non-refundable extension fee equal to 0.125% of the Commitment Amount (i.e., $37,500.00).

7.5 Payment of Lender Costs. Borrower shall have paid, in immediately available funds to Lender all of Lender’s fees, costs and charges incurred by Lender in connection herewith, including without limitation reasonable attorneys’ fees and costs.

7.6 Other Documents and Information. Borrower shall have delivered to Lender such other documents and information as Lender may reasonably require as a condition of the effectiveness of this Amendment.

8. ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER.

The Loan Documents, as modified herein, and as otherwise amended, restated or modified, contain the entire understanding and agreement of Borrower in respect of the subject matter thereto and supersedes all prior representations, warranties, agreements, arrangements, and understandings. No provision of such Loan Documents may be further changed, discharged, supplemented, terminated, or waived except in a writing signed by Lender and Borrower.

9. BINDING EFFECT.

The Loan Documents as modified herein are binding upon, and inure to the benefit of Borrower and Lender and their respective successors and assigns.

10. CHOICE OF LAW.

This Amendment and the attached Consent is governed by and construed in accordance with the laws of the State of California, without giving effect to conflicts of law principles.

11. COUNTERPART EXECUTION.

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This Amendment and the attached Consent may be executed in one or more counterparts, each of which is deemed an original and all of which together constitute one and the same document. Signature pages may be detached from the counterparts and attached to a single copy of this Amendment and the attached Consent to physically form one document.

[Signature Page Follows]

DATED as of the date first above stated.

BORROWER:

WILLIAM LYON HOMES, INC.,

a California corporation

By: /s/ Michael D. Grubbs

Name: Michael D. Grubbs

Its: Senior Vice President

By: /s/ Richard S. Robinson

Name: Richard S. Robinson

Its: Senior Vice President

[Signature Pages Continue on Following Page]

LENDER:

WACHOVIA BANK, NATIONAL

ASSOCIATION, a national banking

association

By: /s/ Kurt Huisman                        

Name: Kurt Huisman                        

Its: Vice President                            

[End of Signature Pages – Consent and Agreement of Guarantor Follows]

CONSENT AND AGREEMENT OF GUARANTOR

Guarantor hereby consents to the foregoing Third Amendment to Borrowing Base Revolving Line of Credit Agreement (“Amendment”) and agrees to the terms and conditions thereof. Guarantor further represents, warrants and covenants to Lender as follows:

1. To the best of Guarantor’s knowledge, no Event of Default has occurred and is continuing.

2. There has been no Material Adverse Change with respect to Borrower or the Land.

3. Borrower continues to be validly existing under the laws of the state of its formation or organization and (1) Borrower has the requisite power and authority to execute and deliver the Amendment and to perform the Loan Documents as modified by the Amendment, and (2) the Guarantor has the requisite power and authority to execute and deliver this Consent and Agreement of Guarantor and to perform the Loan Documents to which it is a party, as those Loan Documents may have been amended, restated or otherwise modified.

4. Guarantor acknowledges: (i) receiving a copy of and reading the Amendment and all other Loan Documents, including any new Loan Documents and any restatements, amendments or modifications with respect to any existing Loan Documents, (ii) the accuracy of the Recitals in the Amendment, and (iii) the continued effectiveness of the Loan Documents to which the Guarantor is a party as those Loan Documents may have been amended, restated or otherwise modified by the Amendment or otherwise, and any other agreements, documents, or instruments securing or otherwise relating to thereto (collectively, the “Guarantor Loan Documents”).

5. Guarantor consents to the modification of the Loan Documents as set forth in the Amendment, and as set forth in any restatements, amendments or modifications with respect to any existing Loan Documents or Guarantor Documents, and as to all other matters as set forth in the Amendment and affirms and covenants to Lender that: (a) such Loan Documents and Guarantor Loan Documents (as restated, amended or otherwise modified) continue to be the legal, valid and binding obligation of Borrower and Guarantor (as applicable), enforceable against Borrower and the Guarantor (as applicable) in accordance with their terms, subject only to bankruptcy, insolvency, moratorium, reorganization or similar laws affecting creditors’ rights generally and by equitable principles of general application, and (b) any property or rights to or interests in property granted as security in the Guarantor Documents shall remain as security.

6. Guarantor represents and warrants that Guarantor has no claims, counterclaims, defenses, or off-sets with respect to the enforcement against Guarantor of the Guarantor Loan Documents. Guarantor further fully, finally and forever releases and discharges Lender and its successors, assigns, directors, officers, employees, agents, and representatives from any and all actions, causes of action, claims, debts, demands, liabilities, obligations, and suits, of whatever kind or nature in law or equity that it has or in the future may have, whether known or unknown, with respect to the Loan and the Loan Documents (including without limitation, the Guarantor

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Loan Documents) or the actions or omissions of Lender in respect thereof to the extent such claims, counterclaims, defenses or off-sets arose from events occurring prior to the date of the Amendment. It is the intention of Guarantor that the above release shall be effective as a full and final release of each and every matter specifically and generally referred to in this paragraph. Guarantor acknowledges and represents that he has been advised by independent legal counsel with respect to the agreements contained herein and with respect to the provisions of California Civil Code Section 1542, which provides as follows: “A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.” Guarantor, being aware of said Code section, expressly waives any and all rights he may have thereunder, as well as under any other statute or common law principle of similar effect, with respect to any of the matters released herein.

[Signature Page Follows]

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DATED as of the date of the Amendment.

GUARANTOR:

WILLIAM LYON HOMES,

a Delaware corporation

By: /s/ Michael D. Grubbs                        

Name: Michael D. Grubbs                        

Its: Senior Vice President                        

By: /s/ Richard S. Robinson                     

Name: Richard S. Robinson                     

Its: Senior Vice President                         

EX-10.61

Exhibit 10.61

AMENDMENT AGREEMENT

This Amendment Agreement (this “Amendment Agreement”) is entered into as of February 28, 2008, by and between WILLIAM LYON HOMES, INC., a California corporation (“Borrower”), and COMERICA BANK (“Lender”). This Amendment Agreement is made with reference to the following facts:

RECITALS

A. Lender has made a revolving line of credit available to Borrower in the initial maximum outstanding principal amount of $50,000,000 (the “Loan”), pursuant to the terms of that certain Revolving Line of Credit Loan Agreement (Borrowing Base Loan) dated as of March 8, 2006 (the “Loan Agreement”). Capitalized terms used in this Amendment Agreement and not defined shall have the meanings assigned to such terms in the Loan Agreement.

B. Subject to the terms and conditions contained in this Amendment Agreement, Borrower and Lender have agreed to modify the Loan Agreement and other Loan Documents as set forth herein.

C. As used in this Amendment Agreement, the term “Loan Documents” means the Loan Agreement, the Note, the Deeds of Trust, the other Security Documents, the Environmental Indemnity, the Guaranty, and the other “Loan Documents” described in the Loan Agreement. This Amendment Agreement and the “Short Forms” described below shall also constitute Loan Documents.

AGREEMENT

NOW, THEREFORE, with reference to the foregoing Recitals and information, and in consideration of the mutual covenants and agreements contained in this Amendment Agreement, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender agree as follows:

1. Recitals; Representations and Warranties. The above statement of facts set forth in the Recitals is true and correct, and the Recitals hereby are incorporated herein as an agreement of Borrower and Lender. Borrower hereby represents and warrants to Lender that (a) no Event of Default or Unmatured Event of Default has occurred or exists, and (b) all representations and warranties of Borrower contained in the Loan Agreement or in any of the other Loan Documents (as the Loan Agreement and such other Loan Documents are amended hereby) are true and correct as of the date hereof.

2. Amendments to Loan Agreement. Borrower and Lender hereby amend the Loan Agreement as follows:

2.1 The definition of “Commitment Amount” set forth in Section 1.1 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

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“ ‘Commitment Amount’ means (a) during the Initial Line Term, the sum of Thirty-Five Million Dollars ($35,000,000.00), and (b) during the Reduction Period, beginning upon the last day of the first Calendar Quarter following the Initial Line Maturity Date, and on or prior to the last day of each Calendar Quarter thereafter during the Reduction Period, the Commitment Amount shall be reduced in the minimum amount of Eight Million Seven Hundred Fifty Thousand and No/100 Dollars ($8,750,000.00) (each, “Reduced Commitment Amount”):

DATE	REDUCED COMMITMENT AMOUNT
Initial Line Maturity Date	$	35,000,000.00
First Calendar Quarter	$	26,250,000.00
Second Calendar Quarter	$	17,500,000.00
Third Calendar Quarter	$	8,750,000.00
Fourth Calendar Quarter	$	0.00

2.2 The definition of “Maximum Aggregate Borrowing Base Concentrations” set forth in Section 1.1 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

“ ‘Maximum Aggregate Borrowing Base Concentration(s)’ shall mean shall mean each and every one of the following:

(a) With respect to all Qualified Projects included in the Borrowing Base (collectively or individually ‘Geographic Concentration Limitation’):

        (i) The aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all Zoned Land, Lots and/or Homes for Qualified Projects located in the State of Arizona shall not exceed the lesser of (1) Twelve Million Two Hundred Fifty Thousand Dollars ($12,250,000.00), or (2) thirty-five percent (35%) of the then existing Commitment Amount; and

        (ii) The aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all Zoned Land, Lots and/or Homes for Qualified Projects located in the State of Nevada shall not exceed the lesser of (1) Twelve Million Two Hundred Fifty Thousand Dollars ($12,250,000.00), or (2) thirty-five percent (35%) of the then existing Commitment Amount.

(b) With respect to all Zoned Land and Lots to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all Zoned Land, Entitled Land, High End Entitled Land, Lots Under Development and High End Lots Under Development for all Qualified Projects shall not exceed the lesser of (i) Twenty Million Dollars ($20,000,000.00), or (ii) sixty percent (60%) of the then existing Commitment Amount (‘Land Concentration Limitation’).

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(c) With respect to all Zoned Land to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all Zoned Land for all Qualified Projects shall not exceed the lesser of (i) Five Million Dollars ($5,000,000.00), or (ii) fifteen percent (15%) of the then existing Commitment Amount (‘Zoned Land Concentration Limitation’).

(d) With respect to all Entitled Land to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all Entitled Land for all Qualified Projects shall not exceed the lesser of (i) Ten Million Dollars ($10,000,000.00), or (ii) thirty percent (30%) of the then existing Commitment Amount (‘Entitled Land Concentration Limitation’).

(e) With respect to all High End Entitled Land to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all High End Entitled Land for all Qualified Projects shall not exceed the lesser of (i) Seven Million Five Hundred Thousand Dollars ($7,500,000.00), or (ii) twenty-two percent (22%) of the then existing Commitment Amount (‘High End Entitled Land Concentration Limitation’).

(f) With respect to all Lots Under Development to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all Lots Under Development for all Qualified Projects shall not exceed the lesser of (i) Twenty Million Dollars ($20,000,000.00), or (ii) sixty percent (60%) of the then existing Commitment Amount (‘Lots Under Development Concentration Limitation’).

(g) With respect to all High End Lots Under Development to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all High End Lots Under Development for all Qualified Projects shall not exceed the lesser of (i) Fifteen Million Dollars ($15,000,000.00), or (ii) forty-five percent (45%) of the then existing Commitment Amount (‘High End Lots Under Development Concentration Limitation’).

(h) With respect to all High End Entitled Land and High End Lots Under Development to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all High End Entitled Land and High End Lots Under Development for all Qualified Projects shall not exceed the lesser of (i) Fifteen Million Dollars ($15,000,000.00), or (ii) forty-five percent (45%) of the then existing Commitment Amount (‘High End Land Concentration Limitation’).

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(i) With respect to all Spec Homes to be included in the Borrowing Base, for each and every Qualified Project financed hereunder, the total number of Spec Homes shall not exceed the lesser of (i) twenty-five (25) Spec Homes, (ii) five (5) months’ appraised absorption for the applicable Project, or (iii) five (5) months’ actual absorption for the applicable Project, as determined by Lender from time to time based upon the actual prior six-month Home sales average for the applicable Project (‘Spec Home Concentration Limitation’).

(j) With respect to all High End Spec Homes to be included in the Borrowing Base, for each and every Qualified Project financed hereunder, the total number of High End Spec Homes shall not exceed the lesser of (i) fifteen (15) High End Spec Homes, (ii) four (4) months’ appraised absorption for the applicable Project, or (iii) four (4) months’ actual absorption for the applicable Project, as determined by Lender from time to time based upon the actual prior six-month Home sales average for the applicable Project (‘High End Spec Home Concentration Limitation’).

(k) With respect to all Model Homes or High End Model Homes to be included in the Borrowing Base, for each and every Qualified Project financed hereunder, the total number of Model Homes or High End Model Homes, as applicable, shall not exceed five (5) (‘Model Home Concentration Limitation’).

(l) With respect to any one Qualified Project, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for such Qualified Project shall not exceed Twenty-five Million Dollars ($25,000,000.00).

(m) With respect to all attached condominium Homes for all Qualified Projects other than the Qualified Projects commonly known as ‘Promenade North’ in San Diego, California and ‘Cambridge Lane’ in Tustin, California, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all such attached condominium Homes shall not exceed the lesser of (i) Fifteen Million Dollars ($15,000,000.00), or (ii) forty-five percent (45%) of the then existing Commitment Amount.

(n) With respect to all attached condominium Homes in those Qualified Projects commonly known as ‘Promenade North’ in San Diego, California and ‘Cambridge Lane’ in Tustin, California, the aggregate Maximum Allowed Advance multiplied by the applicable Draw Percentage for all such attached condominium Homes (i) for each such Qualified Project shall not exceed the lesser of (A) Fifteen Million Dollars ($15,000,000.00), or (B) forty-five percent (45%) of the then existing Commitment Amount, and (ii) for both such Qualified Projects in the aggregate shall not exceed the lesser of (A) Twenty-Five Million Dollars ($25,000,000.00), or (B) seventy-two percent (72%) of the then existing Commitment Amount.

(o) With respect to all High End Homes to be included in the Borrowing Base, the aggregate Maximum Allowed Advance multiplied by the

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applicable Draw Percentage for all such High End Homes shall not exceed the lesser or (i) Twenty Million Dollars ($20,000,000.00), or (ii) sixty percent (60%) of the then existing Commitment Amount.”

2.3 The subheadings entitled “ENTITLED LAND”, “LOTS UNDER DEVELOPMENT” and “HIGH END LOTS UNDER DEVELOPMENT” within the definition of “Maximum Allowed Advance” set forth in Section 1.1 of the Loan Agreement are hereby deleted in their entirety and replaced with the following new subheadings:

“– ENTITLED LAND: The sum of all Advances for Entitled Land shall not exceed the lesser of (i) sixty-five percent (65%) of Total Project Costs, or (ii) fifty percent (50%) of the Appraised Value for Entitled Land, subject to Lender’s approval.”

“– LOTS UNDER DEVELOPMENT: The sum of all Advances for Lots Under Development shall not exceed the lesser of (i) eighty percent (80%) of Total Project Costs, or (ii) sixty-five percent (65%) of the Bulk Finished Lot Value for Lots Under Development, subject to Lender’s approval.”

“– HIGH END LOTS UNDER DEVELOPMENT: The sum of all Advances for High End Lots Under Development shall not exceed the lesser of (i) seventy-five percent (75%) of Total Project Costs, or (ii) sixty-five percent (65%) of the Bulk Finished Lot Value for High End Lots Under Development, subject to Lender’s approval.”

2.4 In Section 2.12(a) of the Loan Agreement, the current reference to “Fifty Million and No/100 Dollars ($50,000,000.00)” is hereby deleted and replaced with “Thirty-Five Million and No/100 Dollars ($35,000,000.00)”.

2.5 Section 6.15 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

“6.15 FINANCIAL COVENANTS. Financial covenants described in this Section 6.15, together with all other financial covenants and restrictions set forth in this Agreement, shall be monitored quarterly by Lender upon receipt of the financial statements to be provided hereunder.

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COVENANT PARTY	COVENANT TYPE	COVENANT REQUIREMENT
Guarantor	Maximum Total Liabilities-to-Tangible Net Worth Ratio	Not in excess of (a) 5.00:1.0 from January 1, 2008 through December 31, 2008, and (b) 4.00:1.0 from and after January 1, 2009
Guarantor	Minimum Tangible Net Worth	Not less than (a) $175,000,000 through December 31, 2008, and (b) from and after January 1, 2009, the sum of (i) $175,000,000, plus (ii) 50% of quarterly net income after December 31, 2008
Guarantor	Minimum Liquidity	Not less than $20,000,000, at least $10,000,000 of which must be cash on hand

Upon the satisfaction of all of the conditions precedent set forth in Section 7 below, the effective date of the replacement of Section 6.15 of the Loan Agreement shall be deemed to be December 31, 2007.

3. Amendments to Note. The Loan, as the maximum principal amount outstanding thereunder has been reduced pursuant to this Amendment Agreement, shall be evidenced by the Note, as amended hereby. The Note shall is hereby amended so that the figure “Fifty Million and No/100 Dollars ($50,000,000.00)” set forth twice in the first paragraph on page one of the Note is hereby deleted and replaced with “Thirty-Five Million and No/100 Dollars ($35,000,000.00)”, and the figure “$50,000,000.00” appearing in the upper left hand corner on page one of the Note is hereby deleted and replaced with “$35,000,000.00”.

4. Extension of Initial Line Maturity Date. Lender has completed its annual review and hereby extends the Initial Line Maturity Date for an additional twelve (12) Calendar Months to and until April 3, 2009. Lender hereby gives notice of such extension to Borrower in accordance with subsection 2.1.3(e) of the Loan Agreement. The “Maturity Date” of “April 3, 2009” set forth in the first paragraph on page one of the Note is hereby deleted and replaced with “April 3, 2010”.

5. Security Documents. Each Deed of Trust, and all other Security Documents, shall secure, in addition to all other indebtedness and obligations secured thereby, the payment and performance of all present and future indebtedness and obligations of Borrower under (a) this Amendment Agreement, (b) any and all amendments, modifications, renewals and/or extensions of the Loan Agreement, regardless of whether any such amendment, modification, renewal or extension is evidenced by a new or additional instrument, document or agreement, and (c) all other Loan Documents (other than the Guaranty and the Environmental Indemnity, the obligations under which continue to remain unsecured by each Deed of Trust), as amended by this Agreement and by the Short Forms.

6. Definitions. Except as provided in this Amendment Agreement, all references in the Loan Agreement and in the other Loan Documents (a) to the Deeds of Trust shall mean the Deeds of Trust, as amended by this Amendment Agreement, (b) to the Loan shall mean the Loan, as the maximum principal amount thereof has been reduced pursuant to this Amendment

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Agreement, (c) to the Note shall mean the Note as amended by this Amendment Agreement, (d) to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment Agreement, (e) to the Loan Documents shall mean the Loan Documents as such term is defined in this Amendment Agreement, and (f) to any particular Loan Document shall mean such Loan Document as modified by this Amendment Agreement or any document executed pursuant hereto. In addition, all references in the Loan Agreement and in the other Loan Documents to (i) “$50,000,000.00” or “$50,000,000”, and (ii) to “Fifty Million and No/100 Dollars” or “Fifty Million Dollars”, are hereby changed to “$35,000,000.00” or “Thirty-Five Million and No/100 Dollars”.

7. Conditions Precedent. Lender’s obligation to modify the terms of the Loan Agreement and the other Loan Documents as set forth herein is subject to the satisfaction of all of the following conditions precedent (any of which may be waived by Lender in its sole discretion):

7.1 Lender shall have received a fully-executed original of this Agreement (including an original of the executed Guarantor’s Consent attached hereto).

7.2 Lender have received an original of each Amendment Agreement (Short Form), each of even date herewith (collectively, the “Short Forms”), fully executed and acknowledged by Borrower and consented to by all applicable Subordinate Rights Holders.

7.3 The Short Forms shall have been recorded in the official records of the counties in which each Project is located in accordance with Lender’s instructions to the Title Company, in addition to all other documents which Lender may reasonably request to be recorded.

7.4 Lender shall have received such endorsements to each existing Title Policy (or commitments by the Title Company to issue the same in form acceptable to Lender) as Lender shall reasonably request to insure the validity and continuing first position liens of the Deeds of Trust, as amended hereby, including without limitation a CLTA 110.5 endorsement (or its local equivalent).

7.5 Lender shall have received a current good standing certificate of Borrower (and its managing member) issued by the applicable Secretary of State of the state of each such entity’s formation.

7.6 Lender shall have received a current good standing certificate of Borrower issued by each state in which each Qualified Project included in the Borrowing Base is located.

7.7 No change shall have occurred in the financial condition of Borrower, Guarantor or any Project, which would have, in Lender’s sole judgment, a material adverse effect on such Project or on Borrower’s or Guarantor’s ability to repay the Loan or otherwise perform their respective obligations under the Loan Documents as of the date hereof.

7.8 No condemnation or adverse zoning or usage change proceeding shall have occurred or shall have been threatened against any Project; no Project shall have suffered any significant damage by fire or other casualty which has not been repaired; no law, regulation,

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ordinance, moratorium, injunctive proceeding, restriction, litigation, action, citation or similar proceeding or matter shall have been enacted, adopted, or threatened by any governmental authority, which would have, in Lender’s judgment, a material adverse effect on Borrower or any Project as of the date hereof.

7.9 The representations and warranties contained in the Loan Agreement and in all other Loan Documents shall remain true and correct as of the date hereof.

7.10 No Event of Default or Unmatured Event of Default shall have occurred and be continuing.

7.11 Borrower shall have reimbursed Lender for all costs and expenses incurred by Lender in connection with the transaction contemplated by this Amendment Agreement, including title insurance costs, recording fees, and attorneys’ fees and costs.

8. Non-Impairment. Except as expressly provided herein, nothing in this Amendment Agreement shall alter or affect any provision, condition or covenant contained in the Loan Agreement or the other Loan Documents or affect or impair any rights, powers or remedies thereunder, and the parties hereto intend that the provisions of the Loan Agreement and the other Loan Documents shall continue in full force and effect except as expressly modified hereby.

9. Miscellaneous. This Amendment Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California applicable to contracts made and performed in such state, without regard to the principles thereof regarding conflict of laws, and any applicable laws of the United States of America. The headings used in this Amendment Agreement are for convenience only and shall be disregarded in interpreting the substantive provisions of this Amendment Agreement. If any provision of this Amendment Agreement shall be determined by a court of competent jurisdiction to be invalid, illegal or unenforceable, that portion shall be deemed severed herefrom and the remaining parts shall remain in full force as though the invalid, illegal or unenforceable provision had never been a part hereof. As used in this Amendment Agreement, the term “include(s)” shall mean “include(s), without limitation,” and the term “including” shall mean “including, but not limited to.”

10. Integration; Interpretation. The Loan Documents, including this Amendment Agreement, contain or expressly incorporate by reference the entire agreement of the parties with respect to the matters contemplated therein, and supersede all prior negotiations. No reference to this Amendment Agreement is necessary in any instrument or document at any time referring to a Loan Document. Any reference to a Loan Document (including in any other Loan Document) shall be deemed a reference to such document as amended hereby.

11. Counterparts. This Amendment Agreement may by executed in any number of counterparts, all of which shall be considered one in the same instrument. The original, executed signature pages of exact copies of this Amendment Agreement may be attached to one of such copies to form one document.

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IN WITNESS WHEREOF, Borrower and Lender have executed this Amendment Agreement as of the day and year first set forth above.

BORROWER:

WILLIAM LYON HOMES, INC., a

California corporation

By: /s/ Michael D. Grubbs

Name: Michael D. Grubbs

Title: Senior Vice President

By: /s/ Richard S. Robinson

Name: Richard S. Robinson

Title: Senior Vice President

LENDER:

COMERICA BANK

By: /s/ David Plattner

Name: David Plattner

Its: VP. Western Market

S-1

GUARANTOR’S CONSENT

WILLIAM LYON HOMES, a Delaware corporation (“Guarantor”), hereby consents to the terms, conditions and provisions of the foregoing Amendment Agreement (“Amendment Agreement”) and the transactions contemplated by the Amendment Agreement. Guarantor hereby reaffirms the full force and effectiveness of its Guaranty dated as of March 8, 2006 (the “Guaranty”), in light of the Amendment, including without limitation all waivers, authorizations and agreements set forth therein. Guarantor hereby confirms and agrees that all references in the Guaranty to the Loan Agreement and other Loan Documents shall hereafter be deemed references to the Loan Agreement and other Loan Documents as amended by the Amendment. In addition, Guarantor acknowledges that its obligations under the Guaranty are separate and distinct from those of Borrower on the Loan.

Dated as of February 28, 2008

GUARANTOR:

WILLIAM LYON HOMES, a Delaware

corporation

By: /s/ Michael D. Grubbs

Name: Michael D. Grubbs

Title: Senior Vice President

By: /s/ Richard S. Robinson

Name: Richard S. Robinson

Title: Senior Vice President

CONSENT

EX-10.64

Exhibit 10.64

FIRST AMENDMENT TO LOAN AGREEMENT

THIS FIRST AMENDMENT TO LOAN AGREEMENT (this “Amendment”) dated as of February 25, 2008, but effective as of December 31, 2007, is entered into by and between EAST GARRISON PARTNERS I, LLC, a California limited liability company (“Borrower”), and RFC CONSTRUCTION FUNDING, LLC, a Delaware limited liability company (“Lender”), as successor in interest to and assignee of RESIDENTIAL FUNDING COMPANY, LLC, a Delaware limited liability company (“RFC”).

RECITALS

A. Borrower and RFC (whose interest has been assigned to Lender) entered into that certain Loan Agreement dated as of January 30, 2007 (as amended, restated or otherwise modified from time to time, the “Loan Agreement”), pursuant to the terms of which RFC (whose interest has been assigned to Lender) made a revolving loan to Borrower (the “Loan”) in the maximum principal amount of Seventy-Five Million Dollars ($75,000,000) to finance the acquisition and development of that certain residential housing community commonly known as East Garrison.

B. Borrower has requested that Lender amend the Loan Agreement by modifying the financial covenants pertaining to William Lyon Homes, Inc., a California corporation (“Lyon Homes”), set forth in Section 5.5(b) of the Loan Agreement.

C. As a condition to granting Borrower’s requests, Lender has required, among other things, the execution and delivery of this Amendment by Borrower.

D. Unless otherwise defined herein, capitalized terms used herein shall have the meanings given those terms in Loan Agreement.

AGREEMENT

NOW THEREFORE, in consideration of the foregoing Recitals and the covenants and conditions, representations and warranties contained herein, the parties hereto agree as follows:

Section 1 Amendment to Loan Agreement

(a) The following definition is hereby added to Section 1.1 of the Loan Agreement:

“Subsidiary” means, with respect to any Person, (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, limited liability company, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power

of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries.

(b) Section 5.5(b) of the Loan Agreement is hereby amended in its entirety to read as follows:

(b) As to Lyon Homes:

(1) Tangible Net Worth. Lyon Homes and its Subsidiaries (including Borrower) will at all times maintain a Tangible Net Worth in an amount equal to or in excess of $175,000,000.

(2) Ratio of Total Liabilities to Tangible Net Worth. Lyon Homes and its Subsidiaries (including Borrower) will maintain a ratio of Total Liabilities (exclusive of consolidated liabilities of variable interest entities) to Tangible Net Worth of not more than (i) 5.00 to 1.00 at all times through and including December 31, 2008, and (ii) 3.50 to 1.00 at all times from and after January 1, 2009.

(c) Section 8.1(24) of the Loan Agreement is hereby amended in its entirety to read as follows:

(24) any two (2) or more of Thomas J. Mitchell, Douglas F. Bauer, Richard S. Robinson, Michael D. Grubbs or William H. Lyon shall cease to be employed by Lyon Homes or Borrower on a continuous and full time basis with power and responsibility to manage the material day to day operations of Lyon Homes, Borrower and their respective Subsidiaries.

Section 2 Conditions Precedent to Effectiveness of this Amendment

This Amendment shall become effective when Lender shall have received each of the following items in form and content acceptable to Lender:

(a) this Amendment, duly executed on behalf of Borrower and duly consented to by Guarantor;

(b) the First Amendment to and Reaffirmation of Completion Guaranty, duly executed on behalf of Guarantor (the “Guaranty Amendment”); and

(c) such other items as Lender shall require.

Section 3 Representations and Warranties of Borrower

Borrower represents, warrants and agrees that: (i) there exists no Potential Default or Event of Default under the Loan Documents; (ii) the Loan Documents continue to be the legal, valid and binding agreements and obligations of Borrower, enforceable in accordance with their

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terms, as modified herein; (iii) Lender is not in default under any of the Loan Documents; (iv) Borrower does not have any offset or defense to its performance or obligations under any of the Loan Documents; (v) the representations contained in the Loan Documents remain true and accurate in all respects; and (vi) there has been no Material Adverse Change from the date of any of the Loan Documents to the date of this Amendment.

Section 4 No Defenses

Borrower hereby agrees and stipulates that Borrower has no defenses, affirmative defenses, rights to offset, or counterclaims against the exercise of any of the rights or remedies of Lender under the Loan Documents or under applicable law.

Section 5 Release of Claims

In consideration of the foregoing, Borrower, on its own behalf and on behalf of its partners, subsidiaries, parent companies and Affiliates, hereby releases, remises, acquits and forever discharges Lender, RFC and their respective employees, agents, representatives, consultants, attorneys, fiduciaries, servants, officers, directors, partners, predecessors, successors, assigns, and Affiliates (all of the foregoing hereinafter called the “Released Parties”), from any and all actions, causes of action, judgments, executions, suits, cross-complaints, assertions, controversies, debts, claims, demands, liabilities, obligations, indebtedness, breaches of contract, breaches of duty, damages, losses, costs, and expenses of any and every character, known or unknown, suspected or unsuspected, liquidated or unliquidated, absolute or contingent, direct and/or indirect, at law or in equity, of whatsoever kind or nature, whether heretofore or hereafter arising, for or because of any matter or things done, omitted or suffered to be done by any of the Released Parties prior to and including the Effective Date, in any way directly or indirectly arising out of or in any way connected to this Amendment, the Loan, the Loan Documents, the transactions contemplated by the Loan Documents and/or the lending relationship between Borrower, Lender and/or RFC (all of the foregoing being hereinafter collectively referred to as the “Released Matters”).

Borrower acknowledges that it has consulted with counsel and with such other experts and advisors as it has deemed necessary in connection with the negotiation, execution and delivery of this Amendment, including without limitation the release contained herein and the provisions of California Civil Code Section 1542, as set forth below, and with the benefit of advice of such counsel, hereby waives the protection afforded by such statute:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing a release, which if known by him must have materially affected his settlement with the debtor.”

Borrower represents and warrants to Lender and RFC that it has not purported to transfer, assign, pledge or otherwise convey any of its right, title or interest or convey any right, title or interest of it in any Released Matter to any other person or entity and that the foregoing constitutes a full and complete release of all Released Matters.

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Section 6 Effect on Documents

Except as expressly modified by this Amendment, the Loan Agreement shall otherwise be unchanged and shall remain in full force and effect and Borrower ratifies and reaffirms all of the obligations of Borrower thereunder. All references in other Loan Documents to (i) the Loan Agreement shall be deemed to refer to the Loan Agreement as amended by this Amendment, and (ii) the Guaranty shall be deemed to refer to the Guaranty as amended by the Guaranty Amendment.

Section 7 Execution in Counterparts

This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument.

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IN WITNESS WHEREOF, Borrower and Lender have executed this Amendment as of the date first written above by and through their duly authorized representatives.

BORROWER:

EAST GARRISON PARTNERS I, LLC,

a California limited liability company

By:  Lyon East Garrison Company I, LLC,

        a California limited liability company,

        its co-managing member

By: William Lyon Homes, Inc.,

       a California corporation,

       its sole member

By: /s/ Michael D. Grubbs                

Name: Michael D. Grubbs                

Title: Senior Vice President             

By: /s/ Richard S. Robinson              

Name: Richard S. Robinson              

Title: Senior Vice President              

By: Woodman Development Company, LLC,

        a California limited liability company,

        its co-managing member

By: Woodman Development Company,

       Inc., a California corporation,

       its managing member

By: /s/ John K. Anderson                    

Name: John K. Anderson                    

Title: President                                    

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LENDER:

RFC CONSTRUCTION FUNDING, LLC,

a Delaware limited liability company

By: /s/ Peter Fischer                                    

Name: Peter Fischer                                    

Title: Assistant Vice President                    

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EX-12.1

Exhibit 12.1

STATEMENT OF COMPUTATION OF RATIO OF (LOSS) EARNINGS TO FIXED CHARGES

	Year Ended December 31,
	2007			2006			2005			2004			2003
	(dollars in thousands)
(Loss) Income before provision for income taxes	$	(349,408	)	$	123,709		$	314,780		$	285,148		$	123,952
Interest incurred		76,497			80,173			73,208			59,024			47,188
Less interest capitalized		(76,497	)		(80,173	)		(73,208	)		(59,024	)		(47,188	)
Amortization of capitalized interest included in cost of sales		57,241			54,356			55,748			62,671			36,376
Non-cash impairment charge		231,120			39,895			4,600			—			—
Cash distributions of income from unconsolidated joint ventures		—			2,599			2,708			—			37,501
Less equity in (income) loss of unconsolidated joint ventures		(304	)		(3,242	)		( 4,301	)		699			(31,236	)
(Loss) Earnings	$	(61,354	)	$	217,317		$	373,535		$	348,518		$	166,593
Interest incurred
Interest capitalized		76,497			80,173			73,208			59,024			47,188
Fixed Charges	$	76,497		$	80,173		$	73,208		$	59,024		$	47,188
Ratio of (Loss) Earnings to Fixed Charges		(0.80x	)		2.71x			5.10x			5.91x			3.53x

EX-21.1

EXHIBIT 21.1

LIST OF SUBSIDIARIES OF WILLIAM LYON HOMES, A DELAWARE CORPORATION

William Lyon Homes

(formerly The Presley Companies) (a Delaware corporation)

Presley Homes

(a California corporation)

California Equity Funding, Inc.

(a California corporation)

Sycamore CC, Inc.

(a California corporation)

Presley CMR, Inc.

(a California corporation)

Duxford Financial, Inc. (formerly Presley Mortgage Company)

(a California corporation)

Bayport Mortgage, L.P.

(a California limited partnership)

California Pacific Mortgage, L.P.

(a California limited partnership)

Duxford Title Reinsurance Company

(a Vermont corporation)

PH—LP Ventures

(a California corporation)

PH-Rielly Ventures, Inc.

(a California corporation)

Silver Creek Preserve

(a California corporation)

HSP, Inc.

(a California corporation)

PH Ventures-San Jose

(a California corporation)

Lyon Harada, L.P.

(a Delaware limited partnership)

Cerro Plata Associates, LLC

(a Delaware limited liability company)

St. Helena Westminster Estates, LLC

(a Delaware limited liability company)

Henry Ranch, LLC

(a Delaware limited liability company)

Brentwood Legends, L.P.

(a Delaware limited partnership)

Lyon Morgan Creek, L.P.

(a Delaware limited partnership)

Hercules Overlook, L.P.

(a Delaware limited partnership)

William Lyon Southwest, Inc.

(an Arizona corporation)

PLC/Lyon Waterfront Residential, LLC

(a Delaware limited liability company)

Lyon Waterfront, LLC

(a Delaware limited liability company)

Tustin Villas Partners, LLC

(a Delaware limited liability company)

Tustin Vistas Partners, LLC

(a Delaware limited liability company)

Marble Mountain Partners, LLC

(a Delaware limited liability company)

East Garrison Partners I, LLC

(a California limited liability company)

Lyon East Garrison Company I, LLC

(a California limited liability company)

Spectrum 90 Investors, LLC

(a Delaware limited liability company)

4S Ranch Planning Area 38, LLC

(a Delaware limited liability company)

San Miguel Village , LLC

(a Delaware limited liability company)

Lyon Treviso, LLC

(a Delaware limited liability company)

Covenant Hills P-30A, LLC

(a Delaware limited liability company)

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Covenant Hills P-30B, LLC

(a Delaware limited liability company)

WLH Enterprises (formerly The Ranch Golf Club Co. which was formerly Carmel Mountain Ranch)

(a California general partnership)

Laguna Big Horn, LLC

(a Delaware limited liability company)

Mountain Falls, LLC

(a Nevada limited liability company)

Mountain Falls Golf Course, LLC

(a Nevada limited liability company)

Whitney Ranch Village 5, LLC

(a Delaware limited liability company)

Queen Creek Joint Venture, LLC

(an Arizona limited liability company)

The Ranch Golf Club, LLC

(a California limited liability company)

Lyon Vista Del Mar 533, LLC

(a Delaware limited liability company)

Circle G at the Church Farm North Joint Venture, LLC

(an Arizona limited liability company)

WLH/WB Rainbow Valley Properties JV, LLC

(an Arizona limited liability company)

Duxford Insurance, LLC

(a California limited liability company)

Moffet Meadows Partners, LLC

(a Delaware Limited Liability Company)

Duxford Escrow, Inc.

(a California Corporation)

Lyon Montecito, LLC.

(a California Limited Liability Company)

Nobar Water Company

(a California Company)

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EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, William Lyon, certify that:

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

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

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

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

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

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 7, 2008

By:	/S/    WILLIAM LYON
	William Lyon Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Michael D. Grubbs, certify that:

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

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

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

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

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

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 7, 2008

By:	/S/    MICHAEL D. GRUBBS
	Michael D. Grubbs Senior Vice President, Chief Financial Officer and Treasurer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of William Lyon Homes (the Company) on Form 10-K for the period ending December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, William Lyon, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/    WILLIAM LYON

William Lyon

Chief Executive Officer

March 7, 2008

A signed original of this written statement required by Section 906 has been provided to William Lyon Homes and will be retained by William Lyon Homes and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of William Lyon Homes (the Company) on Form 10-K for the period ending December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Michael D. Grubbs, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/    MICHAEL D. GRUBBS

Michael D. Grubbs

Senior Vice President, Chief Financial

Officer and Treasurer

March 7, 2008

A signed original of this written statement required by Section 906 has been provided to William Lyon Homes and will be retained by William Lyon Homes and furnished to the Securities and Exchange Commission or its staff upon request.